THE YEAR AHEAD

We wish you guys and your families all the best for the New Year, health, happiness and hopefully some profits too. Thank you for your confidence in us last year, we hope we’ve made at least a little difference and rest assured we’ll do our best to make a difference this year too.

I’ll have to start with a little mea culpa here. We’ve delayed this update largely because of me. Not only  am I still slow and clumsy and inefficient due to my broken hand which isn’t entirely healed yet; but I was also struggling as to how I should structure this commentary section for the first update of the year which we wanted to present as sort of a roadmap for the year ahead. In the end I settled on the framework of a poetry line used in one of his works by Romania’s national poet, Mihai Eminescu: time will pass and time will come, all is old and all is new, what is good and what is bad, ask yourself and reckon it. I just looked at many charts and tried to connect as many dots as I could.

I think key to understanding everything this year will be how certain variables will change and interact with other variables in the context of a 3^rd year in the Presidential Cycle – which is when the incumbent President tends to be the most aggressive on all fronts especially if he is eligible for a 2^nd term – which is the situation applicable to Donald Trump. If you thought political attacks have been vicious during the first two years of the Trump Presidency, I suspect we ain’t seen anything yet. If you thought Donald Trump was rough so far, the coming battles are likely to redefine how you interpret rough.

The first consequences of this 3^rd year politics are already seen after a rather tumultuous December. The bond market, previously a punch bag for most short and long-term investors has suddenly come back to life – well the Treasuries at least. The change in psychology was so brutal that long yields fell a staggering 60-70 basis points in a few short weeks. For the Trump haters, here’s my first point. Do you remember Greenspan and Bernanke choking the markets and the economy and continuing to raise rates in 2000 and 2008 waaaay beyond the point in time when the stock market had topped? In many ways that complicated the situation tremendously during the subsequent corrections and no politician at the time said anything about it. Jerome is being as silly right now and Donald would simply have none of it – and that’s not stupid. As any pilot would attest, you can put the ailerons up to slow down a plane that would otherwise overshoot the runway but you can’t use the thrust reversers during a landing approach for that will never yield a smooth touchdown on the tarmac; a crash is inevitable in that instance. The Fed’s rate hikes last year were inappropriate not because of their number but because they were coupled with the simultaneous winding down of the QE. You cannot both withdraw liquidity from the markets and tighten monetary policy at the same time without making big waves of volatility – and that’s what we saw. Expect 2019 to bring moderation in rate hikes and thus a more buoyant bond market. We will get some ups and downs, but any upside bias in yields in my view can only come AFTER and not BEFORE important economic and stock market surprises. If that’s not the case the market will completely cave in. Trump is already vocal about the potential and does everything he can to prevent it. There are signs he is achieving initial success.

Peaking rates would put some pressure on the USDollar which in turn would be bullish for commodities. Both ideas are very compatible with a late stock market cycle situation when the energy and materials sectors are beginning to outperform almost everybody else. We’ve been bullish Gold and Silver since early November and we’ve also had a sweet spot for metal stocks. Those are ideas we will continue to pursue as we feel the overall uptrends are but in their infancy. Corresponding uptrends in the Canadian Dollar and Ausie Dollar both against the USDollar and more importantly against the Yen seem to be starting off and add further supporting evidence to an eventual commodity – or at least precious metals – boom.

