Gap Down – Foil to 2013 Gap Up?

We had a gap down in the US markets today:

gap down in markets january 4 2016

Since it happened over New Year’s break, I couldn’t help but think of the gap up in 2013. Which occurred over the same New Year’s break:

market gap up 2013 gap down in 2016

Interestingly, that gap up launched a wild bull year in US markets. A gain of 30+% after the rebound in 2009-2012 was quite an effort. So the thought I can not help having is, will we have a wild bear as a foil to 2013? With the market gap down as the explosive start?

Gap Down. My Thesis For Market Weakness

My thesis which draws heavy influence from a few intelligent money managers that I respect. Bill Fleckenstein being one of the majors, as any reader of my blog could attest.

It goes like this:

  1. Economy is weaker than most people think.  Check. (see today’s ISM report showing contraction)
  2. Market and economy can’t handle Fed rate hikes. Check .(Fed’s Williams admits Fed rate hikes not best tool to stabilize markets)
  3. Fed may or may not try to raise rates for credibility but won’t get far. TBD.
  4. Fed reverses course on rate hikes, possibly announcing QE5 (for fear of “losing” the currency “wars”). TBD.
  5. Market rallies strongly on news of Fed easing. TBD.
  6. Rally Fade. TBD.
  7. The real correction kicks in. TBD.
  8. Market participants, realizing that money printing just delayed the problem, turn to precious metals for protection from the currency wars. TBD.

Whether steps 3-8 happen or happen soon is still conjecture. But we’ve had in my opinion, a fantasy stock market over the past 2 years. 2013 was PE expansion due to low rates. And some revenue growth. I get that. 2014 and 2015 boasted no revenue growth at many major firms. 2015 added increasing wage pressures. And wage related pressures and health insurance premiums kept rising.

So now we have all of these working against the market:

  • Rising rates
  • No revenue growth
  • Rising wage pressures
  • Health care costs rising
  • Stronger US dollar (hurting exports)

Working for the markets we have (or had):

  • Momentum
  • The trend

Both of which were flattened in 2015.

Takers Win All

gap down takers win all!

Photo courtesy of F Delventhal on Flickr

Who won in 2014 and 2015? Did we have real growth in the US? Here are my thoughts. For the past 2 years, the “Takers” have been the winners. Who are the takers? takers are those companies that “take” business from others.

Meaning, it’s not been economic growth causing these stock prices to rise. It has been their ability to take business from others.

Facebook (FB) has been taking advertising business not only from local want ads etc, but also from Google. Google (GOOG) has been and still is taking advertising business from everyone. Amazon (AMZN) is taking business from Walmart (WMT), Target (TGT) and numerous small local stores. Netflix (NFLX) is taking from Cable. Replacing Cable. Students in universities no longer need to get cable. With their free university internet, they are well entertained with Netflix, Hulu etc.

Was There Growth?

It’s a good question. We’ve seen stronger car sales. House sales. Sales of luxury items and clothing all doing well. Must be good times right? I don’t think so. Wages are not increasing on average, though they are finally threatening to (too late). And car buying numbers are certainly tainted by record long car loan terms (almost 6 darn years) and zero percent rates.

The number of houses being bought by investors is still way above average. It has been since the crash as the wealthy park their 0% bank account cash in real estate. Renting to the poor fools who overspent before the crash and lost their homes.

Gap Down Game Plan if You agree

If this gap down is the start of something big, how to play it? There are a few options. Do you want to get in on it now or further down the road? By the way, I will cover some of this in a market update video that I plan to shoot tomorrow (1/5/16).

For now, I’d see if we get a market rally close to the top of the gap down. The break down point. I would make my big bet short there. Big means a medium sized bet. if this is truly the start of a downtrend, there will be opportunities to add to the position.

Options on inverse market ETFs can work well for short to medium term ideas. if you’d really like to ride this it may make more sense shorting the regular ETF’s in a margin account. With well placed stop loss points. Can’t be too careful with your capital!

Bill Fleckenstein (mentioned above) has gone on the record targeting chip stocks and semi conductor stocks for shorting.

Further on Down the Road – Gold

If you buy into this full thesis you could eventually determine that gold could be the ultimate benefactor to the US fully joining the currency wars. Or the “race to debase” the currencies. Since gold mining stocks are so beaten down, it’s not inconceivable to see them jumping 500-1000% if the thesis above plays out.

Do you plan to trade short? What’s your strategy? I’d enjoy hearing from you. And look out for my video soon. I will embed it here and on a separate post.

Video Update 1/6/16 – here’s the promised video update

Thanks for reading!


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Featured image courtesy of Lee Roberts via Flickr