Are we there yet?

The US stock indexes have long been widow makers for the bears.  Anyone shorting them, especially after the Trump win last November, have been crucified. But is it time to seriously consider the end is nigh for the most stupendous stock market rally in recent decades?  After all, no tree grows to the sky and all extreme sentiment turns down eventually.

Of course, there are many, especially on seekingalpha.com, who put forward all sorts of logical reasons (and charts) why valuations are extreme and markets are setting themselves up for a fall.  But they have been saying that for many months while markets have continued their merry climb.

But these people are correct – valuations are extreme (the S&P 500 P/E has now stretched to 21.5!), but to make extreme profits from the markets, you must have a reliable timing method that can pinpoint a likely turning point, all the while acknowledging that no forecast can be 100% certain.  Trading with the trend is correct while fighting it is not.

I have been bullish the US indexes for some time but now I am actively looking for a place to take profits and reverse positions.  Sentiment is getting off the wall – a recent forecast for the Dow of 1000,000 – 150,000 has just appeared.

It is well-known that the stock market rally is being kept aloft by a very narrow band of issues – the notorious FAANG Gang.  Under the bonnet (hood), an increasing number of shares is in fact making new 52-week lows – here is an ominous chart

chart courtesy www.elliottwave.com

This number is bound to grow from this low base – now only 3% of NYSE issues – since short term interest rates are climbing rapidly.  Here is the market-driven US 3-mo T-Bill rate

The rate has climbed from 0.5% to the recent 0.9% – a phenomenal rise of 40% in just two months.  Once the penny drops in the canyons of Wall Street, the Fear Gauge should start spiking up and stocks will head south with a vengeance.  But we are not there quite yet.

Yes, valuations across the financial world are extreme from over-extended property markets to the recent record low VIX Fear Gauge, to record debt levels, a looming sub-prime US auto loan crisis and so on.

As an example, here is a house in Toronto that is ‘worth’ a cool C$1 million.

Unless there is a huge plot of land behind it that has planning permission for 25 new homes, can any rational person believe this makes any sense at all?  But who knows in this era of cheap credit, it may look to be a steal a few months hence in that crazy Toronto market (up 30% in a year).  But I doubt it.

But anyone who was around in the mid-2000s will surely recall a similar scenario when Florida condos were being flipped by speculators making great returns at the height of the boom (just before it collapsed). I refer to my post on Tulipomania.  History doesn’t repeat, but it certainly rhymes!

So let’s take a look at the Nasdaq – the most speculative of the major indexes.  Here is the long term picture since the Credit Crunch 2009 low for perspective

I have a clear five up in my Elliott Wave model with a very long and strong wave 3 and the entire multi-year rally has been contained within my blue tramlines – except for past few months when the market shot above the upper line of resistance.  Remember, overshoots like this are usually reversed with force.

But now, the market is deeply overbought in the final wave 5.  Remember, when we have a complete five up, we can expect a corrective multi-year A-B-C pattern where the best strategy is to short the market.

And here is the weekly chart showing this final wave 5

and my wave labels are pretty clear – we are in a very strong wave 5 of 3 of 3 of 5.  When the market does turn down, the falls will be dramatic.  Note the very small scale red labels.  We are in the final fifth wave up – here it is on the daily chart:

I have excellent pink tramlines with the market approaching the upper line.  That is my ideal target.  Note the weakening momentum – if that persists at the turn, it will indicate a very heavy decline to the lower tramline (at the very least).

So no matter what the ‘news’ that emerges over the next few days (or possibly weeks), I expect the market to stage a significant turn.  That means I shall be looking to exit long positions and position short.

Another clue that backs up my case for an imminent top is contained in the latest COT data – here is the S&P 500 e-mini contract (the most liquid of all stock indexes)

While the hedgies barely changed anything (they ride trends), the retail traders and commercials were very hard at work trading between themselves.  The small traders massively added to their longs while the ‘smart money’ commercials took the opposite side as they actively hedged their portfolios.

We know that retail traders usually pile into a trend just before it turns,but  the sheer size of the retail buying is very noteworthy – the increase in their longs is close to 30% in a week! Imagine – after over eight years of a vigorous bull market where valuations are now extreme, the retail trader believes it is finally safe to fill their boots with stocks after being generally cautious for years.  That is a major flashing light.

If you wish to join us in this momentous trading period that lies ahead, join my VIP Traders Club – details here.

Has gold finished its correction?

That was quite a sell-off!  I covered silver recently but gold has not capitulated as much. In fact, gold hit my major internal support line last week

It is currently bouncing off the line.  The big question is: will this line hold and will the market now embark on purple wave 3 which  promises to be long and strong?

I have pointed out before that the COT data showed hedge funds massively long at the B wave high and I expected them to abandon their longs in drives on the way down. As of last Tuesday, that is precisely what has occurred with the hedgies reducing their longs by about 20%, but they still hold a nearly 3:1 ratio of longs.  Do they need a further lesson in why you should not buy at market tops?

All in all, I do not believe we have seen the low on this leg and my ideal turning spot is the Fib 62% support at around the $1190 area.  If that does occur, I will be actively looking to go long and take over $100 on our short positions.

Naturally, there will be a rush to safety into gold when stocks begin their slide in earnest.

VIP Traders Club members remain short from near the B wave high and have taken some very large profits near current levels.