What happens if it hits the fan?

You guys may recall my interview with market historian David Chapman. David Chapman interview: A lesson in history applied to today’s markets – ValueTrend. I thought it timely to quote a piece from his most recent research report:

“Fifty years ago, the Yom Kippur War sparked a major global crisis. We looked at the numerous clashes between
Israel and Arab/Palestinians over the past 76 years, and the Yom Kippur War appears to be the only one that
sparked a stock market collapse and global recession. What happened? The U.S. at the time decided to supply
Israel. In response, OPEC, dominated by Saudi Arabia, embargoed oil shipments to the U.S. in protest. As a
result, oil shot up from roughly $2.90/barrel to over $11/barrel, an over three-fold increase in a matter of
months. Anyone who was around then remembers the long lineups at the pumps. It sparked a stock market
collapse that saw the Dow Jones Industrials (DJI) fall some 45% from an original top in January 1973″ – David Chapman

If you would like to hear another interview with David, let me know. Comment below–do not email. Thx. I will contact him and see if he is interested in relaying his thought’s on current geopolitical risks.

Here’s he DJIA 1970-198. Note what happened to the Dow after oil started rising and the war broke out.

 

So, what do we do, if the fan meets the poo? Live in a shoe?

I could have landed a career as a step-in for Dr. Seuss. Anyhow… You guys know my argument for a sideways market. Traders prosper. Buy n’ hold…not so much. I’m going to keep nagging you on this, because its important:

Please watch this very important video: Investing in Stagflation – ValueTrend

I may be wrong. If markets take out their 2022 highs with conviction, its a bull market. I think we need the Fed to start easing as the first step for the bull to emerge.

I’d love to see a new bull market, and hope we do! I am not fixated or thematic about a sideways market. I am open to any possibility. You should be too. But, lets say the market continues to fail at its 2022 highs. This suggests it is stuck in one of these historic swing patterns (see chart bottom of this blog).

In a sideways market, there will be big swings down. Down-swings inspire bears to proclaim doom and gloom. Geopolitical risks add to the market’s neurosis.

“The offensive into Gaza has yet to fully start” – BearTraps

There will be swings up. Up-swings inspire the media (and sell-side analysts) to announce the bull is back. Earnings calls in the coming days may woo the bulls.

“Be wary of the consensus view of forward earnings penciled in by analysts, they are far too optimistic and conditional” David Rosenberg

Sentiment indicators work well in a sideways environment. They can also help us identify if the market breakout is legit (aka if a bull market has arisen). Read my book Smart Money/Dumb Money for more on that. You may see me post more sentiment charts in the coming weeks. For example: The AAII survey doesn’t show enough bears out there yet. Common’ people, we need some more panic to get a tradable rally!

 

I’ll leave you with my oft-repeated chart. Here’s the history of sideways markets on the DJIA since 1880.

6 Comments

    • Michael– gold in particular is non-correlated to stocks. So neither moving opposite, or with, the markets. It marches to its own drum. However, it is a proven hedge against declining USD, and inflation. If the Middle East conflict grows, there may be a flight to safety to the USD, meaning gold would NOT do well. But that is unknown. I do know that recessions with higher than normal inflation (aka stagflation) can be very good for gold. Silver is less correlated. I consider stagflation a good possibility, so we hold some gold. Please see prior blogs on the subject.

      Reply
  • For those retail investors tempted to make a flatbed truck of profits off gold moving to the upside, from the Middle East debacle, keep in mind many, if not most gold producers are heavily hedged in their prices of delivery of future production, to ensure stable revenues. Even if gold shot up a thousand times, the holders of the futures contracts would be the beneficiaries, not the actual producers mining the mineral.

    Reply
    • Darned good point Mike–thanks for posting. Yes, ABX for example, is a renowned hedger.

      Reply
  • Hi Richard
    I have been watching the Nissan stock closely for the last number of months.
    I have not taken a position as of yet.
    The dividend on this stock is in the twenties which I know is a real red flag.
    Could you please give me your opinion on this stock.
    Thanks
    Anthony

    Reply
    • Anthony–i dont give individual stock opinions on this blog–that’s for my BNN shows. May I suggest you send an email or call in during my next show, which is Friday November 9th

      Reply

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