Hindenburg Omen: 4 Instances In The Last Two Weeks

Yesterday we got our 4th confirmed Hindenburg Omen signal with all the others occurring over the last two weeks.  We had a similar occurrence in September last year before the October swoon.  A Hindenburg Omen is not a timing tool nor does it mean a crash will happen.  It simply means that a correction of 15% or greater has a 25% chance of occurring over the next four months.  So the window is between July and October.  In fact all corrections of 15% or greater over the last 30 years save one have had an Omen signal precede the correction.  Stated another way the pre-conditions for a big correction or a crash have been met and the clock runs over the next 4 months.

Most of you know I am a bear and I have been positioned as one for many months.  I have margin ammo to add to my positions should I gather more confidence.  At the very least for you bulls this should serve as a heads up that the underlying market internals are not healthy.  My belief is that this is the most dangerous stock market we have ever seen since the inception of the Dow Jones Averages in 1876.  The Global Central Bank manipulation has extended this cycle 13 moths longer than the previous record of 60 month advances which occurred in the bull market tops of 1987 and 2007.  Cycles can be stretched but not denied and I would contend that manipulation makes the hang over that much worse. The market is having trouble here at its 161.8% Fibonacci extension form the 2007-2009 low.  The 161.8% Fibonacci level is the Golden Ratio in nature and I suggest the market will have a very difficult time making it through this level in addition to all the fundamental headwinds that are beginning to appear.

I am not recommending you short this market today as we could make marginal new ATH’s from here.  However, I think the risk reward is very skewed to the downside as we are now in the crash window and 13 months beyond the previous 4 year cycle advance record.  View this post today as a Public Service Announcement rather than a prediction or a recommendation.

The Dollar has been taking some time off since March and consolidating the Monster move up from last May when it completed its 4 year cycle low.  I am pretty sure that we have seen the intermediate term bottom with maybe one more minor push down.  The dollar strength should act as a tightening mechanism for global credit and kick off another round of risk off in emerging market equities and debt.  I suspect the energy complex will get destroyed so I will be looking for shorts there.  The general equity market looks very tired and has technically very weak momentum.  I suspect more chop with a bias lower.  I have started a long dollar position yesterday and will add on weakness.  My longer term target for the DXY is 120.

Bull Markets do not end on bad news.  As much as it pains me to say that it is true.  Do you really think the central banks will let these two blokes end their confidence game.  Hell no! The market internals are awful and we are due for an intermediate term correction (5-10%) that began on May 20th.  I expect to cover around 2010-2040.  The market could correct down to the October 14 lows but I doubt the CB’s let that happen.  When the VIX hits 20 I will be looking to go long some call options for a trade.

We have been churning at a top since December.  Ultimately I expect tremendous pain ahead.  I don’t think we get a lot of heads up as to the end of this Bull Market due to the ungodly amount of CB intervention and lack of liquidity due to market structure and the regulatory regime that’s reduced dealer balance sheets.  The odds of a crash are high.  However, I don’t think we crash due to Greece.  Keep an eye on credit spreads as they appear to be be widening again and the stock market buyback machine may be in jeopardy.  Bottom line: at some point we get a buyable dip in the next two weeks (but it is only a trade) and then we rally to a new high or close to a new high.  I would not want to be long coming out of August into September.

Code Rebel (CDRB) a Maui based enterprise software firm had an IPO on May 19th.  The stock was sold through Burnham Financial and they priced about 1 million shares at $5.00 to raise $5 million.  Since the IPO the stock is up 640% and currently sports a $450 million market cap.  Their revenues and losses in 2014 were $223,000 and $679,000 respectively- a mere 1,800x Revenues.  Their premier product is iRAPP® terminal services products that allow users of Windows-based personal computers (“PCs”) and Apple Inc. computers (“Macs”) to simultaneously access programs on their PCs and Macs through a single device using a single monitor, mouse and keyboard.  They claim they are the only working product on the market but site Citrx, Microsoft, VMware and Red Hat as competitors.  Last time I checked they are not shabby competitors.

So what is wrong with an enterprising young CEO tapping the capital markets to raise money to grow his business?  Absolutely nothing, except this should not be a public company.  This is an early stage company that should be in the portfolio of a VC fund.  Why didn’t they go that route instead? Maybe because they couldn’t.  In the DotCom era IPO’s of venture capital stage companies were routine at the end of the cycle.  Most of them were zeros once the capital markets closed.

