There is an almost universal misconception about how the financial markets work.  This is highlighted (again) by headlines such as: “We have seen $1tn flow into equities this year. This has been the strongest driver of the equities melt up.”  Let’s examine this thesis.  OK, so $1tn has been used by stock buyers to purchase stock which they now hold.  Why don’t we look at the obverse statement: $1tn has been received by investors who sold stock. That is just as true, isn’t it?  So why do we never see in the MSM stock transactions from the seller’s point of view?  (I have an answer for that!)

When I buy a share of Apple say, I transfer $160 from my account into the seller’s account.  There is no net transfer of funds in the market. If I want to buy 10 million shares, I transfer $1.6tn from my trading account into the seller’s.  The only thing that changes is the valuation given to the Apple share.

So why do share prices go up and down if there is no net change of funds in the market?  Many believe the mythical ‘wall of money’ can move markets up.  Not true as there is no ‘wall of money’ just money that changes hands from buyer to seller.

If I am interested in buying one Apple share, I check the current price.  If I consider that price too high, I will wait until it comes down to my price (assuming it does).  But if I really want that share, I will pay the going price eagerly.  In the first instance, my stance is pretty neutral but in the second, I am feeling very positive and bullish and keen to do the trade (high bullish sentiment).  Put thousands of market participants together and you will get an overall bullish/bearish/neutral mood of both buyers and seller at any one time.  To see a rise in the price, the buyers must want the shares with greater desire than the sellers want to sell them (and vice versa).  It’s as simple as that.  Look at trading like a Seesaw with buyers at one end and sellers at the other.

Of course, when the Fed floods the institutions with zero-cost funds, they feel compelled to do something with the money to earn their keep. and they look for investments. That urgency has spilled over into the retail crowd. But just like a bucket that is gradually filling with water, when it reaches the rim, it overflows and the last drops in are the first out – and cascade down.  That is the fate of investors who buy at tops.

With that thought, have we reached major turning points in stocks and also the dollar?  If so, we are at an historic time in market history (as I have been maintaining for some time).  Let me present some evidence that further supports that thesis.

Fact 1  Bullish sentiment (DSI) towards the dollar is at a 21-month extreme from where in 2020 a major dollar reversal occurred.  It has reached a DSI bullish reading on the euro of 9%. There are 9 euro bulls for every 91 bears – an extreme 10/1 ratio.  Yes the dollar is nowhere near its extreme high (see chart below).

Fact 2  A most remarkable thing occurred last week in the Nasdaq (home to most of the high-flying tech issues).  While the index was making new ATHs, the number of shares in the index making new 52-week lows surged! How could that be? Of course, the reason is that the index is being led higher by a smaller number of hot leaders where much investor buying is concentrated.  Here is a fascinating chart from EWI

Chart courtesy www.elliottwave.com

This chart is worth spending a little time in study.  Throughout, it shows the new 52-week lows spike when the index plunges (red vertical hashed lines) as is to be expected of course. 

But last week, that pattern has been broken with the record high new lows set against a move to ATHs in the Nasdaq index. That to me is a stunning and clear demonstration of the overwhelming leadership of this bull market by the big name tech shares (as represented by the FAANG gang and others).

Fact 3  While the Nasdaq was making a new ATH last week, the Dow was making a new three-week low.  Yes, the Dow is the venerable index of 30 of the largest cap Industrials and so represents what we can call the ‘old’ economy.  On the other hand, the Nasdaq is populated with mostly tech issues in the ‘new’ economy such as EVs, batteries, hydrogen, electronics, and so on.

Just as in previous revolutions in energy production and transport, many are called but few will be chosen.  When the bubble does burst, many shares will go under as their viability will be tested to destruction.

Thus today, we have bullish extremes in the dollar and in shares.  So could their imminent reversals be linked?  Both are over-loved and over-hyped and that is usually when surprises are sprung on markets.  In fact, those surprises have already occurred in several share sectors.

