Last week, with stock indexes relentlessly climbing the biggest Wall of Worry in history, I warned VIP Traders Club members to expect a fireworks display.
And right on cue, that is precisely what we got yesterday with bond yields exploding higher (much to almost everyone’s astonishment), Gold/Silver cratering lower. This followed the latest US jobs report, which is usually a trigger these days for some violent action. But this one was a ‘surprise’ to most.
And we have been ready for this surge in bond yields having positioned VIP Traders Club members short the T-Bonds much higher up some time ago. But who would have thought it – bond yields on the rise??? After all, the all-powerful Fed has everyone’s backs, do they not? They promised to scoop up even low grade corporate debt to ‘save’ over-stretched businesses during the pandemic-devastated business environment.
So a rise in the ‘ultra-safe ‘Treasury yields is impossible, surely? The Fed has unlimited firepower to buy anything it wants, so the story goes.
But since the Fed is a privately-held institution with the need to make profits (and avoid losses), I doubt the governors would stretch their generosity that far to guarantee major losses!
There was even talk of them buying Junk Bonds at the height of the Pandemic Panic on March 23 when stocks made their Corona Crash lows.
But in reality, they are no mugs – they respond to market moves – they do not lead.
Casting our minds back to the March Corona Crash, The Fed made some panic moves – first by lowering rates to an all time low of 0% – 0.25%. But that failed to staunch the selling and then they announced they would do an ‘unlimited buying of Treasury debt and mortgage-backed securities’. The MSM called this ‘QE Infinity‘.
But that also failed to reverse the tide of selling, so they announced a further plan to buy corporate debt and ETFs that track the sector. They also set up a separate company to lend to troubled companies and buy distressed assets and crucially indicated it would intervene in the stock market directly. They received a guarantee from the Treasury they would suffer no losses on these ‘investments’.
With that kind of firepower, who in their right mind would fight the Fed?
Well, we did – and we shorted T-Bonds (the wave patterns were pretty clear to me). Yields are now surging. The pundits are scrambling to find ‘reasons’ – and they will! Only we know the true reason – bullish sentiment had become extreme – and this ‘perverse’ action confirms what legendary trader Joe Granville once said: “As soon as you think you’ve got the key to the market, they change the lock”.
It is often said that bond traders are a lot smarter than equity investors. The bond markets often get wind of a change in economic conditions way ahead of stock traders. With Treasury yields now on the rise (and moving against universal consensus), they are signalling deflation.
And a rising Treasury yield will play havoc with government finances, of course. All future expense projections are hinged on a continuation of low yields. With social security expenses ballooning, they don’t need a massive hit from interest expense on the mammoth bond issuance they will be carrying. That is another elephant in the room to appear down the line.
So how long will it take for the penny to drop in stock markets? Not too long, I believe.
I came across two fascinating charts last week. The first is the remarkable proof that when interest rates are lowered, the public saves more of their take-home pay! They don’t fall over themselves in a mad rush to spend it. How about that – what a counter-intuitive fact! That of course flies in the face of the usual tripe that rationalises lowering rates in order to ‘stimulate’ the economy that the Fed and all other central banks trot out. In fact, it does the opposite.
Yes, above about 4%, the public spends more as rates decline, but below 4% (which we certainly are in today), the scenario is deflationary! So another myth has been busted. And one more clue we are in a deflationary economy – and heading for a depression (although the stock market doesn’t know it yet)
and the second chart shows the US Savings Rate against the S&P P/E ratio.
Certainly from at least the 1950s, the two factors ire pretty much in synch – when savings rise, so does the P/E ratio. That is natural because it is the growing liquid wealth of public savings that goes into investments – especially shares.
But observe the exploding divergence last month! The Savings Rate has rocketed up to 16% (the Lockdown Effect) while the P/E hasn’t budged at a lofty 21. Something has to give.
The bottom line: The stock markets are in cloud cuckoo land and heading for an almighty fall. OK, I have not yet nailed the relief rally top yet, but I fully expect to very soon.
