As Wall Street axioms (Santa rally, January effect, as goes January etc.) are rapidly falling by the wayside at the start of 2016, following a chaotic but return-less 2015, the UBS analysts who correctly forecast last year’s volatility are out with their forecast for 2016. It’s simple – Sell Stocks, Buy Gold.
UBS Technical Analysts Michael Riesner and Marc Müller warn the seven-year cycle in equities is rolling over.
UBS expects S&P 500 to move into a 2Q top and fall into a full size bear market, with risk of a 20% to 30% correction into minimum later 2016 and worst case early 2017
“The comeback of volatility was the title of our 2015 strategy. Last year’s rise in volatility was in our view just the beginning for a dramatic rise in cross-asset volatility over the next few years,”
Noting that while equities have had a good run, Risener and Muller warn, “we are definitely more in the late stages of a bull market instead of being at the beginning of a new major breakout.”
Our key message for 2016 is that even if we were to see another extension in price and time, we see the 2009 bull cycle in a mature stage, which suggests the risk of seeing a significant bear market cycle event in one to two years.
S&P-500 trades in 4th longest bull market since 1900 Bear markets are defined by a market decline of 20% and more. It’s a fact that since its March 2009 low, with 82 months and a performance of 220%, the S&P-500 now trades in its 4th longest and 5th strongest bull market since 1900. So from this angle alone we suggest the 2009 bull cycle has reached a mature stage.
Keep in mind, since 1937 the average downside in a 7-year cycle decline was 34%…
Having said that, if we look at equities globally the picture looks more diverse. Last year we said we think the May top in the MSCI World represents a major equity top. Our view is unchanged, and in this context it is important to understand and sort in the extent of last year’s summer correction. In the MSCI World universe, we saw in 20 out of 48 markets a correction of 20% and more (DAX -25%), which is per definition bear market territory. The MSCI Emerging Market has been factually trading in a bear market since 2011 but from its May top alone the EM complex lost another 28% into its late August low!
Together with the 200-day moving averages rolling over in more and more markets globally, the break of the 2011 bull trend in the Russell-2000 and the equally weighted Valueline-100 index in the US, as well as intact sell signals in our monthly trend work, we can clearly say that globally, a bear market is already underway in more and more markets; whereas the S&P- 500 has just corrected 13% from its May top, and where into H1 2016 we can still see the large and mega cap driven S&P-500, Dow Jones Industrial and Nasdaq Composite to hit a new all-time high.
In 2013, high yields topped out and particularly since 2014, we have a real bear market underway in the high yield segment, which in the meantime is forming a multi-year divergence versus the S&P-500, similar as prior to the major market tops in 2000 and 2007.
The bear market started with the energy complex but it is a trend, which is filtering through into other commodity themes, as well as Emerging Markets, Asia and at the end of the day into the Western world, which translated means we are running through a very classic credit cycle.
2016 is a Presidential Election year, which usually have a rather bullish track record in the 4-year cycle. However, if we look more selectively into this cycle there is a big divergence between a normal Presidential Election year and the 8th year of a presidential turn, which we highlighted red in chart 9.
Since 1920, more or less all 8th years of a presidential turn were amongst the worst election years.
Also, pattern-wise the two cycles have a very contrarian message where the average of all 8th years of a presidential turn is actually outright negative for next year, which we think would be quite a big surprise for most investors.
So if stocks are due for a 30% correction – what to do? Buy Gold…
Gold has been trading in a cyclical bear market since 2011.
In 2016, we expect gold and gold mines moving into an eight-year cycle bottom as the basis for the next multi-year bull market.
Initially, we see gold profiting as a safe haven and as of 2017, gold could profit from the US dollar moving in a major top and starting a bear market.
Tactically, over the last three years, we’ve tried playing bear market rallies in gold and gold mines several times. In 2013 and 2014, our targets were reached.
In 2015, the bounce in gold was weaker than expected. However, in all these cases we made it clear that we just expect a bear market rally before resuming its dominant cyclical bear trend. Generally, our cyclical roadmap and our long-term call on gold of the last few years has not changed.
A potential bottom in 2016 bottom could be a rather powerful bottom, since together with a four-year cycle low we have also an eight-year cycle low projection for this year. In this context we expect a potential 2016 low in gold to be the basis of a new multi-year bull market.
In contrast to the underlying secular trend in commodities (which has turned bearish) UBS sees gold (which is in our view a currency and not a commodity) still trading in a secular bull market.
Pattern wise we continue to see the 2011/2016 cyclical bear market in the same context as the 1975/1976 bear cycle in gold. Keep in mind, in the mid-70s gold lost 43% of its value from its January 1975 top before another gold bull market started into the January 1980 bubble peak. It is amazing to see that with a loss of 45% from its August 2011 top into the early December 2015 low, the decline in gold has more or less exactly the same proportion as in the mid-70s.
Furthermore, there are still a lot of market commentators who say that the August 2011 top in gold was the top of a bubble. According to the average gains we have seen in historical financial bubbles, the gold bull run from 2001 into 2011 (760%) was far away from any bubble territory. In the first gold bubble, gold gained 2400%. In the 1903 to 1929 Dow bubble, the Dow Jones Industrial gained 1200%. The 1979 – 1989 Nikkei bubble came in at around 2000% and the 1980 – 2000 Nasdaq bubble topped out a +3900%.
So if gold moves into a bubble, we would need to see a gold price of minimum $3300, and in this case we would still talk about a low bubble phenomena such as the 1903 – 1929 Dow Jones bubble!!
What kind of macro environment could justify such a gold bull market in the end of the decade?
In December we saw the Fed’s first rate hike. Even if we were to see another 1 or 2 rate hikes in H1 2016, with a 20% to 30% bear market event in later 2016 or into early 2017, it would be very likely to see a big U-turn in the Fed policy where initially we should see a negation of the rate hikes and at the end of the day we would expect the Fed to move into QE4.
Our call is, that at the point where we see a Fed u-turn, we get the top of the decade in the US Dollar, and together with the accommodative stance of the ECB, BOJ and the PBOC, this would be the trigger for the ultimate reflationary trade, where equities, commodities and finally also gold could rally hard on the back of a big recovery in inflation towards the end of the decade.
And judging by the market so far this year – and post FOMC – the Buy Gold, Sell Stocks plan is already being implemented…
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