Avalanche Of Horror: First Gold, then Crude Oil, now equities in for whacking?

3 mins. to read

One of the best things about the financial markets for anyone that likes to have their brain cells stimulated, and in some cases fried (!), is the way that we are always being challenged in terms of where they are headed. Gold has been something of a classic. It was a taboo only recently to go against the idea that the peak here (over $1,900/oz) was anything more than a temporary affair. The “supercycle” should have been back on track by now but yet it continues to slump. Presumably after the “pie in the face” that the metal has delivered to gold bugs this month, it is 2014 which will be the year of recovery..? The argument is that we are heading for hyperinflation, the end of fiat currencies and of course, if that joker in North Korea, has anything to do with it, a nuclear disaster that will make the Boston bombs look like a cake walk.

But, actually what I am focusing on today is not so much the carnage for the Gold bugs and mining stocks in recent days and rather whether the bottom falling out of this market is actually an indicator of wider malaise. It was said to be the case a couple of years back that when hedge funds and others ran into trouble they would liquidate their holdings in Gold. Could it be the case now that Gold is being liquidated for the kind of fire sale reasons that are not yet apparent – a sign of trouble to come?  It may very well be the case is that Gold is a leading indicator of doom with Crude Oil next and then the stock market?

Certainly, the almost daily 5-10% losses for mining stocks we have been seeing of late are starting to be replicated in selected oil plays such as Tullow Oil (TLW) where the daily chart is currently painful to watch. Indeed, 970p was nominally the floor of the falling 2012 price channel here, and incredibly the shares even managed to plummet below this at one point in extremely short order.  A retest of the former 879p intraday low of 2011 now looks to be highly likely even before the end of April.

What, you may very well ask though, is just what is the reason behind this fresh bout of serious bearishness? My pet theory is that it may be China related. During the autumn I went on like a broken record about luxury goods Burberry (BRBY) being the proxy of choice as far as a hard landing for the former Communist emerging market is concerned (see image below for this idea and others from the start of the year). However, this would appear to have been a tad premature (the Hugh Hendry rule about being too early to a party?). It may be that for this spring, bears of China are now on firmer ground, especially if you are like me and don’t actually believe much of the economic data emanating from Beijing….

I also don’t believe that given the difficulty we in the West have in handling our economies after hundreds of years of practice, how the new capitalists in China would have a clue on how to deal with what is plainly a massive asset bubble waiting to burst.  And when it does burst it could provide a headache every bit as problematic as what has been seen in the Eurozone, in fact make it look like  a veritable storm in a teacup!

I am therefore happy to get back to my China sell proxy: Burberry.  From the chart we can see that we have been treated to what is called, rather floridly, a “shooting star” daily candle today, with the  likelihood here being that while there is no end of day close back above the 50 day moving average (now at 1,360p) a sub 1,200p November support retest will be seen over the next 2-4 weeks. Of particular interest is the way that despite the upbeat noises emanating from the company today regarding demand in China, the shares have not been able to sustain the initial spike. Stay short is my mantra.


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