Code Rebel qualifies as an emerging growth company which allows them to skirt a host of reporting requirements (buyer beware).

I found out about the company from a friend who is a software engineer on the island and he asked is this legit?  Yes it is likely legit in that it is a legal company and is registered with the SEC.  Is it worth $450 million? I will let you all be the judge of that.  I will provide some pieces to the puzzle that might suggest the valuation borders on the absurd and insane.

Arben Kryeziu is the CEO of the company but he is also the CEO of Bump Networks which apparently shares the same address and offices as the public company Code Rebel.  From the SEC filing of Code Rebel the address is:

Additionally, the CEO was embroiled in a bit of controversy on the Island of Maui which may have pushed him into the very accommodating public markets via Burnham Financial:

http://www.bizjournals.com/pacific/news/2014/07/17/maui-fund-mbloom-in-conflict-of-interest.html

And finally last week the CEO Arben was featured on Fox Business Making Money with Charles Payne.  They were waxing philosophical about tech disruption, VC markets and Arben’s company.  Arben plans to use the $5 million to expand his business and roll up other companies.  When asked about profits and revenues he was rather modest in that he said he could not disclose.  Funny but I thought he filed an S1 to IPO.  However, he did say they will be on the path to profitability shortly.  Charles asked “Your are not VA Linux?”  In case you are not familiar with LNUX here is the wikipedia description:

VA Linux Systems took its stock public in an initial public offering (IPO) on 9 December 1999, under the stock symbol LNUX. The IPO offered shares at $30, but the traders held back the opening trade until the bids hit $299. The stock popped up to $320 later in the day, and closed its first day of trading at $239.25—a 698-percent return on investment. However, this high-flying success was short-lived, and within a year the stock was selling at well below the initial offer price. As of 2005, this was still the most successful IPO of all time. The stock price reached an intra-day peak of 54 cents on 24 July 2002. It then soared more than 1,000 percent to an intra-day high of $6.38 on 11 September 2003. As of 26 November 2006, the stock closed at $4.64.

You can tell Charles and the panel had no clue who this guy was or the fact that CDRB was trading at 1,800 times revenues.  They should have at least pressed him for some revenue figures since he was already public.  At the end of a long Bull Market people don’t do work or really care anymore because making money is so easy.  Charles needs folks to fill the chair.  Arben was only too willing.  You can be the judge on this nonsense but if I look out a year this is trading sub $5.00 unless I am missing something.  I would not short this just yet as the float is thin but put it on your radar screen.  The bull market is aging and just washed up on the shores of Maui.  Below is the Fox Video of Arben’s interview. Arben speaks in the beginning and again at minute 10.  Enjoy the farce that is our capital markets.

Living so far away from the buzz of Wall Street has its advantages.  As I sit on the side of my volcano (which is dormant) I am witnessing a synchronicity of events.  These events are seemingly unrelated.  From where I sit many long term cycles are asserting themselves.

Earthquakes: Earthquake and volcanic activity is off the charts this year.  We have had the disaster in Nepal and more concerning we have had an increase in earthquakes in North America this year especially in rare places.  For example, Ohio and Texas had one as well as Nevada on Friday.  The ring of fire has been increasing in activity for years, however much of that activity has occurred in the Pacific Rim and Asia.  California is in the ring of fire and it is likely to see a 5.0 or greater mag earthquake over the next 12 months given all the related activity in North America.  The common reason cited for this increase in activity is climate change.  Somehow human activity is responsible for this increase is what the proponents of this theory espouse.  I have also heard that it is caused by celestial alignments that occur with cyclical regularity over hundreds and thousands of years.  Another theory is that the sun is going into a cyclical dormant period which will cool the earth and increase the earthquake and volcanic activity of the earth thus the sun is the cause (record cold winters lately).  Regardless of the reason something dramatic is happening to the earth and it is cyclical in nature.

Here is a video of a guy predicting increased activity in North America over the next several months.

Bond Crashes: On the 8th and the 11th of May in the wee hours we had Global bond crashes that were fixed before the New York open.  Massive Central Bank intervention was needed.  I watched both these crashes occur in real time.  How can bonds crash with massive CB purchases and ECB and BOJ QE?  Well they did and you should be concerned.  The ECB was so concerned they announced that they were going to accelerate their bond purchases in May and June.  My guess is that the speculators have front run this trade so much that their is more supply than the ECB can handle as they go to purchase in the open market.  Have rates bottomed after a 30 plus year bull run?  It remains to be seen but the whole advance in stocks is predicated on cheap money and buy backs.  Higher yields will not support that trade in my opinion and stocks should suffer.  All cycles eventually end.  Keep an eye on rates.

