Am I nuts, or is it the stock market?

Am I the only one, but does anyone else think the behaviour of US stock markets is plain nuts (a macro technical term)? We have just had a significant banking scare, interest rates are not falling as fast as many expected, crude oil prices are back in strong rally mode, consumers are feeling the pinch from cost-of-living pressure, tensions are rising around the world and while the FTSE is sailing away into the stratosphere, the UK economy is being hit by the greatest strikes for many years.

But investor sentiment rides high, despite the evidence of the huge hedge fund short interest. How come? For one thing, retail trading in the USA is being dominated by the hugely speculative 0DTE (S&P options which expire the same day). They have become the latest get rich quick scheme and latest data has the volume of these very short-lived options account for over 40% of the total S&P options traded daily. That is up from 5% in 2020).

How is this any different from gambling? It is manic speculation on steroids – and is another indication that bullish sentiment remains hugely positive.

This activity has been taken over by the Reddit crowd of trading GameStop stock and its ilk back in 2021 which famously forced massive losses on hedge funds who were short. This was a loss-making company and hedge funds were entirely rational in shorting it.

Lesson: Being rational is not necessarily a winning strategy in financial markets. It depends on what type of rationality you employ!

Naturally, GameStop shares are now trading at a fraction of the volumes today and the share price is very low and very quiet – the caravan has moved on to 0TDE keep the speculative flame alive.

In addition, crypto is back in rally mode with Bitcoin making new highs for the rally. Recall, BTC and Tesla are my two main tells for the state of overall investor/trader market sentiment.

But not all is well – several sectors are making new lows and in strong bear trends (take a look at housebuilders and EV makers ex-Tesla, for example). Yes, we have highly fractured stock markets still.

But Big Tech is leading the charge in the US indexes higher as they possess the highest capitalisations and dominate the Nasdaq and S&P. The tiddlers are left to sink or swim on their own. Here is the S&P with my targets

It is good practice to step back and regularly review the long term charts such as this weekly. The major October low terminated a major bear phase losing almost 30%. The relief rally off that low has retraced almost 50% of that.

This is occurring despite the headwinds of sharply higher interest rates, high commodity and consumer inflation and increasing global tensions. This resilience to shocks tells us that something else is going on! And we had better pay attention.

The Fib 50% resistance ceiling lies just ahead at the 4200 area. And a strong push up through that would set up a major Fib 62% target around 4330.

But be advised that is not my firm prediction – it is one viable option for my roadmap. The market could well turn back at or below the Fib 50% area at 4200 – and I shall be on high alert for this option.

One of the many factors that suggest the share rally is on borrowed time is the current low dividend yield

At the current 1.66%, it is near historic lows and compared with the safe no-risk yield of 10-yr Treasuries at 3.41%, is positively measly – and you have the added risk of share price falls to contend with. Investors today are obviously looking for capital gains rather than the dividends – and that is a purely speculative/trading approach in contrast to that of a true investor (in it for the dividends such as Mr Buffett).

At some stage, the pendulum will swing back towards US stocks being cheap again.

But for now, investors are totally complacent against a major collapse – here is the Fear Index, VIX

It made a new low yesterday under the 20 mark and sits on the long-term support shelf. The RSI now shows an oversold condition – at the same level where major rallies got started previously.

And if my forecast below is correct of a little more upside for share indexes this month, then the VIX should bump around these low levels a little longer but kick off a major rally phase as shares sink.

Are UK shares really ‘cheap’?

But here in the UK, the FTSE 100 dividend yield lies around an impressive 10% (stocks cheap!) – and is one reason this index is way out-performing rivals currently.

One major point of difference with the US is that there are no major Big Tech UK shares that attract so much speculative interest in the US. We have very few speculators in the UK share market! It is dominated by institutions and the much more conservative public that does pay attention to dividends. And the index is loaded with traditional non-tech companies that have tried and true dividend policies.

And with the index dominated by commodity shares, the rising oil price and now rising base metals should point to even higher payouts this year (unless something big happens, of course)

Here is one of those base metals – Aluminium

It suffered a huge bear market last year into the October lows along with share indexes. And from there it has been a slow grind in relief. But with the latest rebound off my lower tramline, it is poised for a strong rally in wave 3 of C to my first target (in pink).

Note the textbook Elliott waves and thus am looking for a decent swing trade here.

OK, so this commodity is well off the radar of most retail traders – and that is a very good thing for us. It is dominated by the trade – and these are a lot more reliable in their positions than are the retail crowd. Output is being hampered by the huge electricity costs involved in smelting and if China’s re-opening can be sustained, demand could increase this year along with prices.

And yesterday, US bank earnings came in strong and that should support UK bank shares and the FTSE with it.

Incidentally, a great trade has been long FTSE 100/short Russell 2000. The dividend yield ratio is about 6/1 with the S&P and could well narrow into the year.

My bottom line for the indexes: Odds favour a little more upside this month perhaps into early May at the latest and then the crash wave 3 down will likely kick off into June and beyond.

Is inflation really licked?

The bulls certainly think so – and are pushing T-Bonds higher (at least until yesterday) to depress the inflation expectation element of yield. But wait! – the respected U of Michigan Inflation Expectations survey yesterday showed a totally unexpected strong jump in what consumers believe inflation will be a year from now.

In January, I had a prediction the measure would retreat to around the Fib 50% retrace and then bounce. This is precisely what has occurred. And it puts into grave doubt the consensus for a rapid decline in inflation.

And with crude oil prices advancing strongly, the official data should surely catch up with the public survey in coming months.

But short term, here are my three main possible options for T-Bonds

Any sharp break of my pink target would elevate the immediately bearish option to top choice.

Last year and into this, stocks and bonds have traded together almost in unison. And that has spurred pundits to suggest Treasuries are a strong Buy since stocks are advancing and they cling to the notion that inflation is licked.

But hedge funds have failed to buy into this idea with both feet. Latest COT data tells us they are massively short futures – sometimes by a 4/1 short/long ratio. And that suggests any squeeze on them would favour a move higher.

The bottom line: We have two major opposing forces here and a likely outcome is for more trendless volatility near term

.

_________________________________________________________

Are you prepared for the economic devastation to come? Interest rates are rising and we are only one more bank/hedge fund/insurance company/commercial property outfit failure away to kick off this next stage. Already, US small/medium size company bankruptcies are rising alarmingly. And now oil prices are advancing again to put upward pressure on cost inflation for corporations and the consumer.

And my favoured commodity sector – the tropicals – are advancing strongly as forecast.

I am guiding VIP Traders Club members through the treacherous swings in markets today. Come join us!

TAKE A TWO WEEK FREE TRIAL HERE.

___________________________________________________

Is another massively destructive El Nino brewing?

I am seeing early reports of a potentially huge El Nino brewing in the Pacific. If it develops into one of the biggest, it will heavily impact crop harvests later in the year around the globe.

I have been tracking Wheat and on Friday it gave me a bull signal – finally.

It made a bear market low at 660 on 23 March as it appears to have completed the Elliott wave 5 of 5 of C off the 1350 high of last March. Note that this low made an approximate Fib 50% retrace of the bull run – and on a very strong mom div.

Up until yesterday, the market had been dominated by the flood of supplies coming out of Ukraine and Russia that has relieved worries over food security in the importing nations.

But any threat to supplies later in the year – such as from a huge El Nino – would send prices flying again (remember the explosive rally Jan-Mar 2022?).