One in particular is the travel sector where rising Covid cases and sudden renewed lockdowns in some European nations have clobbered travel shares such as Tui (the large German operator).  Note that this sector resides in the ‘old’ economy.

Last week it moved to new lows as further travel restrictions appear likely this winter when epidemics usually magnify especially where many people still refuse to be vaccinated.

The question for companies like Tui is how much longer can they survive with negative earnings and high debt?  Another poor winter would surely kill off many smaller operators.  Maybe that is the message of the dreadful Tui chart.

Fact 4  To highlight the Asset Mania gripping markets, Non Fungible Tokens (NFT) are booming with sales now reaching $7 Billion (JPMorgan).  These are digital tokens that some pay millions for – in other words, a set of lines of code.  Anyone can access and reproduce them and there is no copyright attached and can be copied/hacked at will.  Hmm.  There are no regulations in this ‘market’ and legal problems are huge. Does this sound like a bubble in the making to you? I have a leading example above (one monkey ‘artwork’ NFT fetched $24 million at Sotherby’s),

The traditional art market is replete with forgeries/copies and many galleries keep weeding out the fakes from their collections as they are discovered. If hard copies of a work of art can be convincingly faked, what hope for lines of code?  Can anyone seriously believe holding NFT code on your computer gives any pleasure compared with a Turner (or even a good copy) on your wall?

No, NFTs are simply objects for pure speculation that have caught on in a typical fad that comes near the end of a global speculative mania that has been with us for many decades (I would argue since the depths of the 1930s Great Depression, or even from 1913 when the Fed was invented).

But as a certain Mr Greenspan (ex Fed Governor) said: “Markets can remain irrational for longer than you can remain (bearishly) solvent”.   With this in mind, the madness can continue.

The human race is capable of the most unbelievable irrationality.  The classic “Popular Delusions and the Madness of Crowds” by  Charles Mackay that he wrote in the 19th Century outlines some examples.  Perhaps one day, someone will update it and include The Great Asset Mania (and also Net Zero – but that is another story). 

 

Update on the dollar

I have been waiting for a major reversal from up to down for some time.  I am not at all concerned the reversal has not yet occurred.  Major reversals often take weeks to occur – and anyway, I tend to be early in my forecasts especially when dealing with long trends.

But now with dollar bullish sentiment an an extreme 9% euro bulls reading, I believe it is primed for a shock to the downside

Last week, it rose to the Fib 62% retrace after a three up from the January low (wave A) with DSI bulls at the same level as that at the much higher March 2020 high.  This means that with all of the bullish fervour behind it, the index could only manage a pathetic 2/3 retrace to the old high.  That is a very weak performance and should herald a major collapse in the very near future.

In trading terms, I believe several dollar crosses have high potential for stunning gains in the weeks and months ahead.  

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To receive my daily commentary and recommended trades in currency crosses such as EUR/USD, GBP/USD, JPY/USD and EUR/GBP take a two week Free Trial to my VIP Traders Club where I cover the major stock indexes, Cryptos, Commodities and T-Bonds. 

This is the Year of the Commodities with Coffee, Sugar, Energies and US Grains all in strong bull trends which I believe will extend well into next year.  Significant profits will be made by those traders who see the potential.

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The EV sector is at a Moment of Truth

I have recently issued a Special Report on the leading shares in the EV, Battery and Charging sector that have seen an upswing in values.  But several are now at major decision times where breaks above resistance levels are required to maintain the bull trends.  One of my top picks is Chargepoint Holdings, the US operation that runs charging points across the US.

The take-up of EVs in the States is relatively modest so far so will we have a chicken and egg situation for further growth?  Range anxiety and long charging waits are the two leading concerns for switching (as is the higher cost of EVs compared with ICE models.  Another is the higher insurance premiums).  So the question remains – if they build it, will they come?

Chargepoint Holdings is right at the forefront of the EV charging sector and the shares are bang on the major downtrend line in force all year

We have been riding it up for Pro Shares members.  Will it charge through?

 

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