Are we there yet?
Before November 8 – Trump Day – I warned about heightened volatility in most markets, especially stock indexes, currencies, gold and possibly T-Bonds. But I really had no idea we would see 1,000 point swings down and then up in the Dow, $70 swings up and down in gold and four big points in EUR/USD.
But what takes the biscuit for sheer panic is this chart of the Trump for President market on my platform:
The pundits had Hillary leading early on and betting on Trump was only in the 20% range for days on end. But when voting got under way and it became apparent The Donald would clinch it, the market shot up in a mater of nanoseconds to the very top at 100. That’s what I call a short-covering rally!
And the fallout sent shares from 700 Dow points down to 300 up in short order, thereby sending VIX Fear Index up and down the elevator in the mother of all whiplashes.
At the same time, one of my top trades for 2016 – short T-Bonds – sent that trade into overdrive profit when yields had the biggest one-day gain in many years
So that little trip cancelled out my five wave continuation idea I had last time – but sets up a new one. If stocks turn down now, VIX would rally and set up that distinct possibility.
One other market I like to keep a close eye on is the Junk Bond Index that I have shown before. Corporate junk bonds (with high yield) behave more or less like risky equities but when there is a general rise in bond yields, they are torn between two stools.
For days, T-Bond prices have been falling hard but this junk index held up well, supported by rising shares. But yesterday, they caved in and dipped below chart support. Also, they have pushed down through the 50-day MA which is now turning down and that is a bearish signal. I believe we are on the verge of a huge swoon in junk bonds and the 200-day MA (red) is my first target.
So, are we there yet? Here is the Dow daily
The Dow made an all-time high overnight at the 18,900 level which is as close to my original 19,000 target as makes little difference. And the pattern looks very much like an ending diagonal at the end of a fifth wave. If so, the move down will be breathtaking.
Interestingly, the MSM carried the story of Carl Icahn (a very prominent investor) rushing to buy $1 Billion in shares when he learned of Trump’s victory – my question is this: is this the ultimate HI (Headline Indicator) top signal?
Incidentally, because Icahn is no dummy, was he actually covering shorts to take his losses and perhaps reversing and going long? The thought crossed my mind when I read it.
Bond yields are going through the roof
Already Treasury bond (so far, the ‘safest’ bond) yields are zooming up, so how can stocks maintain their extreme bullish bias? 10-yr yields – which mortgage and many other rates key off) have risen from 1.3% to 2.12% in just a few months – a rise of 60%. That is a massive move – and note that it was not engineered by the Fed, who most people believe ‘control’ interest rates. In fact, they always follow the market. They will be raising the Fed Funds rate very soon as they follow the market rates up.
So will mortgage rates soon follow by going through the roof (sorry!)? They have to, surely. That will kill the real estate bubble stone dead.
When I made the prediction last July that Treasury yields had bottomed, all of the gurus were saying that rates would ‘stay lower for longer’. Just as the pundits got Brexit and Trump wrong, they seem to have been leading the herd over the cliff at a major turning point.
I believe bond yields have much further to fall. One reason is the looming brick wall that is the US debt ceiling wrangle coming up in March. To satisfy all of Trump’s declared tax cuts and infrastructure spending, a tsunami of Treasuries must be issued which promises to give the market severe indigestion. And the bond vigilantes have already twigged that something has to give – and they are usually the winners.
As seems likely, much of Trump’s spending plans (and tax cuts?) may well be ditched and if so, his supporters may well feel cheated and take action. There will be increased polarisation in the US (and elsewhere) next year and I expect a very big down year for stocks.
Copper is king!
When I advised VIP Traders Club members to start taking long positions in copper back in February and again in July, the ‘experts’ were telling us that because of China’s slowdown and mammoth stockpiles, copper was heading south. Here is the weekly chart.
It appears the experts were looking at their charts upside down. Interestingly, in the past 18 consecutive days, there has been only one very small down day – all of the others have seen huge gains. This week’s gain must be one of the largest ever.
But now, these bears have seen the light and have been converted because with Trump taking charge, they believe he will deliver on his promises to increase infrastructure spending with knock-on demand for commodities. He is a ‘can do’ man, isn’t he? But even a ‘can do’ man runs into reality – and that reality is the budget deficit problem (see above).
But with the Fibonacci level at the 27 cent level being hit on a highly overbought market, we are taking some profits off the table – and what superb profits they are. From the 21 cent level, that is a gain of 7 cents – a move of a third. With the usual spread betting leverage, we have a big winner.
Markets setting up for more massive moves. I invite you to follow them with me by joining the VIP Traders Club. Full details here.
