Thoughts from our recent conversation with ECU Group's Chief Technical Strategist Robin Griffiths, which can be listened to on the Newshour podcast page here or on iTunes here.
It’s no secret the bear is back and to many fear is starting to take over as stock markets around the world plunge into bear market territory. Robin Griffths, along with many of the other technicians we feature on our program each week, has been telling our listeners since last year that stocks were peaking and to prepare for a bear market.
“The last bull market from that ‘09 low was seven years long, extended by zero interest rates and quantitative easing,” he said. “We’ve actually got to correct an artificial bull market.”
Right now, Griffiths is shorting the market, and otherwise advocates holding cash or high-quality government bonds. High-yield bonds of lower quality are being trashed because people have realized they might not get return of their money, he added.
“The global economy is already cooling, and parts of it – China, Russia, Brazil, Turkey, Greece – they’re in depression,” he said. “Right now, they’re in depression.”
The world index is in the middle of the pack in terms of value, Griffiths said, with only two world indices beating it: the S&P and the Japanese market. But even they are not in the strongest category when it comes to his valuations.
Commodities are near the bottom of his valuation model, he said. When it comes to what’s wrong with the U.S. market, it’s not the state of the economy, but the value basis that’s been put on the stock market.
“It’s, quite frankly, absurdly, dangerously high,” he said. “History shows that whenever you buy the U.S. stock market on a P/E ratio of 20, let alone 27, the probability of making money on a one-, three- and five-year basis is vanishingly small. And the probability of actually losing money somewhere along the line is high.”
He recommends maintaining at least some cash to have available for bargains later on next year, he told listeners on Saturday.
“I believe the conditions for a near panic, or what they used to call a flash crash...are really very high now, rather like 1987,” he added.
Oil has already seen this crash, as has copper, Griffiths said. All commodities are in the extreme capitulation phase of a major bear market, and that can’t happen when the world economy is in great shape, he stated.
Though many have expressed concerns about the Fed’s stated goal of further rate increases in 2016, Griffiths noted that Janet Yellen specified all policy decisions are data-dependent. He thinks that if conditions warrant it, we might not see the anticipated rate hikes, and might possibly even see additional QE.
The stock market is telling us our economy may be OK now, but it is going to cool down, he said.
Griffiths argued that China is doing worse than official numbers suggest, and that the country is slowing down substantially, probably closer to 3 percent growth.
Oil too could see further declines, as well. Griffiths sees the next level of support for oil around the $20 mark, and falling prices are likely to bankrupt a lot of people in the oil industry and the banks that have been funding them, he noted.
His work suggests the lows for the bear market are likely to be in 2017. He expects the bear market to play out with a scary fall, followed by a major rally, followed by the rest of the fall, with the S&P and Dow probably losing around 25 percent. China is likely to fare worse, with at least a 50 percent move down. Gold isn’t yet attractive in Griffiths’ estimation.
“At this stage, more people are saying, ‘I want to own the dollar,’” he said. “If you panic currently into a currency, it’s into the dollar. And while the dollar is strong, gold in dollars is not going to be strong.”
There are scenarios where gold could do very well, but the bottom isn’t certain yet, he said. He recommends holding quality franchises paying good dividends greater than government bonds, and raising some cash to be ready for buying opportunities.
“I would resist being brave at the moment,” he said. “If you try and catch a falling knife, you might cut your hand. It’s better to let it stick into the floor first, and then pick it up.
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