Brit and I have been writing about market crashes for the past few weeks. We’ve given evidence in charts, anecdotes, and statistics.
We’ve proven that the market has never been more overvalued, according to a host of various value metrics.
That said, the market is more than just numbers on a page. It is a psychological beast that wants to suck in the most money it can from the most foolish people.
This is why we follow the corporate financial news media. You can clearly see the news has a great influence on the market, but it is not the way most people understand. Financial news has three phases, depending on the phase of the market.
- Good news is good news.
- Bad news is good news.
- Bad news is bad news.
At the bottom of a market, stocks move higher on good news. Someone beats earnings and the stock goes up.
We are in the late stages of a bull market now or phase 2. In phase 2, we have the “bad news is good news” dynamic, where perversely, the more bad news we get, the higher the odds that the Federal Reserve will cut rates. The so-called “Fed Put” will save the day. The market moves up on the idea of rate cuts despite all of the historical evidence that says the Fed is always late with its moves and therefore the market falls when the Fed cuts rates.
That’s exactly what will happen this time. And that’s phase 3 – where bad news actually is bad news.
I did some research and looked at what the media was saying in July of 2007 right before the big crash of what today is known as the Great Financial Crisis (GFC) but, at the time, was a subprime meltdown.
Here is the chart that covers the peak to the trough of that event. As you can see, the market put in a double top. The first top was in July of 2007, and the second one was in October of the same year. The S&P 500 bottomed over a year and a half later in March of 2009 after giving up 2/3rds of its value.
Here are headlines from the Wall Street Journal on July 17, 2007. Some might seem familiar.
Stocks Gain as Dow Tests 14000
By Joanna L. Ossinger
July 17, 2007 5:26 pm ET
The Dow industrials crossed the 14000 level for the first time Tuesday and were above it much of the day, but couldn’t hold through to the end.
The Dow Jones Industrial Average ended up 20.57 to 13971.55, its fourth record in a row and 31st of the year.
Subprime Fears Ebb, Treasurys Fall
By Deborah Lynn Blumberg
July 17, 2007 4:02 pm ET
U.S. Treasurys were weaker Tuesday morning as subprime worries retreated again from investors’ focus, with the market’s flight-to-quality bid waning.
Stocks Rise, Through It All
It Hasn’t Been a Fun Ride, But Indexes Are Hanging In; Cautious Hope for 4th Quarter
By Peter A. McKay
Oct. 1, 2007 11:59 pm ET
There are no guarantees that everything is behind us, but it looks like the worst is behind us,” says Citigroup strategist Tobias Levkovich, who is sticking by his year-end forecasts that would require a 3.6% rise in the Dow in the fourth quarter and a 4.8% rise in the Standard & Poor’s 500-stock index.
Here is a chart from the same article:
Of course, October 1 would market the second top. The market would sell off until the S&P 500 hit 666 at the low.
Silver and Gold
Here is a chart of GLD and SLV, the gold and silver ETFs. As you can see in the second half of 2007 they start to diverge from the broader market.
They both started off hot until halfway into 2008. At that point, investors got hit with margin calls, or just gave up and sold the good with the bad, forcing precious metals down in price.
If the market follows the same path then you could make 50% on GLD and SLV over the next six months, sell the dip, and buy again later in the year. Gold and silver peaked two years after the market bottom when tech stocks again were popular.
Buy GLD and SLV
Right now GLD is up 23% over the past twelve months and the chart shows a clear breakout. This is bullish. Silver is up 22% since July of last year and is just off 52-week highs. The SLV chart shows a bullish flag.
I have been selling my large-cap index funds/ETFs and putting that money in money markets and gold and silver ETFs, as well as small-cap stocks like Avino Gold and Silver (ASM) which I told you about a few months ago. ASM is up 118% in three months. Full disclosure: I own GLD, SLV, and ASM.
All the best,
Christian DeHaemer
Outsiderclub.com
Brit is writing some great stuff: https://www.outsiderclub.com/this-chart-says-game-over/
https://www.outsiderclub.com/7-ominous-market-charts/
https://www.outsiderclub.com/inverted-yield-curve-hits-record/