Equity ATHs: Last Monday night on the S&P futures we hit the 161.8% Fibonacci level incorporating the 2007 top and 2009 low.  This level is huge resistance.  We also have time resistance as well: from the 2000 top to the 2007 top was 91 months and from the 2007 top to now is 91 months.  Additionally, the Dow Transports have taken out important support today and we have had a Dow Theory non confirmation for six months.  Non confirmations are not good timing indicators but they have occurred at all market tops except one-1929.  The longer non confirmations go on in time the more meaningful they are.  The longest non confirmation occurred in the 1919-1920 top which was 11 months.  The breadth and internals are also flashing huge warning signs as well as the lopsided sentiment and huge complacency demonstrated by the low VIX.  I am massively short and have been for awhile.  The bulls are banking on continued CB largess and easy money.  The global economy is rolling over and S&P revenue and earnings estimates are coming down but yet we hit new marginal ATHs.  The bulls should consider this fact: we have had 27 CB’s ease this year, a dovish Fed, ECB QE, China rate cuts and continued BOJ QE but yet we are basically unchanged for the year.  The momentum of this market is pitiful and the P/E multiple is expanding as the earnings estimates ratchet lower.  Liquidity is an absolute joke and should the herd come around to my point of view this market will become unglued quickly.  I will cover if I am wrong.  A marginal new high does not make me wrong given what I am seeing.  Remember all market tops begin from new ATH’s.

Social Unrest: The disparity in wealth is at record levels and real unemployment is high.  The masses are becoming increasingly restless and as I have said before we should continue to see civil unrest and mass demonstrations and protests across the country.  Also the government corruption is coming to light as scandal after scandal breaks as the most recent pay to play Clinton Foundation highlights.  The government appears to be preparing for civil unrest given all their ammo purchases by DHS and now the Jade Helm 15 drills occurring across the nation.  When I have casual conversations with people and we turn to politics the common theme is the total lack of trust in government.  Civil unrest is cyclical in nature and it is on the rise.  War is also cyclical and our Nobel Peace Prize President seems to be racing us towards conflict with the Russia and China.

Conclusion:  Are these four things related? Maybe, maybe not.  What I do know is that everything is cyclical and change is constant. However, it does seem to me that a number of cycles are converging.  You are not awake if you don’t have a sense that something big is going on.  Change is coming and it is coming fast.

As I noted several weeks ago many turning points were at hand.  Bonds are crashing today.  The three year cycle top may be in.  The implications for equities are clear.  Higher bond yields will likely put the brakes on the stock buy back machine as the math stops working to issue bonds and buy back stock.  In addition, equities have been bid to the moon as fixed income substitutes so higher yields will send dividend paying stocks lower.  My guess is that we will see equities under considerable pressure until bonds settle down.  Risk Parity funds worst nightmare is both a declining bond and equity market.  The leverage in that trade is likely considerable.  Stay tuned.

I don’t have much to say.  I am alone.  All my brethren have been killed.  Everyone I know who was a bear has flipped on me.  I am not talking a couple people and their PA.  I am talking friends here and in London who command billions of equity and hedge fund assets.  Now they were not short per say but they were cautious.  No More! TINA rules the day.  To a man and woman they have given up fighting the central banks.  Mind you they have not been fighting them the whole time but over the course of the last 6-12 months.  The high priest central bankers have converted everyone.  Apparently revenue and EPS misses are ok now because it means more stimulus which of course means higher equity prices.  No one cares about the deteriorating fundamentals like the fact that semi-conductor companies are missing big on the top line.  They are usually early warning indicators of economic weakness across the board.  It just doesn’t matter.  The central banks are no longer subject to the cyclical laws of nature.

