There are a few times in stock market history when rationality goes totally AWOL and a mania envelops investors like a cloud. We saw it in the 1990s in the Dotcom Bubble when the Nasdaq soared just on the basis of the projected eyeball count for iffy start-up tech companies. Then, it crashed as reality bit, as it always does – but not before shooting for the moon. It has taken almost sixteen years for the index to regain those highs of that era but this time, actual revenues are being produced.
I confess I have been taken aback by performance of the US indexes for much of this year. I had been looking for tops most of the year based on my reading of the Elliott waves and other inputs. In fact, I did manage to capture some significant down moves, but since the Trump victory early last month, the sheer explosion of buying has been breathtaking.
Of course, much of the buying is down to short covering as many have been tempted into shorting, hoping for a turn. These hapless traders are being killed. Many are holding short positions without a stop loss as they hope and pray the market will turn down soon.
They have been so convinced by their own bearish feelings and from reading the postings of many pundits who post bearish articles explaining logically why the rally is false and why the global economies are heading for disaster. And there is no shortage of bearish statistics in the US economy – I have referred to David Stockman’s postings as he is one of the more eloquent and rational commentators out there. But he is not a trader! And thereby hangs a crucial difference.
Yes, it is easy to convince yourself that investors are being foolish and creating a gigantic bubble that will pop with a vengeance (as did the Nasdaq in 2000). While that is almost certainly the eventual outcome, in the meantime markets are rising rapidly and the mania is very much alive. Standing in its way is like standing on the tracks as the proverbial express train hurtles towards you. Not a sensible strategy for creating wealth.
Remember, markets can stay manic for far longer than you can remain solvent. And I have noted that when I have a conflict with the market, the market wins every time!
It is social mood – or sentiment – that drives markets and this has been running red hot for some time. One of the most important recent touchstones for sentiment was last month’s surprise Trump victory. It was initially greeted by furious angry demonstrations and denials and calls for recounts, but now a month later it appears calm on the Trump front and I would say most accept that he will be the next President. That rapid calming of this test of mood just shows that social mood remains positive.
If we were still seeing angry mobs in violent demonstrations in the streets, that would indicate a darkening of mood -and the stock market would respond. So for now, mood is positive and stocks remain in a hard bullish phase.
So let’s analyse the Dow to try to get a handle on the possible upside targets.
This is the weekly chart and shows my long-term blue tramlines from the 2009 low.
The market has just poked above my interior pink tramline and has indicated a five wave continuation (see text, pp 38 – 39, 144 – 145) and this gives a measured target in the 20,000 – 20, 500 zone.
The pink line is a line of what was resistance and now is support.
Naturally, if/when this round number 20,000 target is hit, the MSM headlines will be six inches high! It will dominate the web and the airwaves – and could herald a pull-back (watch this space). There is also the possibility that the market could fall a tad short of the round-number 20,000 level before turning in a correction. Watch for this.
And if this target can be exceeded, my next one is at the upper blue tramline around 20,500 – 21,000.
In terms of EWs, we are in a third wave (long and strong) of the final red wave 5 and it appears the move may accelerate into Christmas in the traditional Santa Rally.
Here is the five wave continuation pattern that could have been an ending diagonal provided the market had turned down from the upper blue tramline (but clearly didn’t!)
The initial reaction to the Trump win on 8 November was a pigtail spike below the lower tramline to the 17,500 area. And then the oxygen mask was immediately applied and incredibly, since then the market has rallied by 2,280 points in about a month. Astounding!
I can recall declines of this severity, but hardly any rallies to match this speed. We are in a another world. And isn’t it strange that this is occurring at the same time as interest rates and bond yields are becoming more normalised rapidly? Surely, rising yields should be bearish for stocks at this juncture?
In fact, the 30-year Treasury bond has moved down from the 178 level at the July highs to last week’s 148 -a decline of a massive 30 full points. Investors have started to believe that with rates on the increase and commodity prices likewise, inflation is poised to rocket up from near-zero levels.
My forecast: It will be the inflation data series investors will be scrutinising heavily next year.
And why are investors’ gaze suddenly turning to inflation? Here is the chart of Dr Copper, which has long been considered a bellwether for the general state of the economy:
That was quite a collapse in prices – and occurred in a lovely five wave formation. By the time the wave 5 low was reached, sentiment had turned extremely bearish with forecasts for the commodity complex much lower with over-production and stockpiles of almost everything at record levels. There was no way the price could recover, was there?
But a funny thing happened on the way to the basement. Savvy traders were buying as they read the technical setup was highly conducive to a recovery of some sort. The lovely pink wedge teed up those who recognised it and it did its usual thing of heralding a big trend change.
Here is a close up of recent action
How’s that for a trend reversal! If this pattern is a pennant, my measured target is on the 30 – 32 cent area – and that puts it right at the major resistance level marked on the weekly chart.
So just when all had admitted deflation was here to stay (with many bonds trading at negative yield), the tables are being turned on the bears.
And stockpiles are still at record levels!
The euro recovery was short-lived
Last time, I noted that the expected sharp Trump-inspired decline in the euro was delayed, but that was not for long as the market resumed its hard down stance
It now appears the market is in a third wave down and a break of the early 2006 low at 105 should confirm. But then there is potential support on my blue line at the 102 level. And if it can break that, it is off to the magic parity.
But I have severe doubts it will be that easy – bearish sentiment has been running hot and this is not the usual backdrop for a hefty extension to a severe bear trend. But the two-year consolidation between the 1.14 and the 1.05 levels where the market has been trend-less has stored up a ton of wrong-way bets when the market does break free.
I do not believe this is a great time to be taking large positions either way, so I will be watching for now.
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