I’m sorry for sending your Monkey Darts a little late this week.
After the festive break, it seems the cogs in the machine have seized up a little. And it’s taken longer to get thoughts down on the page!
The normal Tuesday and Thursday schedule resumes as of next week…
Talking of Christmas, I note Santa never showed up to give the stock market a boost in the cold, dying days of 2018.
That’s sickening for people who bought in at the start of December, expecting the market to end the year with a bang, like it’s supposed to.
A Depression-era December
Pundits always talk about December being a good month for stocks.
And there is some statistical evidence to back that up.
According to the Stock Trader’s Almanac:
“December is typically a very positive month for markets. The Dow has only fallen during 25 Decembers going back to 1931.
“The S&P 500 averages a 1.6 percent gain for December, making it typically the best month for the market…”
And it’s a similar story in the UK.
The Stock Market Almanac, says that since 1970, the FTSE All-Share Index has risen in December in 75% of all years.
But last year WASN’T one of those years…
As it turned out, 2018 lays claim to the worst December performance since 1931, in the depths of the Great Depression.
And according to Forbes, it was the US stock market’s worst month overall since February 2009.
If you’d bought the Dow on 1st December 2018, you’d have lost 8.72% of your money by New Year’s Eve.
You’d have done better buying the FTSE 1oo.
That would have only wiped out 4.22% of your investment.
Of course, these are just numbers.
People are unlikely to have bought the indices at the start of December with a view to selling out at the end of the month.
A few adventurous traders may have taken a punt on Santa turning up… but not many.
A sign that there could be worse to come
My point is that it’s historically unusual for the market to perform so badly in December.
And when December’s performance is negative, it’s often a sign that there’s a bear market coming.
… if it’s not already here.
And that’s where people are divided.
The text book definition of a bear market is where there has been a 20% fall in price from a recent peak.
Well that happened on Christmas Eve, when the S&P 500 dipped into bear market territory from the September highs.
OK, so it was only on an intraday basis. The market didn’t close 20% down from the peak. And it has since rallied some 11%.
Even so, the 20% line was crossed.
And having printed that level, there could well be another attempt to push prices back lower and through that level once this counter trend rally has run out of steam.
That’s my take on it.
And there are far smarter people than me who are saying we’re already in a bear market.
One of them is Jeffrey Gundlach, CEO of DoubleLine Capital, who manages more than $200 billion of funds.
Gundlach has great form for making bold predictions that come true.
For example, he called the massive December sell-off, as CNBC reports:
“In mid-December, Gundlach predicted that the S&P 500 would go lower when it had already fallen 11 percent from its intraday all-time high, saying “I’m pretty sure this is a bear market.” His call came true a week on Christmas Eve, when the index dipped into bear market territory briefly, tumbling more than 20 percent from its record high on an intraday basis.”
Gundlach isn’t interested in the 20% rule – he says that’s just an arbitrary number.
Having seen a few bear markets in his 35 years in the markets, he says it’s more about how you lead into it that’s important.
“It’s about how it develops, how sentiment changes. And I think we’ve had pretty much all of the variables that characterize a bear market.”
If Gundlach is right and this is a bear market, there’s likely more downside from here.
Hair triggers for the next market sell-off
Stephen McBride at Forbes notes that “in the 10 bear markets since the 1920s, stocks fell an average of 32% from their highs.
“The S&P has already fallen 17% since peaking in September 2018. If we’re in for an “average” bear market, stocks should continue falling.”
And let’s face it, there is plenty that could turn the markets lower again.
To start with, the U.S. government shutdown that’s lingering on into its third week.
Ratings agency, Fitch, is warning that “if the current impasse triggers another debt ceiling breach, the country runs a record deficit and pushes overall borrowing past $22 trillion.”
That could be enough to spook markets again and trigger another sell-off.
And all the while, we have the ongoing problems in China.
To start with, its immense economy that has for so long been a core driver for global growth is now slowing more than expected.
CNBC has the story:
“China plans to set a lower economic growth target of 6 percent to 6.5 percent in 2019 compared with last year’s target of “around” 6.5 percent, policy sources told Reuters, as Beijing gears up to cope with higher U.S. tariffs and weakening domestic demand.”
That has serious implications for the US and world economy. And that’s on top of the ongoing trade wars.
It may sound like Trump and Xi are making headway. And that’s partly why stock markets have been rising in the past week or so.
Earlier this week, Trump tweeted: “Talks with China are going very well!”
But we’ve been here before, haven’t we?
Trump loves to try to control the media and the markets – and messages like this are an attempt to keep the market from falling.
But don’t expect this to be the end of trade tensions between the US and China.
Trump will spook the markets once more with his tariff programme, I’m sure. It’s just a matter of time.
And then we have the Fed…
S&P at important ‘make or break’ technical levels
After the latest rate rise in December caused a stock market rout, Fed Chief, Jay Powell, tried to calm things down. And the markets have responded by rallying.
