Over the last several months, markets of all types moved in lock-step (either up or down) based on weakness in the US Dollar Index.
During that period we continuously warned clients that the BAM Model was signaling an imminent stock market crash based on a “melt-up” in the US Dollar Index.
We also warned clients that this fairly new trading dynamic (we first identified it back in 2007 with relation to the YEN Carry Trade) whereby formerly diversified markets now move in lock-step, looked to us to be the single most dangerous dynamic we’ve seen in our years of following markets.
The idea that a major train-wreck based on a mechanical unwinding of a single (crowded) trade could crash AND melt-up markets across the globe is simply a disaster waiting to happen.
Today, Nouriel Roubini, Chairman, RGE Monitor, shares a similar forecast with us based on his fundamental view of the markets.
Of course, if this does occur as our model is predicting, we’re going to hear the same old tired excuses from the masters of the financial universe.
In our opinion, we simply have too much money being controlled by too few “brains” but since this pattern of boom and bust is destine to repeat over the coming years, we’ll simply do the best we can to protect our followers and allow subscribers to make money from these apparently predictable blunders.
The greed and optimism in this tape are setting records in my work and although the fact that we just made a marginal new high is insignificant, the nature of the advance is a BIG deal.
As you remember, the Nasdaq triggered a capitulation sell signal at the 1979 level on 7-29 and we stalled and started down prior to today’s marginal new high. (No change in that signal and we should drop like a stone based on that signal alone.
What’s remarkable though is the fact that today the SPX and INDU FUTS just triggered a capitulation sell signal. Granted, most of you will think I’m dead wrong on this call but we’ll only know that answer weeks and months from today if, as i expect, the market is much closer to the march lows than this morning’s highs.
BIG PICTURE
Based on the bearishness of the overnight FUTS model this weekend–as well as what’s been unfolding in China (the bulls are ignoring China’s 2 week 20% crash)–I would think we now have a good chance to see the expected US market crash sparked by China.
The fact that my US dollar model looks like it wants to melt-up into 8-25 next week and the fact that my US 30 YR bond model wants to melt up to that 130.30 level and the fact that my crude oil model wants to crash, seems to be consistent with an “opps” type of unwinding.
The catalyst could come from anywhere, but I’m focusing on China because it’s the most obvious train-wreck according to the BAM model.
Based on the China stock index model, it seems logical to me that we’ll see them breakdown to new lows on high volume and, assuming I have that correct, all of the other forecasts should work coincident with and instantaneous to that event.
The TRANS model sees a sharp decline leg into September 3rd so that matchs well with the Crude Oil model’s call for a crash into September 2nd (ish)
(I’m not fan of DOW theory but it does look to me like the TRANS will fail to confirm today’s new INDU high on this move off the March low)
As I’ve said before, I really like the energy sector shorts. (XOI)
I also think a tremendous amount of money can be made being long the DUG (ETF) into Q1 2010.
I also think the swine flu will hit worker productivity/earnings very hard this fall and into next spring.
The gov warned as much yesterday but people simply ignored that.
-JGS
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