A Bullish Outlook on a Bearish Day

Posted On Jan 6, 2016 By Dave Gonigam

  • Despite another “look out below” day…
  • … Elmerraji says the market’s set to gain at least 10% this year…
  • … But your gains could multiply that figure several times over
  • China’s “controlled devaluation” careens out of control
  • We’re not the only ones saying the Saudi regime is in danger
  • An ill omen for the Rio Olympics… what we should have titled Monday’s episode… more nonspecific reader feedback… and more!

On a morning the major U.S. indexes are tumbling again — for the first three trading days of the year, the S&P 500 is down 3.2% — we dare to introduce the next of our team’s 2016 forecasts: The S&P 500 will end the year up at least 10%, says Jonas Elmerraji of our trading desk.

We hear your objections already: What about China? What about oil? What about all these screaming headlines today?

We’ll get to them soon enough in today’s episode. But for the moment, we step back and look at a longer-term picture. The stuff that might not be urgent, but is important, if you will.

“The uptrend that began back in 2008 is still very much intact,” Jonas said in this space nine days ago.

And despite the turmoil this week, it still is. Note the solid blue line…

Long-term Picture

“Every touch of that primary uptrend line has acted like a springboard for higher ground,” he said, “and the S&P 500 touched that line on October for the first time since 2011.”

“2015 was a great reminder that history often rhymes when it comes to the stock market,” Jonas says — teeing up his 2016 outlook.

Here’s a chart that caught Jonas’ eye last fall at the International Federation of Technical Analysts’ conference in Tokyo. It shows uncanny parallels between the market action in 2011 and 2015. This version of the chart is updated through year-end 2015…

History Rhyming

No, it’s not a perfect analogue. “But history is certainly rhyming here,” says Jonas — “the major reversal points line up extremely closely on both charts.”

The bounces off those October lows each year? “This isn’t just random chance — it’s happening because similar market conditions breed similar reactions from market participants.

“And that’s why looking back at 2012 is now so critical as we head into 2016,” Jonas goes on. Note well: The S&P rallied 13.4% during 2012.

“It’s worth adding that this isn’t the first time we’ve used post-2008 market relationships to forecast the move for the coming year,” Jonas points out. “In 2014, we managed to guess the S&P’s ending number within 1.5% by looking at years with similar market conditions. And while I had expected to see a single-digit rally in 2015, we were at least correct that it would be a muted trading year.

“So here’s the bottom line: For 2016, I’m forecasting that we’ll see a low double-digit upside move in the next 12 months.”

Yes, there’s a caveat: “If the S&P suddenly violates its primary uptrend, then we’re not going to buy it on the way down just because our forecast was bullish. Variables change, and when they do, so does our outlook.”

Now, if you wanted to play Jonas’ forecast conservatively, you’d just buy an S&P 500 index fund and book your 10-12% gain at year-end. But what fun is that?

“Because I’m forecasting a return to a strong trading environment in 2016, I think the timing is perfect to kick off an exciting new trading challenge.”

Jonas has done these before. But this time is different: He’s out to make his premium subscribers a total $2 million this year. And he wants you to grab a share of it.

The fun begins on Thursday, Jan. 14 — eight days from now. “I want to prove to you,” he says, “that you have what it takes to make impressive gains in the markets over and over and over again.”

No previous trading experience is necessary. “Previous participants have since generated extraordinary gains,” Jonas enthuses. “One reader even exceeded $30,000 in a single month.”

It doesn’t cost a thing to take part in this event. All we need is your email address and we’ll reserve a spot for you. Here’s where to sign up.

OK, now to the market turmoil: As we write, the S&P 500 is down nearly 1%, sitting a fraction of a point below 2,000.

Treasuries are rallying, sending yields down — the yield on a 10-year note is now below 2.2% for the first time in two weeks. Gold is also rallying, the bid at last check $1,089. That’s a seven-week high.

As to the crosscurrents driving the safety trade today, let’s explore…

China’s devaluation of the renminbi is picking up speed. Remember how on Monday we said the Chinese government pushed the renminbi-dollar peg to its lowest level in more than four years? Now it’s five years.

“The People’s Bank of China (PBOC) fixed the renminbi this morning at a much weaker level that was outside of their normal operations,” writes Chuck Butler at EverBank Global Markets, “thus indicating that even though they injected 130 billion renminbi into their money markets [Monday], they are serious players in the currency wars!”

As was the case last summer, the Chinese government doesn’t appear to be fully in control of this devaluation thing.

Last August, the PBOC devalued the renminbi 2% against the dollar in a day… and another 1.6% the next day. Then market forces took over and dragged the renminbi down still further. Oops, that wasn’t part of the plan. The PBOC had to reverse course, ordering state-owned banks to dump dollars. The renminbi rallied.

This time, the situation’s a little different: There’s a growing mismatch between the renminbi’s two exchange rates. See, there’s the onshore market, which the government has tight control over. But then there’s the offshore market, more exposed to market forces. Look at the action in the offshore version in recent days…

Devaluation Accelerating

Today’s level is, umm, rather lower than the onshore rate fixed by the PBOC today at 6.5314 renminbi to the dollar. The gap between the two rates has widened to a record — which isn’t what the Chinese government has been promising the rest of the world, hoping to get the renminbi more widely accepted in global trade.

