The years cited in this article’s title included or ushered in 50% debacles, or concluded extensive topping patterns, while only 2019 presents a question mark (for me, regardless this year’s conclusion, the coming decade offers little mystery). While 1987’s topping process was only three months, the market today concludes a year of going nowhere, with a Dow all-time high having occurred last month.
History DOES repeat itself and, depending on how far back one wishes to reach into the past, one can find protectionism and a long term reversal in the trend of interest rates as excuses that would later be cited for rationalizing the financial upheaval or depression that would ensue.
As writers love to share the same hackneyed explanations, rather than join the so-called analysts’ linear reasoning, I far prefer to understand that politicians and “market planners” are not so stupid as to be unaware of what has historically portended calamity.
My approach is to analyze when is the time that the authorities WANT markets to collapse, since the lower valuations represent the desired opportunities to take advantage of long-since-planned expansion of the accumulation of strategic assets.
Since this space is reserved for financial forecasting as opposed to political analyses, I must simply share that the time for fight-picking and asset devaluations has arrived, and we may concern ourselves solely with price targeting, including a technical look at the best means by which to benefit from the anticipated trends in stocks and precious metals.
Dow Jones 30: Over these recent years, the magnitude of the index’s declines has generally increased off of each successive peak.
Moreover, not only do the December 2017 – July 2019 peaks connect with near perfection, but the expanding triangles within the expanding triangles (each of which, by definition, portend ever-increasing volatility before a collapse), also include multiple (and highly likely conclusive) post-March 2009 5-wave movements that, I believe, ended last month.
With that, one may expect an initial (and possibly yearend) crash to the 16,000 – 18,000 area. Many ought to employ strategies that are not dependent on the latter event. That said, however, be prepared now for precisely such a debacle.
Gold & Silver: The understandable inverse has occurred in gold during the 2016 – 2019 period through which time the metal coiled within a contracting triangle, out from which gold has enjoyed a foreseeable eruption (also in keeping with the traditional analysis of such a pattern). This has extended/resumed the post-2016 cyclical bull market, which itself was a resumption of the secular bull market that was identified at the higher low at $285.
The greatest leverage is obviously found in silver, about which the most noteworthy observation from a technical perspective remains, as it always has since 2001:
The inter-relationship of the patterns of the two metals confuses investors. The sole observation about which most all investors agree is that gold leads silver due to its liquidity. For trading and investing in these metals, the most important point, however, is that one may glean gold’s wave count by noting silver’s own Elliott pattern, since they are the same. This must be underscored.
If one can correctly identify silver’s wave count, one would anticipate gold’s major movements (related long term examples and analyses linked here).
STRATEGY/CONCLUSION: Depending on the level of sophistication, and assuming that one chooses to maintain conventional assets, two strategies appear to be appropriate in order to provide maximal yet tempered protection with a small percentage of one’s capital.
One may utilize equity index options to establish calendar delta hedges so that an accelerating decline protects a geometrically increasing portion of one’s holdings. The calendar aspect mitigates the increase of the effects of the recent advance in the VIX and, in an accelerating plunge one could sell a small percentage of the long put position to repurchase the nearer-to-expiry option.
For the very sophisticated who do not wish to feel that preserving the capital committed to the strategy is dependent on a sharp downturn, an option combination should be devised whereby a positive return is generated as a result of a favorable quarter. Such a strategy would likely include a calendar-price spread, using both long and short put options.
Employing precious metals options and precious metals index contracts, in conjunction with equity index options, one could aim to efficiently reallocate portfolio assets from exposure to stock prices to benefiting from the outperformance of precious metals versus stocks.
Here, the purpose is to reduce exposure to conventional assets, while hopefully enjoying protection from a market decline that coincides with an advance in gold and silver.
These asset classes’ asymmetric performance not only represents the very long term norm, but is also the condition by which one could enjoy exponentially increasing profits, owing to an eruption in these asset classes’ volatility premiums from their respective historic lows.
Such a strategy would then equate to a highly efficient reallocation of assets from stocks to precious metals, particularly as little capital deployment would be required as compared to the volume of asset turnover required, if one were to sell stocks in favor of precious metals or their equity indices.
For the nostalgic, yesterday was August 25, the anniversary of the 1987 peak. I remember it like it was yesterday. Good times…..