But there are still two rate hikes planned for this year.
And at the same time the Fed is reducing its balance sheet of the bonds that it bought to support the market in the depths of the financial crisis.
In other words, the Fed is removing stimulus (market support) on two fronts.
Will the market cope with the stabilizers coming off? A bit of bad data or some negative corporate news could be the acid test.
Let’s see what happens.
What we know is that there’s been an impressive rally in the markets over the past two weeks.
The S&P is back testing the important 2,600 level that had provided solid support until it broke down through it on 16th December.
If it can break back up through that level convincingly and close above it, there’s probably more upside to come in this countertrend rally.
But if 2,600 proves to be solid resistance and the market cannot break above it, there’s a good chance the bear trend will resume – to test the lows from 24th December.
Those are the levels to watch carefully on the S&P: 2,600 and 2,315. Will the market be stuck within that range… or break out to the upside or downside?
We should find out soon…
Meantime, while stocks ended 2018 with a whimper, some markets delivered an impressive performance by comparison.
I’m interested in how our old friends, gold and silver have perked up lately. More on them in a moment.
Bitcoin bounces back
But Bitcoin deserves a mention, too.
If you’ve been following the crypto market, you’ll have seen the impressive rallies Bitcoin and Ethereum delivered into the year end and the first week of 2019.
In Monkey Darts just before Christmas we wondered whether mainstream media’s “death of Bitcoin” declaration marked the bottom for the savage sell-off that hit cryptos in 2018.
Still too early to tell on that one.
But there’s certainly been more buying interest since that low point for Bitcoin on 15th December.
Bitcoin is up 15% since then. Ethereum’s gained 53%.
And that’s after pulling back significantly from their latest swing highs in early January.
Seems like interest in this asset class is picking up again.
As Robert wrote earlier this week, Bitcoin has just had its 10th birthday.
And despite several bubbles and bursting of bubbles, there’s still huge appetite for cryptos.
Not necessarily from retail investors. Many are licking their wounds following the price collapse in 2018.
What’s more compelling, as Robert explained in his piece, was that this time it’s the institutions that are lining up.
Here’s how he put it:
“And this next bubble should be an interesting one.
“Over the last few months, we have seen a number of major financial institutions preparing to enter the market.
“In fact, crypto is unusual in that it is the first bubble in history where professional investors are last to the party.
“So far it has been led by retail investors and other “enthusiasts”.
“But now that regulators are cleaning up the market…
“The UK government is poised to give sweeping new powers over digital currencies to the Financial Conduct Authority.
“And now that liquidity in the crypto market is sufficient to tolerate large injections of money by financial institutions…
“The big players are entering crypto in earnest.
“CME, the world’s leading derivatives exchange, has established a regulated futures market – which will allow big institutions to trade huge volumes in crypto.”
And it’s this interest from big players that could ignite then next huge rally in crypto prices.
To understand why, I recommend you re-read Robert’s article.
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Those guys have both made a fortune investing in cryptos and understand the technology more than anyone you’re likely to come across.
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As I said, the jury is out on whether we’ve seen the bottom for the crypto market yet.
But if it is and there’s another bullish move on the horizon, now could be a great time to prepare.
Gold and silver rise from the dead
It wasn’t just cryptos that put on an impressive show at the end of the year.
Our old friends, gold and silver, had a great final quarter, too.
While the Dow Jones index fell 8.7% in December, gold went up 4.9%.
And its little brother, silver, did even better, rising 8.9% for the month.
In fact, gold and silver did exactly what they’re supposed to do – vindicating the Monkey Darts recommendation to hold precious metals as a hedge against falling stock markets.
Frank Holmes at US Global Investors, quoted on BullionVault, explains:
“Global uncertainty made gold a holiday winner for investors seeking a relatively safe haven.
“US stocks just logged their worst year since 2008 – their worst December since 1931 – as fears over global trade, ballooning debt, the end of accommodative central bank policy and a US government shutdown unsettled investors.
“Against this backdrop, the price of gold rallied late in 2018, reversing a trend of negative returns and weak investor demand that prevailed for most of the year.
“The yellow metal, after all, has historically had a strong negative correlation with the market. I’m pleased to report that this inverse relationship held firm in 2018, proving again that investors continue to see gold as a valuable asset in times of financial instability… Gold beat the S&P 500 Index for the month of December, the fourth quarter and the year.”
The point is, we don’t know what markets are going to do.
But despite the recent run-up in stocks, there are plenty of signs that we’re in a bear market.
If that’s true, then rallies like the one of the past week or so could turn out to be opportunities to lower exposure to equities.
And if this turns out to be a ferocious, prolonged bear market – which, given the size and duration of the preceding bull market, is entirely possible – then it makes a lot of sense to divert some of your portfolio into alternative assets.
Those include gold, silver and even good quality crypto currencies.
They could all perform well if tradional asset markets crash.