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Stock Market Massacre: Madoff Says...

The past few days of stock market mahyem should not be (i) a surprise or (ii) a harbinger of any kind of "massacre." Then again, it depends on what your definition is when it comes to "massacre." Especially when it comes to Black Mondays. That said, the August 2015 stock market sell off will certainly be remembered...for being the type of market cycle event that was easily predicted and is typically repeated.

If you've been following "Madoff's Tweets" you know that I've been sharing the outlook of the smartest credit market and global macro folks I know during the past year; two of whom have been pointing to widening of credit spreads as being a fool-proof lead indicator of the where equity market indices will be on a 6-9 month forward looking basis. Aside, if simply because CNBC has been ranting and raving for the past year about the unicorns, the price of Tesla, and cheering the stupid over-reaching for a broad universe of stocks, you knew the writing was on the wall. Greece didn't scare you. China does...and Donald Trump should scare you more, especially when he announces that his choice of VP is Alec Baldwin.

The past week did remind me of October 1987; a crappy week, ending with a horrible Friday, and a following Monday that made every specialist on the NYSE shit the bed. The capitulation finally took place on that Tuesday morning, and then followed by markets gyrating less violently over the next few months, but generally headed higher for the next 4 years. Then there was the October crash of 1991. That blow-off came after a cycle of merger mania and culminated with the crash landing of attempted buyout of AMR.

The '94 sell-off was inspired by margin-fueled buying of Russian bonds--it was a long time ago, but that blow-off was credited to hedge fund Long Term Capital, whose bets on Rusky debt were emulated by every major bank, simply because they were all 'piggy backing' on what they thought was the best black box around.

The Internet Bubble of 2000 was simple to call. The writing was on every wall. And, even if the fall of 2008 market meltdown had Madoff's name attached to the tail leg according to the image below, we all remember that period for proving to be the washout from the financial market crapout that will go down in infamy.

What's my point? The chart to the right, which extends back to 1998 thru today, leads me to wonder whether breaking below 16,000 on the DJIA might lead to a decline down to 14,000 area. That would equate to a 20% sell-off, and a 20% sell-off brings the phrase 'recession' to mind. The fact is, when people feel poorer on paper, they don't spend as much money. No new 'Benz this year, that $20mil condo is put on hold. Restaurants suffer, etc etc. The emotional blowback that comes from 10% declines leads to tightening the belts. We call this austerity spending. And we all know what happens during austerity spending. Shit gets much worse.

16,000 is a relatively important 'level' because after it being a peak price in both 2000 and 2007, the markets roared through that level and have remained above that level for the last few years. However, charts are good indicators of where stock prices have been, not always a predictor of where stock prices will be. Bears and Bulls make money, Pigs get slaughtered.

I don't believe the world is coming to an end. I don't believe that events unfolding in China will trigger a global recession. I don't believe that oil will trade below $32 and if goes to $28, I'd recommend leasing a tanker and filling it up. If you country club types are still sitting on those energy MLPs...I wish you luck. You were sold a bill of goods when you bought them, you knew it and you were determined to throw caution to the wind.

This is a good time to buying dividend stocks that have just sold off 10%+. Its not a good time to buy Tesla stock. Its probably a great time to put in your orders for the upcoming Match Group IPO. During lousy times in the market, people want to hook up so they can get some kind of emotional and physical gratification when their financial statements are taking a toll on them.

BLM

 
 

Full post as published by Bernard Madoff on August 24, 2015 (boomark / email).