Yes, I regret not trading the relief rally off the March 23 lows. I admit that is a bias of mine – I did the same thing in 2009 after the Credit Crunch (although I was not trading at the time). Many traders look at the plunge on the chart and the thought of a long trade fills us with trepidation. In my defence, we are all human!
But the form of the advance still looks corrective with many overlapping waves (a sure sign of corrective behaviour). The Corona Crash was impulsive ( a sure sign the major trend is down) with few overlapping waves – and this recent exponential surge is almost certainly the final Buying Climax into the tops.
Today, bullish sentiment is off the scale with DSI bulls at around 80%+ which matches the reading at the Dow February ATH.
One measure of extreme confidence is the outpourings of the financial writers in the MSM.
Here is one from yesterday: Six High Quality Stocks To Buy Now – And Keep Forever. The important part is the ‘Keep Forever‘ part. Only after the advance has carried much higher off the lows can a pundit proclaim with total confidence that it is now utterly safe to buy shares and keep them forever (never a sensible policy, by the way). At the March lows I did not see such advice – they were too busy ‘keeping their nerve’ while we were taking profits on our shorts.
Here is my updated roadmap in the Nasdaq which made a new ATH yesterday
This tech-heavy index lead on the way up and should lead on the way down – and with yesterday’s ATH, I have a potential ‘overshoot’ which would be confirmed on a move down inside the wedge pattern. And if that happens, the rule states that a rapid descent to at least the lower wedge/ending diagonal line is to be expected.
And that should confirm the top is in at 9848. So next week’s action will be crucial – and should provide even more fireworks!
The Dollar has hit my main Target
We have been trading the dollar short (long EUR/USD) and both markets have met my main targets on Friday. Here is the EUR/USD and our campaign
The March – April period was exceptionally difficult with a trendless market. I had penciled in the correct EW labels with my ‘a’ wave in place and expected a fairly simple three-wave ‘b’ down wave, but instead it morphed into a lengthy and complex zig-zag pattern which I luckily managed to identify late in its formation – and enabled me to identify a low risk long entry around the 1.09 area.
It then acted according to plan and zoomed up out of the gray consolidation zone and I set a target around the 1.12 mark. Note that this occurred when the background news was ‘bearish’ with the ECB promising to print infinite euros to ‘stimulate’ the EZ economy (see above).
I saw a very amusing video of Ms Lagarde as the President of the European Central Bank explaining how this would push up inflation to the desired 2% target in the EZ and cause interest rates to fall to ‘stimulate’ the economy. In fact, if she had glanced at my chart above, she would have opted to raise interest rates instead so as to stimulate the economy!!
You really have to love the antics of the ‘experts’. In reality, all bureaucracies suffer from the need to form a consensus within all their manifold committees – and that takes time. And this consensus is that of the majority (the herd) who is at maximum bullish/bearish sentiment. They are therefore usually making policy right at the end of the trend they are attempting to mitigate just as that trend becomes ‘obvious’ to everyone..
For contrarians like us, it is manna from heaven as we can fade their decisions. So the ‘bearish’ euro implications was met with a rapidly ascending currency, which we took full advantage of. Nice.
I now expect a decline in EUR/USD as wave 3 down starts.
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Massive Jobs Beat!
This is the headline after yesterday’s shocking non-farms that was overwhelmingly seen as very bullish, of course. But are we at a Buy the Rumou/ Sell the News moment? After all, the Dow has gained an astonishing 9,000 pts off the March 23 low (50%) in anticipation/hope the economy would ‘rocket’ back to life.
Now the news is out confirming the economy is back on track – or is it? Thereare many questions over the veracity of these unemployment numbers (how many fraudulent claims?) – so can they get any better? Or can they start to worsen? What a great time to take profits on longs!
On this scale, the 900 pt Dow gain has produced this tiddler of a Dead Cat Bounce in jobs, which Mr Trump has lauded in his Big Big way.
My guess is that the revisions will not be so kind to the market – and provide even more spectacular fireworks!