A market I never comment about because I simply refuse to acknowledge it as a real asset class – unlike the vast majority of homo sapiens out there – is crypto currencies. It is beyond my professional interest or ability to forecast if the blockchain technology is of any true substance; intuition is telling me it probably is and just like any other revolutionary technology will have to go through a complete boom / bust cycle before completely changing the world. Consider this. Three and a half centuries ago people in Netherlands got excited about something called tulip bulbs – a little wonder the Western World had developed knowledge of by trading with the Ottoman (Turkish) Empire. By 1720 ies the tulip bulb trading evolved into a mania whose aftermath took decades to resolve. Today, tulip bulb trading is a Dutch specialty – Netherlands being called in many parts of Europe “The Country of Tulips”. Dutch growers produce some 2 billion tulips every year and the industry contributes significantly to employment, income and tax receipts in the country. In the 1990ies the development of the internet as a new technology lead to a stock market boom that culminated with the dotcom mania. Undoubtedly, the industry is something indispensible not only to the US but rather to the global economy at this point, contributing enormously to employment, gdp, national income and tax receipts. Many dotcom companies, however, went bust in the meantime and a lot of the prominent ones – such as CISCO Systems – are roughly 50% UNDER their corresponding 2000 highs after initially having fallen over 90% from their peaks. So here’s the deal: if blockchain is just smokescreen and only the NSA conspiracy some claim it is, it will fall 99.99% from the peak and just cease to exist. But I am an optimist, I think it will fall an overall 90% PLUS, get reformed, repackaged, re-tweaked and come back and change the world with applications way beyond finance. Under either scenario it is hard to conclude we have seen the end of the bust phase and there are two technical pieces of evidence that support my view:   since we toped at over 20,000 every single countertrend rally peak brought the belief that new cryptos uptrends were just getting underway to lead to doubling, tripling or quadrupling of prices. It happened at 15000, 11000, 8000 and more recently at 6800. I think it may happen one more time on the current bounce around 5000-5500. The prevalence of this “dip buyer” psychology suggests there is more bearish energy to fuel additional price destruction whose completeness would only be confirmed by the reverse of the “dip buyer” view, i.e. “the mother of all whores / this garbage is no good and serves no purpose” view – which is the normal level of desperation at a true market bottom. Secondly, the current move down is a post triangle thrust whose minimum price objective has not been reached yet. Perhaps the current rally might get some initial fuel to reflect an overall falling USDollar but ultimately reality will settle and people will agree that BTC at 5000-6000 is every bit as idiotic as BTC at 20000. I strongly suspect the implosion won’t stop before the BTC reaches triple digits and if it’s really unlucky maybe even double digits.

Finally we have to talk about stock markets around the world. They are a mixed bag. In Europe, where EU neo Marxists continue to push for their absurd dream of political integration things are beginning to fall apart. Les gillets jaunes / the yellow vests movement have spread from Paris to Rouen to the whole of France to UK to Portugal to Belgium to Netherlands and are flaring up every now and then as the peoples of Europe are growing increasingly fatigued with the failures of a project THEY HAVE NEVER APPROVED – the French have in fact EXPRESSLY REJECTED – AND WHICH IS NOW TAKING A HEAVY TOLL ON THEIR STANDARDS OF LIVING, CULTURES, LEVEL OF SOCIAL PEACE AND EVEN PHYSICAL SECURITY. We believe the German DAX, the UK FTSE 100 and the French CAC 40 have already topped and the eventual no-deal Brexit can only add pressure towards an eventual breaking point. Short-term bullish surprises are only theoretical options based on the information we have right now and would merely postpone a collapse that ultimately seems unavoidable.

Emerging markets are a mixed bag within a mixed bag. China looks awful, quite frankly the Shanghai Composite is at best wasting time in a large degree trading range and at worst setting up for a violent decline. India has topped after a quick thrust out of a triangle pattern and reversed rather sharply. Brazil’s BOVESPA clearly is a rock-star and is conceivably charging higher into what could well be a powerful 3^rd wave intermediate term uptrend. Russia is building bullish energy and could well surprise to the upside. As it is the case with the European counterparts, Trump’s friends or acquaintances do well, Trump’s foes do not so well. What can I say, I am shocked capitalism, Christianity and democracy work while economic fascism, atheism and dictatorship don’t!

This brings us to the all important S&P 500. We’ve said in a previous update that some wave ambiguity in 2010-2011 could make the peak of September 2018 just the top of a big 3^rd wave, with a consolidation-final run sequence still due till we complete the big cycle from the 2008 lows. I had thought that with the angry democrats taking power and with Mueller’s report due at some point early in the year Trump’s presidency might be taking a turn for the worse, in which case I said the market would break below the 2200 area – an otherwise logical support range for a 4^th wave correction (38.2% retracement of wave 3 up). But the market bottomed before 2200 and rallied hard and in doing so is leaving behind a corrective declining structure from the September peak. Far from this removing the overall downside risk we will continue to face at least another few months, this is a potential outcome too important to ignore in a 3^rd year of a Presidential cycle, especially since the guy we talk about clearly knows what he is doing and also clearly knows what he wants. So let’s see how it all develops folks, at least for the US this does not seem all lost despite that atrocious 4^th quarter of 2018. I am beginning to see how in a chaotic world turned upside down by the cancerous globalism of the past 4 decades, Trump’s America can continue to be an engine, a safe heaven and a power to reckon with beyond that rally that topped last year. Despite being a DT supporter, my points here are not based on my political views but rather on the quantum of implications I see from the many patterns I have studied before I put this piece together. Dismiss what I say as political activism at your own risk, but before you do so just stop for a second and look at those patterns below cos who knows, the Donald may be able to singlehandedly pull one more 5^th wave out of his hat !

