Well-known market timer Bert Dohmen said the directionless behavior of the major indexes, like the Dow (DIA) and the S&P 500 (SPY), over the past several months reflect a top in the market. He also cited slowing economic growth in the U.S. and a “monumental credit crunch” in China as his main two concerns in a recent interview with Financial Sense Newshour.
The market has been trading up and down for the past several months and really going nowhere. From your perspective, do you think we are seeing a consolidation or more of a topping process?
"This is typically what happens at a market top. You get this big churning up and down, up and down, until finally the market goes where it wants to go, and that's downward. And this churning action is really produced by the big money in the business: the big hedge funds, the big trading operations, and so on. They have to sell their large positions and that's being done. They sell a bunch of them…prices [go] back up again so that the prices get more attractive for them to sell. So you get this pattern of rising volume on declines and declining volume on rises, and that is what we call a distribution pattern. That means that stocks are being sold by the big smart money to the naive money, which is the typical money manager. So until they are finally rid of their whole load of stocks, and they are nicely positioned on the short side…then it can just fall by its own weight. In my opinion, that's where we are now."
What are your main concerns right now for the U.S.?
"Housing sales are really concerning, I think, because both new home sales and…existing home sales are down at an annualized rate of 24%. That's quite a bit. Now this is at a time when there's a real shortage of homes supposedly out there because nothing has been built for 5 years. So if you have low housing inventory and then you get low demand, that's not very good for the market. It really shows you that the market is weak. Now the homebuilders, of course, they're still out there raising prices, which diminishes demand even more. Maybe that's why we're seeing a decline in the new homes sales because they raised prices too fast and we're not going to pay those prices. It also means that banks are not making mortgage loans. So this is concerning. The opinion on Wall Street—probably 95% of all the economists you see in the news—they will tell you the economy is strengthening or will strengthen this year. Our opinion since late last year is that 2014 will see the economy getting weaker and weaker and possibly skirting a recession. And right now it seems that our forecast is on track from everything that we look at. The surprises are really on the negative side. But the economists are not recognizing it. This is very much like 2008.”
Outside of the U.S., what major problems do you see weighing on the market?
“China is having an enormous monumental credit crunch. No one can get a loan over there unless you are an SOE, which means a government owned company. If you're owned by the government, you're controlled by big party officials who are very well related and they can still get loans. No one else can... A China recession is now in progress—and I'm talking about a private sector recession, not the manipulated numbers that you see in GDP coming out of China. They include the government and they include big fudge factors as well. The private sector in China is in a recession right now. The ripples from that will go across the world—Asia first, of course, and then everywhere else.”
So you see a lot of headwinds facing the market right now. Are there any tailwinds or positives that could change your view?
"The potential positives are this: the Bank of Japan, in my opinion, sometime over the next four to six weeks will roll out another big stimulus program because they will see that the economy is weakening very rapidly since they just hiked sales taxes from 5% to 8% on April 1st. And that's a big big increase... The ECB will also [stimulate]. They made some comments now—the head of the ECB, Draghi—that the ECB is ready to act, ready to stimulate, and it’s generally thought now that over the next month or two the ECB will come out with some type of stimulus program; because they are now also fighting deflation. They're getting worried about deflationary forces. The strongest economy in Europe is Germany and Germany is just on the edge of no growth. That's very bad when the strongest one is weak.”