FYI | Oct 09 2013
By Peter Switzer, Switzer Super Report
One of the great tragedies of US history was the Hindenburg disaster. Herbert Morrison made “Oh the humanity” famous as the announcer at that unforgettable event. So, could the stock market be heading for a Hindenburg moment?
Major headwinds
Before that, let me set the scene.
Sam Stovall of S&P Capital IQ is one of my favourite US experts and recently he was talking about a market analyst, who was tipping a 13% pullback in stocks. The discussion is relevant with the major headwinds, significantly in hurricane season for the Yanks, coming from Washington and the nincompoops in Congress.
Let’s face it, China, Japan, the UK and even Europe look to be making a positive contribution to the world economy and global markets. Also, the US economy keeps delivering, on net, more positive signs that it is in recovery mode, but the now week-long shutdown of non-essential government departments and the October 17 deadline on the debt-ceiling could easily rattle the market, if it was thought a genuine debt default could happen with the USA.
This would make me believe a 13% or more fall in stocks would be possible, but I still don’t see it as probable.
A default just can’t happen, as it would undermine investor confidence worldwide — the belief in US treasuries is that important!
The ‘no default’ view
So where are we with this Congress standoff?
Republican House Speaker John Boehner doesn’t have a majority to pass legislation on raising the $16.7 trillion borrowing limit, without spending cut conditions attached. He is hamstrung by his Republican colleagues, who have defected to the ‘Tea Party’ — a bunch of conservative economic maniacs, who interpret economic theory literally like religious hardliners perceive the Bible or the Koran.
Boehner says the US was on the path to a credit default but a Tea Party pollie, Tim Huelskamp from Kansas pointed out on CNBC that the next repayment on US borrowings isn’t until October 30 and then the one after that in mid-November. He argues the October 17 deadline could be passed with no default happening, and so he thinks markets know this and that’s why they haven’t sold off heavily.
He ruled out a default would happen and I hope he’s on the money.
Moody’s has also joined the debate and it doubts a default will result.
"It is unlikely that we go past October 17 and fail to raise the debt ceiling, but even if that does happen, then we think that the US Treasury is still going to pay on those Treasury securities," said Moody's CEO Raymond McDaniel.
Stovall thinks a 5% sell-off is more likely but his analysis is certainly based on the debt-ceiling issue being settled and that it would be buyer fatigue that could explain the lack of enthusiasm for stocks after the market’s 25% plus gain this year in the USA.
Sell-off on the cards
On my Switzer program last night, Lance Lai of Accountancy Invest, said the charts indicate a toppy-feeling for stocks, and so a sell-off is on the cards. If the Congress adds more lead in the saddlebags, then the 13% call is possible. That said, he thinks an end-of-year rally also looks likely.
Meanwhile Gary Stone of Share Wealth Systems thinks US markets are in a sideways pattern, but a move up could be just as likely as a move down. Like Lai, he thinks the bull market will reassert itself after any sell-off. He nominated low interest rates, the history of low economic growth as a starting point for a bull market and “the don’t fight the Fed” attitude of smart investors as the prime reasons for stocks to head up, even after a pullback.
The Hindenburg Omen…
And then there is the Hindenburg Omen, which could well be telling us that Stovall is wrong and a big stock slump is on the way!
Chris Puplava of financialscience.com looked at this old indicator, which in a nutshell says if a market starts delivering lots of new highs and new lows, then there could be something crazy afoot. A normal bull market will generally make new highs — for the indexes and for companies — but if you get lows as well, then there could be a Hindenburg zeppelin blow up on the cards.
Puplava did a neat job to explain some odd reasons for new lows and pretty well dismissed the Hindenburg doomsday merchants around right now for being long on hot air.
“We got a cluster of Hindenburg Omens in late 2005 and yet we only saw a mild pullback—not a crash or bear market, which was confirmed by new highs still dominating new lows… However, around the cluster of Hindenburg Omens in 2007, we saw that new 52-week lows began to dominate new highs; this was the sign of a market topping and why the Hindenburg Omen carried more weight in 2007 than in 2005.”
Buying opportunity
For my part, if Congress stupidity allows a default, then I would expect a sell-off and it could be 13% plus, but I’d then repeat my usual message that it would be a buying opportunity.
I wouldn’t be saying that if there were real Hindenburg omens out there, as it is this Report’s job to tell you when it could be “get out” time.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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