SUMMARY:

• Interest rates should be calming down. Central bank moderation expected.

• This should drag the USDollar lower, though mostly against commodity currencies

• Gold and Silver appear to be poised for a rally

• Bitcoin collapse not over yet

• European indices have likely topped

• Emerging markets are a mixed bag. Brazil is hot, Russia hotish, China and India not so much

• US Indices remain in cards for a consolidation / final run sequence to complete secular bulls – but only if the December lows hold

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A LOOK AT ETFs

Welcome to 2019! Marius and I hope you all had a great holiday season with friends and family and we hope you are as excited as we are for what is to come in 2019.

As you are aware, we continue to find ourselves in an especially volatile environment where dispersion among individual stocks is muted. In other words, the overall stock markets in the US are highly correlated and it matters little which stocks you own. Overall indexes swing from short term overbought to short term oversold in days, taking the majority of stocks with them.

This service will continue to cater to what we believe will help subscribers navigate current market environments. As markets change so will we, and emphasis will be placed on both identifying opportunities while attempting to keep you out of harms way.

In Q4 of 2018, the stock picking portion of this service assumed a swing trading style as opposed to day trading. We are in a day trader’s market and short-term gains need to be booked quickly as the current speed can serve to evaporate unrealized gains as fast as you made them. A look at the CBOE Implied Correlation Stats show graphically what I am talking about:

As long as this continues, we believe ETFs to be the safer play, while still providing ample opportunity to capture gains. Most importantly, ETFs mitigate single stock risk. The following is a list of the top 5 ETF setups taken from a scan built this past week. They are liquid and optionable so those who trade options can benefit as well.

SYMBOL	DIRECTION	SELL ZONE	TARGET	VEHICLE
HYG	SHORT	82.50-83	81.00	OPTIONS

High yield bonds had a mean reversion bounce last week which I think will stall in the coming week. Price is coming up against an area of resistance where I believe it will reject and fall, possibly filling the gap left below. We want to be short of HYG near $83 as I think the gap higher last week will need time to come back in to put in proper lows if that is what is happening.

SYMBOL	DIRECTION	SELL ZONE	TARGET	VEHICLE
XRT	SHORT	42.50-43	40	OPTIONS

Much the same setup as HYG, we have XRT mean reverting into an area of heavy resistance. Many individual stocks and ETFs got overdone to the upside on Friday and will need time to come back and consolidate which I think happens here. Get this one as close as possible to $43 and look for a retest of the midrange of the initiative bullish candle put in on 12-26.

SYMBOL	DIRECTION	BUY ZONE	TARGET	VEHICLE
EWZ	LONG	40-40.50	46	OPTIONS

One of the recent standouts from a long perspective has been Brazil. It has become somewhat of a rarity to see an instrument buyer controlled, but the EWZ has been just that. We want to get long on any pullback. Look for price to trade down towards the top / mid of the initiative bullish daily candle from 1-2 and plan an entry there for a move up to $46.

SYMBOL	DIRECTION	BUY ZONE	TARGET	VEHICLE
TLT	LONG	120-121	140	OPTIONS

TLT was a great example of a failed breakdown which turned into fake a move to make a move. Should this stay trading above the 120 area this has potential to turn into a long term sustainable uptrend back toward highs seen back in 2016. For my own IRA I am looking into some long term ITM calls on any pullback.

SYMBOL	DIRECTION	SELL ZONE	TARGET	VEHICLE
GDX	SHORT	22-22.50	19	OPTIONS

Since volatility entered our markets in September GDX and related Gold trades have been a popular (and profitable) trade. However, GDX in particular has the look of a bear flag as it approaches overhead supply. Former support turned into resistance should prove to give the trade trouble trading higher as we approach $22. I would get short close to $22 and play for the fall back to the lower bound of the value area.

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