AI does it again – another stunning rally

I confess I am stunned. And I am sure I am not alone. The AI mania I call the Nvidia Effect is in full swing and has done most of the recent lifting of the rocketing Nasdaq. And yesterday, not to be left out, the Dow caught its own rocket ship on the back of the latest highly questionable payrolls data.

So is this the start of another huge stock rally phase where AI will really transform the business world and boost bottom lines for everyone?

But in the background, evidence is piling up that economic activity is waning. For one thing, there are dire warnings that the UK housing market is poised for a sharp decline as the looming mortgage re-financing this year at much higher rates will cut into consumer disposable income and hence spending.

Similar things are happening over in the US – and the housing picture in China is on shaky ground (more stimulus seems to be forthcoming there).

All of the technical indicators I watch are flashing high danger signals. Here is the Nasdaq against US interest rate expectations this year. In ‘normal’ times, they track each other pretty closely (proving that interest rates go hand-in-hand with economic growth) but started to sharply diverge last month.

So has the rate consensus got it all wrong and the Fed will start cutting rates hard in the summer in defiance of their inflation mandate? Maybe pigs would fly if they had wings.

One other factor to consider: the Nasdaq is being led by a narrow group of stocks. Here is the advance/decline ratio which has been stable for months as the index has roared higher being led by a narrow group. This is not the mark of a healthy bull market.

Despite the index being in an almost exponential ascent, there have been no net new highs since February. The generals continue up the hill with fewer soldiers obeying orders.

And here is the Put/Call ratio of the NYSE and it is plumbing the depths where previously major market tops have been put in.

The large-scale buying of calls and small scale selling of puts signals a very bullish complacent attitude that the rally will carry on much further this year.

On the other hand, I see that on my IG platform, over 71% of traders are short showing a bearish stance. Hmm.

The recent rallies seems to me to be mostly short covering by professionals who look at the ‘bearish’ macro data. It thus has all the hallmarks of a rally that will soon be running out of rocket fuel.

Thus, in ‘normal’ times, I would have said that the rallies are very much living on borrowed time. And as the S&P 500 approaches a critical Fib level, I expect the next few days to offer clues as to which scenario will prevail – either a major topping and sharp reversal or the start of another major leg up as the promise of AI fires up the imagination of yet more investors.

It seems we are at the stage with AI that is equivalent to that near the start of the dotcom bubble in the late 1990s. Back then, seasoned investors were equally stunned at the crazy valuations of any share that carried a dotcom in its name.

But we have the benefit of hindsight to know that the valuations got even crazier and the bull Nasdaq market persisted into the stratosphere. It was the unseasoned investors that ignored history and just went for it. Just when most pros believed the 1,000 level would mark the top, it defied all outside evidence and zoomed up to the 5,000 top

Just like today, that five-times multiplier was quite a bit painful for the bears who set their trades in a logical way from the macro data. While the ‘old’ indicators screamed Sell, the ‘new’ indicators told a bullish story. What a lesson in following the adage that the trend is your friend!

Fast forward to this year and we see a similar exponential rise to the November 2021 ATH at 16,850. We then followed the sharp decline (in five waves?) down to the October low but missed this current AI-inspired rally to the current hit on the Fib 62% retrace area.

So now we are at a moment of truth. Will it reproduce the 1999 experience by shooting ever higher just as in 1999? Or not? Of such questions, fortunes are built (and destroyed).

The AI revolution seems to be in the early stages of development similar to the internet and websites in the early days. Does anyone remember the green screens on our monitors where we had to dial-up our modem on our copper landlines? And the clumsy early websites? The internet is streets ahead now.

Personally, I have refrained from trading short the Nasdaq for weeks (except for a recent long trade for Phoenix Traders Club). Why stand in front of a steamroller was my overwhelming question.

Recall last time, most of the dotcom companies had no idea how they would make money with their early crude websites. Most of us knew that the internet would be a genuine game-changer given time for it to develop, but that most early forays would fail, as is the usual custom in finance.

As a great example of this phenomenon, read up on the 18th Century UK canal builders who jumped on a game-changer in transport as investors pumped up share prices only to see them collapse as haulage revenues failed to match expectations (and then railways emerged to kill them off as a major force). The same happened in the early railways shares. by the way.

The pattern is that when a revolutionary positive discovery is made, investors are first fired up with eager enthusiasm with stars in their eyes and project mammoth earnings to come. Then, reality strikes as valuations are so extreme that profit taking is enough to send the shares lower. And the many companies with huge debt fail and sentiment falls back.

Then, after the wash-out, a few companies figure out how to make money with the new discovery and they attract investment and their shares rise over time. Tesla and Amazon are great examples.

The big question is this: Is AI in the ‘extreme’ overvalued phase ripe for the wash-out phase, or are valuations going to get even more extreme before investors’ financial ability (and desire) to keep the balls in the air wanes?

Here is one more indication that inflation is not dead – on Friday, the crude oil market reversed up sharply from its deep correction in what looks very much like a Head & Shoulders reversal:

And if this pattern is forecasting much higher prices ahead (to be enhanced by OPEC production cuts?), then my long-standing target for $100 becomes a lot more feasible this summer. And that would hit the economy hard.

Oh, and US banking woes have dropped off the radar for now but will another one surface soon?

Corn is off the radar – that’s one reason why I like it

Yes, the ags rarely feature in the MSM headlines, except when there is a massive crop failure because of disease, drought, heat or any number of hazards agricultural crops can suffer. (Did you know that the cabbage stem flea beetle (CSFB), pigeons and the rape stem weevil are crop hazards? No, I didn’t either).

But by that time, prices have zoomed and unless you have foreseen the rally, that information is of little use to a trader as the move has already occurred.

We saw last year the immense profit potential of trading these markets – and I believe we have a similar set-up today.

Because of large crops in prospect, the ags have been in bear trends for some time. But take a look at the Corn chart

The wave 5 of ‘c’ low at 523 on 19 May marks a major low and on a huge mom div.

In every year we get weather scares somewhere on the globe and I expect the same this season. The largest corn exporters by far are: USA, Brazil, Argentina and Ukraine. Two each in the Southern Hemisphere and two in the Northern. That spreads the corn crop to an almost year-round activity.

With prices near two-year lows and global population still growing, corn demand is still growing and any adverse weather should propel corn to much higher levels.