Is This The Crash?
What Does This Mean for All Markets
As we enter a week traditionally full of good cheer, Xmas week, the market is far from cheering. Indeed there is real sense of panic analogous to that before the 1987 and perhaps possibly the 1929 crashes. Today’s newsletter tackles this issue head on: are we on the verge of a Christmas Crash?
Following the concern expressed by the Fed this week about US and therefore global growth the stock markets remain under significant pressure at a time when stocks are typically strong? Unprecedented? No, not at all. There are many reasons why this year Donald Trump may have stolen Christmas.
The first and overwhelming reason is that it all FITS (Fundamental, Intermarket, Technical and Sentiment) with the projected 1929 and 1987 conditions for a crash. Two years ago we outlined the economic criteria necessary for a blowout and crash. With US growth and inflation now possibly slowing due to fears associated with a trade war, analogous to 1987, all conditions have now been met. The key market that reflects this dangerous loss of heat, the US bond market, shows a remarkably similar reversal to 1987.
Another cyclical market also highlights the impact of feared if not actual global economic slowing is Oil.
Curiously Oil and many other markets appear more advanced in this meltdown than the simultaneous crash of 1987 and perhaps ironically highlights a crucial difference between now and October 1987. The most striking example is the apparent maturity of the decline in FANGs, the previous growth engine of the economy and stock market uptrend. Apple continues to follow the path set by one of the market leaders in 1987, General Electric:
So how similar is this to Black Monday October 19th 1987? Over the last few weeks, days and now hours, increasingly the technical answer is very.
The market is now breaking down from the pivotal 2018 range previously similar to both the last correction in the first half of 2017 and the very top before the crash and, in itself, the long awaited resolution to the crash or correction dilemma. Our view that other markets such as German DAX and Indian NIFTY had already topped but would consolidate until they were ready to lead the global market lower has even been borne out by the completion now of the US uptrend versus the rest of the world.
This series of leads and lags into a crash was a feature of the run up to the 1987 crash during one of the biggest correlation breakdowns ever. Yet the markets came back together for the meltdown with the Dollar having led the turn. Although the Dollar is clearly similar to 1987, if anything it appears to be lagging, almost ignoring the decline in yields.
The safe haven Japanese Yen appears the closest of all Dollar pairs.
Even the risk-averse AUDUSD can be compared.
Yet the decline also appears relatively mature and perhaps needs explaining. For the last three years we have sought a similarly massive correlation breakdown to 1987 that would end with the crash. The arrival of Donald Trump and his arguably divisive but expansionist agenda helped explain that divergence and perhaps a crash will restore correlation. Whether the markets now come back together really does depend on further drivers of the current crisis. In October 1987 it was arguably James Baker who triggered Black Monday.
On Sunday October 18th 1987 (the day before the Black Monday crash) the then Treasury Secretary James Baker tried to force resolution by the telling the Germans he would collapse the Dollar if they did not agree to fall in line. Are we there now? Possibly but probably not. Although it is easy to take the details of an analogy too far, until we such an overtly aggressive threat, the market should remain in trade war limbo and therefore driven by economic fundamentals rather than political gestures, rhetoric or real.
Clearly one can take the analogy too far into comparable specific comments. But any such action or lack of action will affect the markets into 2019 and specifically how the Dollar reacts and exacerbates any fall out. Previously we explained the historical reaction of the foreign exchange markets into a crash.
Much will depend on any particular cause or none. After all it is sentiment that has driven the 2018 market. Complacency, front running and disappointment have been a characteristic of the last few weeks. In an increasingly illiquid market some, but certainly not all, are still overweight in stocks and still waiting for an event—the Santa rally. If this does turn into a Christmas crash rather than climax many liquidating stocks and Dollars into year end will blame the Grinch:
Monday is Christmas Eve and the start of the quietest week in the markets. But for those of you who think nothing happens over the holiday period, remember this?
Here’s to making the very best, and compliments of the season to all our readers, and Good Luck
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