Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Stock Market Sell-Off Happened – and How to Make Money on It

Stock-Markets / Stock Markets 2015 Aug 24, 2015 - 02:03 PM GMT

By: ...

Stock-Markets

MoneyMorning.com Shah Gilani writes: It shouldn't come as any surprise that U.S. stocks went into free-fall mode last week.

The signs were everywhere. I'll prove it to you in a moment.

What's likely to happen next is no less frightening, so investors better look for cover.


But before that happens, I'm going to show you all the telegraphed signs that this was coming and what to look for next.

Then I'm going to show you how to cash in…

Investors Were Only Too Happy to Forget About the Fed

The big, big picture that too many investors lost sight of was that the U.S. Federal Reserve's zero interest rate policy (ZIRP) and massive quantitative easing moves didn't stimulate economic growth.

And it didn't work when the European Union, Japan, and China tried them, either.

Lower interest rates were supposed to stimulate consumption, production, and gross domestic product (GDP) growth. And they were designed to lift asset prices – in the case of the Fed, this was an articulated policy goal.

In the Federal Reserve's "wealth effect" scenario, consumers would feel better about the economy's prospects (and their own) by watching stock prices rise.

Rising stock prices, fueled by cheap money in the U.S. that financed $2.7 trillion worth of stock buybacks in the past six years, of course lifted share prices and increased earnings per share metrics (because the same or lower earnings are measured against fewer shares).

The one-two punch of corporations buying their shares at ever-increasing prices and better earnings metrics made stocks look better and better to the untrained eye. And that created a "virtuous momentum"-fueled push to higher highs for equity averages.

While other countries were following the Federal Reserve's lead, China not only lowered interest rates but embarked on a debt-fueled stimulus tear – including runaway infrastructure spending.

According to McKinsey Global Institute research, China's total public and private debt burden skyrocketed from less than $7 trillion in 2007 to more than $28 trillion by mid-2014. And still, China's GDP growth has been slipping badly.

The combination of low interest rates diverting investment capital and savings into capital markets, chasing equities and increasingly lower yielding fixed income securities, and China's stimulus efforts to increase infrastructure, manufacturing, and its exports, which led to over production and stockpiling of commodities, brought us to this point.

That's a big, big picture I just painted, of course. But beneath that, mechanical realities were signaling trouble.

The price of oil has been sliding. When the price of the most important commodity in the world starts to slide, it's not just because America's new record production of 10 million barrels a day is tipping the supply side of the equation.

And it's not that other producer countries desperate for revenue (which is another indication of trouble) are pumping furiously.

The price of oil, that critical bellwether, is crashing because global demand hasn't been rising as much as it was, because global growth is slowing. That's been a flashing light.

Planet of Debt

It's been a great 28-century run, but Greece is on probably its last legs. That's another sign, not just about Greece, but about the burden of debt in general.

There's no way Greece can pay the more than $350 billion it owes, and that's just in bailout loans.

There's no way Japan can repay its government's $11 trillion in debt, which will be three times Japan's GDP by 2030.

The United States is no slouch in the debt department either. Globally, debt burdens have been climbing higher.

And that takes us back for a moment to that big, big picture: Central banks slashing interest rates is a scheme to cut governments' cost of financing their increasing debts.

The only pathway out of everyone's debilitating debt spiral is for economic growth to accelerate (that's of course what everyone hoped low interest rates would accomplish) to such a point that higher tax revenues help pay down debt and that robust growth leads to inflation, which reduces the cost of debt.

That's why central banks want inflation – and that's another crystal clear clear signal of trouble: There's no inflation.

Then there's China. The saying used to be, when the United States sneezes, the world catches a cold.

That's now true of China. And China is sneezing, hacking, loading up on NyQuil and taking three days off work.

Chinese officials tried to push Chinese stock markets higher by cheerleading them on through party papers and TV shows.

Millions of new brokerages accounts have been opened since the end of 2014, and Chinese "speculators" have been lavished with margin to buy into China's hot stocks.

The central planners' hope was to get China's debt-ridden corporations, especially state-owned and controlled corporations, to be able to issue equity to new stock investors in order to offload balance sheet debt onto equity market plungers.

That didn't work. When Chinese stocks crashed, that was a giant flashing light screaming trouble.

There's just no good news left to lift stocks higher. There's no market leadership from any industry, other than the brief momentum runs made by some tech darlings and a bunch of hot biotech companies promising next-century solutions… to yesterday's problems.

And Here's Where It Ends… and Where We Clean Up

And there's the final straw, the Federal Reserve's leaning towards raising rates.

All these signals were flashing yellow, then bright red in the past few weeks.

We caught them all in my Short-Side Fortunes newsletter service and are very short and very, very happy, because we are short China, oil, Europe, and all the U.S. equity averages.

I'm looking for an oversold bounce at some point, but to me, if we get one on thin volume, it will be a chance to just load up for the next downdraft.

There's nothing holding markets up any more. It's truly frightening.

Central banks have shot their ammo. Their bazookas are smoking empty pipe-dreams now.

That's the most frightening reality now: The emperor wears no clothes.

What the markets need is a good, long flushing-out. Not that I want to see that, even though we are short, but that's what they need to squeeze out excesses built into artificially inflated equity prices and bond prices.

It's not too late to take profits, if you still have them. And it's not too late to hedge against further downside moves, or to make money if stocks have a lot further down to go, which I think they do.

Since puts are now so expensive, the best way to hedge and the best way to profit from any further selling would be to buy inverse exchange-traded funds (ETFs) like ProShares Short Dow30 (NYSE Arca: DOG), or ProShares Short QQQ (ETF) (NYSE Arca: PSQ). We own both in my Short-Side Fortunes service, and they provide great short exposure to the big American indexes.

As sure as this sell-off's been clearly signaled, there will be signals when we're near the bottom.

There were clear signals in March 2009 that the market was turning up, which I wrote about right here. I'll be writing here again to tell you when this storm has passed.

Get Even More High-Profit Crash Recommendations

Source http://moneymorning.com/2015/08/24/why-the-sell-off-happened-and-how-to-make-money-on-it/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in