However, what if the death of the bears was a problem for the central bankers? The marginal buyer of equities has been companies purchasing their own stock, Europeans chasing dollar asset momentum and stubborn bears covering their shorts.  Last week I wrote about multi-asset class turning points.  It appears to me that the U.S Dollar has peaked and is heading lower, bonds yields look like they want to rise and gold is showing signs of life.  We also have potential for a bullish reversal for the Yen and the Euro.  So essentially the last of the bears went long and there are no shorts below us to cover when selling begins, the europeans are up to their eyeballs in the US Equity Strong Dollar Trade and look to become net sellers as the dollar weakens.  In addition, bond yields look set to rise which could slow down the debt fueled corporate stock buyback binge.  Buying power may be drying up for the time being.  The market today felt exhausted.  Friday’s minor new high had only 18 new 52 week highs on the S&P.  A very poor reading of strength.  In addition, all sorts of exotic technical voodoo triggered last week which suggests at least a reversal.  We are close gentleman.  Bull markets end when there are no more bears.  Well the bears are dead and now the bulls are next.

“Money, capital, has a life of its own. It’s a force of the nature like gravity, like the oceans, it flows where it wants to flow.”

Maxwell Emery-Chairman, First New York Bank from the Movie Rollover 1981

I have consulted the charts and burned some entrails…I come to only one conclusion…capital is about to flow in different directions from the prevailing trends as the fiat currency quickening accelerates.  New trends are already emerging and some appear to be on the Horizon.  The most important piece of this puzzle is the Dollar.  It appears to have topped or will shortly in the near term and is entering a correction mode that will prevail for weeks perhaps months.  I think the Euro and JPY will rally in response to the dollar weakness.  Oil and other commodities have already sniffed this out.  Oil looks poised for a sustained move up.  How high and how long remains to be seen.  Gold looks poised for a big move.  I have chatted with OA and he agrees.  A big move is coming.  I am biased up given my near term view on the Dollar.  Bonds look ready to fail here potentially and I think yields begin to rise.  And finally US Stocks look ripe for a significant correction from all my measurements that I follow.

Sentiment on most of these currencies and assets classes are at extremes in the direction of the prevailing trend.  Cycle work suggests major turing points.  The boats are too loaded to one side and we are about to flip.  Some of you might ask “What is the catalyst?”  There does not need to be one but lets use Greece as the current excuse.  I am looking to perhaps go long gold and/or the miners if it breaks above $1220 and potentially short QQQ or SPY on a break.  I think we should see the speed of the markets pick up and volatility increase.  I am looking for this to begin over the next 2-4 weeks.  Of course I could be absolutely wrong so I will wait for some confirmation. Don’t worry the world is not ending…just changing

Long-term I expect the dollar to go much much higher as the emerging markets de-lever their $9 trillion in $ debt.  However, trends don’t go up or down in straight lines.

We are officially a Banana Republic.  Ben Bernanke has announced his intention to Work for Ken Griffen of Citadel as an “advisor”.  He will not get paid a bonus and it will not be dependent on the performance of the Fund instead it will be a fee arrangement.  Sounds like a straight up payoff to me.  When I saw the headline I thought it was the onion.  Zero Hedge, the supremely pessimistic financial alternative news site, has been claiming for years that The Fed has been using Citadel as their equity trading proxy to manipulate the equity markets.  I must say this smells to high heaven. Being the shit stirrer that I am, I tweeted the “Fed Hating” Rand Paul that he contact Zero Hedge and look into this matter.  Ladies and gentleman we are not in Kansas anymore.  Let the fireworks begin and get your pop corn ready.  I demand congressional hearings!

For those of you old enough to remember Monty Pythons “The Meaning of Life” the fat man (AKA Bulls) is stuffed to the gills.  The waiter brings one more wafer thin mint and the fat man Explodes.  This weekend all the talk was of a blow off top coming in US equities.  Pro Traders were talking about the potential to really explode from here.  Of course today’s action suggests we retest the lower band this week.  We could fail and continue lower, however, I think we bounce and run to 2140.  Why? Because this market is designed to kill both bears and bulls.  I think bears try one more time this week and get the Heisman.  Then the bulls take one last glorious wafer thin mint run at an ATH before they explode in a spectacular fashion.

Seriously, the market is at a critical juncture here.  I will be Zen about this and observe.  Will the US stock market demand Fed action and correct to test their resolve or do we follow the other indices into an ending parabola? Either way the Wafer Thin Mint scenario is not that far off in my opinion.  I have some exposure but I will act more decisively when the evidence presents itself.

A technical guru I respect suggested that the first week of May has a potential set up like the one we had on 9/19/14.  Who knows but we have warnings from Druckenmiller and El-Erian.  Two gentleman that may know a thing or two.