More uncertainty, more excuses to hit the “sell” button…

[Ed. note: As the Financial Times put it today, “Investors around the world are worried that an unexpectedly fast depreciation will destabilize China’s economy. Some also fear it could trigger a wave of competitive devaluations across the region.”

Jim Rickards has been saying as much for weeks. Click here for his most recent video message. It takes only 60 seconds to watch… and because the situation is so fluid, we’re taking it offline next Monday. Check it out while it’s still fresh.]

And then there’s the 4% sell-off in oil. Brent crude, the international benchmark, has touched an 11-year low at $34.74. West Texas Intermediate trades at $34.51, although it was lower than that just two weeks ago.

Apparently, as long as Saudi Arabia’s restive Shia minority isn’t torching the oil fields, no one’s worried about the fallout from the regime’s beheading of a revered Shia cleric last weekend — or any resulting “supply shock.”

Indeed, there’s a line of thought that says because Saudi Arabia’s Sunni regime and Iran’s Shia regime are even more at odds now than they were before… the Saudi princes will open up the spigots still further, the better to drive down the oil price and stick it to their Iranian enemies.

But that doesn’t alter the fact the Saudi Arabian regime is skating on increasingly thin ice, if we can apply a wintry metaphor in the desert.

On Monday, our Byron King ventured to say this would be the year war and revolution would come to Saudi Arabia — which would certainly crimp its crude exports, at least for a while. We see affirmation this morning from Patrick Cockburn, Middle East correspondent for the London Independent.

“There is a growing suspicion in the Middle East and beyond,” Cockburn writes, “that the Saudi royal family is losing its traditional political touch which enabled it to survive over the past 70 years when other monarchies, along with once-powerful socialist and nationalist regimes, have long ago disappeared.

“It seems to have lost its old caution and is plunging into political snake pits without much idea of how it is going to get out of them. Over the past year, the Saudis have overplayed their hand, backing local allies and proxies in Syria and Yemen who are never going to win decisive victories.”

Indeed, Cockburn believes the beheading of the Shia cleric Nimr al-Nimr was all about maintaining street cred with the Sunni majority: “Furious denunciations by Shia communities and countries will do nothing but good to the reputation of the ruling family among the majority of Saudis.”

Yikes. Pat Buchanan agrees in his latest column. The first purpose of the execution was to “signal the new ruthlessness and resolve of the Saudi monarchy where the power behind the throne is the octogenarian King Salman’s son, the 30-year-old defense minister Mohammed bin Salman.”

He’s also deputy crown prince, second deputy prime minister, chief of the royal court and chairman of the “Council for Economic and Development Affairs.”
[Wikimedia Commons photo by Mazen AlDarrab]

What’s the old saying about those who cling to power most tightly eventually see it slip from their grasp? We’ll be closely watching Prince Mohammed and his cohorts in the months to come.

In a microcosm of Brazil’s current economic predicament, electricity and water have been shut off to one of the major venues for this summer’s Olympics in Rio de Janeiro.

Brazil is suffering from “stagflation” of the sort America experienced in the 1970s — inflation running nearly 11% even as the economy likely shrank 4% last year. To complete the ’70s parallels, President Dilma Rousseff faces impeachment.

And now the João Havelange stadium, capacity 45,000-plus, is officially a deadbeat.

Up till recently, maintenance costs were paid by Rio’s Botafogo soccer team. Botafogo turned over management to the Brazilian government as the Olympics drew near. Now Botafogo and the government are arguing over who’s responsible for utility bills totaling $225,000.

Deadbeat stadium [Photo by Flickr user JorgeBRAZIL]

Way we figure it, at least someone plans to use the thing this summer. That’s more than you can say for 12 new or heavily refurbished stadiums built for the 2014 World Cup at a cost of $3 billion.

As we mentioned last May, one in the capital, Brasília, is used mostly as a bus depot. Sheesh…

After our Monday episode titled “The End of Saudi Arabia,” a reader suggests we should have amended it with “… Can’t Come Soon Enough: Sic Semper Tyrannis.”

“And,” the reader says, “that applies to the British tyrants who brought the tyrannical house of Saud to power in the first place, after they conquered half of the Middle East during World War I and set up puppet kingdoms in all of their new colonies, as if the Roman Empire never really fell.”

The 5: Ah, but you need to follow that through to its logical conclusion. It’s true the British Empire controlled a quarter of the Earth in 1919… but wound up surrendering most, along with the pound’s reserve-currency status, by 1949.

Something for Saudi Arabia’s American sponsors to think about… but they won’t.

“I didn’t start out liking your article, but it grew on me,” a reader writes. “Well done.”

The 5: We can’t tell whether you’re assuming we know which of our voluminous episodes you’re talking about… or if you’re consciously mimicking the nonspecific complaint we got yesterday. (In which case, well played, sir.)

In any event, we’ll take our compliments wherever we can get them. Thank you.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. “I want you to be there,” says the aforementioned Jonas Elmerraji, “so you can claim your part of the $2 million in gains my readers will book in 2016.”

Be where, you wonder? At Jonas’ next live trading tutorial.

When? One week from tomorrow, Thursday, Jan. 14.

The cost? Free. Gratis. On the house.

How can you take part? Sign up right here and take the first step toward claiming your piece of a $2 million fortune.


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