Two weeks ago when the Nasdaq was trading at 15,400 – only a few percent off the 15,900 recent high of 19 July – I titled my blog Fasten your seatbelts, this is going to be a bumpy ride. Now with the index off by around 800 pts, the ride has certainly turned bumpy – with much more to come.
So how did I manage to nail the abrupt change on trend with such high precision? Two weeks prior to that post, I titled my blog: “One step closer to the edge“. And only two days later, the Nasdaq made one final push up to its Elliott wave 2 high and then reversed.
Of course, no-one can be certain that the top has been found when working in real time. After all, the market had remained in a strong uptrend since last October and as we are all taught: “Never try to pick tops in a strong bull market”. Trade with the trend!
But I had excellent reasons to believe a major reversal was at hand late last month.
Long time readers will know that I have devised a simple litmus test for the state of overall market sentiment – my BT Sentiment Index (Bitcoin and Tesla) – that drives markets. Over months, the Bitcoin price has moved more or less in synch with US share indexes and last week, the cryptos fell out of bed with a very hard bump with Bitcoin (off almost $4,000 last week) breaking hard below my major lower tramline to confirm big wave 3 down was in progress. My major target is around $15,000 with lower potential.
And this fits in nicely with my call for a big wave 3 down in stocks. Here is Tesla
In my video below I have outlined the importance of the false breakout /overshoot as a pointer to a sharp decline ahead in a lengthy C wave. Remember, C waves are usually in fives and have similar characteristics as third waves (long and strong). Currently, the shares are in a small third wave down to my target around $205 (latest $216) and then $150.
Little-noticed by the MSM but the shares are already down 30% off its 19 July ATH of $300. And there is a lot more to come with Chinese suppliers with huge price advantages about to invade the UK and US with its self-proclaimed mission to ‘destroy’ the competition.
Already, Tesla as the supreme luxury high volume manufacturer has been forced to cut prices several times recently. This will not help their profit margins – and investors are already eyeing hits to future earnings.
Thus, my BT Sentiment Index is flashing trouble ahead for shares. Here is the daily Dow on the long term monthly
It is always good to occasionally review the Big Picture and the July 27 counter-trend rally high just short of the January 2022 ATH has confirmed the new downtrend. Note the position of the Stochastics – starting to come off an extreme high from the recent strong advances. There is plenty of room to move to the downside.
As I commented at the time, these index rallies were propelled by a tiny number of Big Tech issues on the back of the AI ‘revolution’ (that may never some).Here is the daily chart
As I noted at the time, it was only a matter of time before stars-in-their-eyes bullish stock investors looked over to see what was happening in the bond markets as yields surged. Rising rates are always headwinds to stocks.
As of yesterday’s close, the index had rapidly fallen to the confluence of the long term major trendline and my lower tramline on a short term oversold condition and we could see a small wave 4 bounce early next week. Regardless, the trend is now hard down in wave 3of 3 (of 3). Surprises will continue to happen to the downside.
And a convincing decline through this support will confirm the recent advances as an overshoot which will herald another major leg lower.
And because bullish sentiment has been ramped up to the heavens in recent decades, this bear market will be historic and I believe will exceed the carnage of the Great Depression of the 1930s. That has always been my forecast since the late 2021 highs.
Stock ownership has been the universal road to riches for many but we are now in an era of ‘normal’ interest rates post-pandemic when rates were forced artificially low. This encouraged a tsunami of reckless speculation with QE money driving share valuations to manic levels as the funds stopped at Wall Street and never filtered down to Main Street.
But now the chickens are coming home to roost as rates rise. Debt levels are unsustainable at current rates – and none more so than in China where we are seeing the start of waves of bond defaults and bankruptcies.
As for RE, commercial RE valuations in the US and UK continues lower. Asset prices are falling as commercial rents are not sufficient to maintain previous high valuations when occupancy rates were much higher. Home working has killed the usual business model for offices. This process will accelerate as the economy heads lower.
Residential rents here in the UK are screaming higher as the combination of fewer properties on the market and higher wages are doing the capitalist thing of obeying the universal law of supply and demand.
Rents are far out-stripping mortgage costs making buying more efficient than renting. The big problem is that many renters cannot qualify for mortgages even if they can stump up the hefty deposit and are thus forced to keep renting. And there is a shortage of supply. A double whammy alright.
But if the falling stock market is telling us to expect a weaker economy with higher unemployment to come- as I believe it is – then many renters will be forced out on the streets as their income dries up and unable to pay the rent.
Thus, public finances will be far weaker leading to higher taxes for longer. This is the real ‘higher for longer’ issue to come. And I see a breakdown in social order with more company bankruptcies, higher unemployment, higher consumer price inflation.
Also, the unstoppable and growing illegal immigration issue will become a flash-point to the hard-working tax-paying majority of many target nations including southern Europe, the UK and USA. This will lead to civil strife and a major backlash against the ‘establishment’. The speed which this will impact societies will be astonishing to most.
On top of all this is the upward pressure on UK government spending as the population ages and the state pension is ‘triple locked’. Pension spending is set to rocket in the years ahead. How many workers can support this with their taxes? And how many want to?
With the tax take at a record as a pc of GDP, it can only grow. Thus I see a rising exodus of productive workers from the UK.
With the Fed promising to bring US inflation down to its target 2% level (good luck with that, Jerome) interest rates are destined to stay higher for longer – perhaps permanently so. What the Fed giveth, the Fed can taketh away. In any case, they will continue to follow market rates as they have always done.
Thus, a very hard landing appears the most likely outcome, not the soft one as many hope for. The vast majority of investors believe that at worst, we will see a small pull-back in equities before the bull rides again. That is because social mood remains high and today’s problems are seen as a blip on the road higher.
But as the mood darkens, more will come around to a bleaker outlook – but that point is yet to arrive. Maybe seeing their brokers statements with major portfolio losses every month will change their minds.Gold
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We are starting a major bear campaign in stock indexes which is now under way. My analysis here strongly suggests the historic and hugely destructive Elliott wave 3 down to new lows has started.
Timing entries will require skill (and a lot of luck). Several false starts are to be expected. It will be like catching a tiger by its tail! But the rewards will be immense – and life-changing.
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As for Gold, it so far has not behaved as a safe haven (from falling chares and a weakening economy) – yet (maybe that will come later?). It is part of the larger asset price deflation that grips most commodities.
I have lovely tramlines working with the recent kiss (tramline validation!) and the slide off it in a Scalded Cat Bounce. It should continue lower to T3 area and then stage a renewed rally phase. That could be when the market recognises it really does need a ‘safe haven’ from the coming stock crash very likely next month. I shall be on high alert.