At the risk of being whipsawed, I have this week switched my stance on the stock indexes from bearish to bullish.
What irony! With an extreme socialist on the verge of replacing Trump, you may have thought that the markets would have taken fright. With their well-established reputation for profligacy, waste and ballooning governments, socialist regimes are known for their authoritarian hold on commerce that usually dampens activity. The falling dollar at least is taking note.
But one of the drivers of the stock markets is the expectation now for a lot more QE to pay for all the extra spending to come. Maybe that has been the plan all along. And that is trumping (sorry!) the negatives such as the tanking real economy.
Bullish sentiment is off the scale still, and that condition always attends major tops. That is why I do not believe this bull has too much life left – a few weeks/months maybe.
But facts is facts, as Yogi Berra the baseball philosopher probably said, and as a disciplined trader, that’s what always guides my forecasts. The traders’ graveyard is filled with those who fight trends stubbornly. Yes, at times, fading rallies can work out very well when your wave analysis supports a turn.
But when does having a firm well thought-out view become donkey-like obstinacy? That’s a tough call.
The final straw for me was the strong leaps early in the week ahead of the ballot counting when it became plain that the market was in determined rally mode and couldn’t really care who became President. It just wanted to go up. So I took note and here is my new roadmap for the Dow
We were short going in to the 26,000 Monday low – but that was a point of maximum support as two major tramlines crossed there. That is where we took some profits on our shorts. The market then had to either collapse or stage a very powerful rally. When it chose the latter this week, I immediately exited all shorts for good profits and advised long positions.
What a great lesson in how to take profits when you have guessed wrong and traded against the major trend!
And now five days later, it is up strongly and my new targets are shown. I expect the first target to be hit in December and if the upper target is valid, that in February.
But after that, a major top will be in and the market will begin a multi-year collapse when all of my fifth waves are complete.
So a major ATH in 2021 appears highly likely – and the decline off it will be historic.
And will that high occur at about the same time as a major low in the dollar – an event I have been forecasting for some time? With the talk of coming QE, the dollar has been hit recently and is near a new low
When it arrives, it will mark a complete five down and herald the start of a major rally phase.
It is interesting that all sentiment indicators have been hugely bearish the dollar for some weeks – but that has not stopped the downtrend. As I constantly repeat, extreme sentiment readings are not great timing tools, but they do warn of coming reversals ahead. You must use other more accurate tools for timing trades.
A cautionary tale – for stock bears
In 1996, Alan Greenspan, the Fed Governor, gave a speech where in his opinion – doubtless agreed by the whole board – that investors in tech shares in the Nasdaq were showing signs of ‘irrational exuberance’ (a memorable phrase that is still with us). Here is what happened next
Yes, they went on to soar into unimaginable heights to the top in 2000 – four years later. Greenspan thus offered a solid buy signal!
We have a similar state of manic bullish sentiment today, but to my knowledge no Fed governor has passed comment on the state of the markets. Can we take that as a bearish signal?
Our Sugar campaign is progressing sweetly
Meanwhile, away from the madness of the mania in stock markets, in the real world of basic commodities, I am happy to report our bull campaign in Sugar is progressing according to the plan I laid out months ago for VIP Traders Club members.
When the market dipped into the 10 cent region in May, I recognised this area was into historic low territory and that was my cue to start looking for a major upside reversal. We entered around the 10 cent region and have been adding ever since and now it trades just under the major pink resistance around the 15.50 area.
Some may be wondering how come sugar prices have rocketed by 50% in the face of huge supplies and a move in the West away from its consumption. If there is one thing I have learned in trading commodities it is this: When fundamental factors appear so bearish and the market strongly rallies ‘unexpectedly’, the ‘reasons’ become apparent to everyone later and that is when profits can be taken.
This strategy is the very opposite of how most investors (esp in shares) operate. They discover great reasons why they should buy – reasons that are obviously accurate esp to MSM journalists – and then sell when bad news appears. Doing that would have bee a major mistake in 1996! (see above).
My thoughts on the coming global deflation
Many will look askance at my firm long-held view that the world is approaching a deflationary bust with the dollar plunging, adding to the ‘inflationary’ forces (Gold is buoyant, as are many commodities). Also, many are viewing the coming new wave of QE as hugely inflationary. Many prominent MSM pundits are fully on board the inflation scenario.
But I defer. Yes, some asset prices are increasing but inflation and deflation are results of changes in the amount of credit available. Today’s markets revolve around credit. Period.
And with many companies going bust as the pandemic has smashed their business models (esp retail) – their bonds have become (nearly) worthless, thus reducing the amount of credit. With little respite from further lockdowns this winter just starting, I expect this process to intensify.
And very significantly, the much-anticipated Chinese IPO of Ant Financial – the huge record-busting fintech of Jack Ma’s – has been ‘postponed’ by the Chinese authorities at the last minute. Seems the government’s all-powerful state banks were being threatened in a big way and their big clunking fist was brought out of retirement. Could this mark the end of the gung-ho wild west fintech boom and lead to more crackdowns on big tech around the world?
This IPO was being leveraged 33/1 by lenders! In other words, punters only needed to put up 1 yuan and get 33 yuan in a loan. Apparently, banks were falling over themselves to offer these loans as they viewed anything from Jack Ma as a ‘can’t lose’ proposition. But a dip of only 3% would wipe them out. Now that’s what I call irrational exuberance – Chinese style.