You know, I learned a lot about life (and the markets) from my mother. As a lad, I watched her Sunday mornings in the kitchen preparing the roast dinner (lunch). Whenever she had plenty of time to cook the Yorkshire Pudding, measuring carefully the ingredients on the scales, whipping them up just so and precisely timing the cooking in the oven – that’s when the results were mostly disappointing.
But when she did it at the last minute with no time to spare, slapped the thing together by guessing the right amounts and then smacking it in the oven (in the style of the young Jamie Oliver) – the results were usually fantastic – much better than when she took her time.
I learned that in some situations, the ‘inspired’ rapid approach works much better than the carefully-studied. In the field of trading/investing, some of my best setups have emerged from a quick chart reading where the wave patterns stand out like a beacon shining the way ahead.
Several markets have been in a fog (at least to me) but now that fog is starting to clear. The wave patterns in the relief rally in stock indexes have been tough to navigate, but I sense clarity ahead.
All of last year, stocks climbed multiple Walls of Worry to rack up impressive percent gains. For instance, Apple shares doubled. For many, the future looked bright in January. With the Fed having their backs with an infinite supply of fingers on the Buy buttons, what could possibly go wrong?
Of course we all all know what could – and did – go wrong. A market-crushing pandemic arrived on the scene which very few saw coming (I didn’t – but I did expect a hard decline off the extreme complacency). The virus came so far from out of left field, it was actually from out of the park and across town.
And that is the everlasting nature of financial markets – when all eyes are on the Fed, a dirty great left hook comes up from nowhere and lands a solid blow on the unsuspecting herd (apologies for the mixing of baseball and boxing metaphors!).
And a very similar setup occurred yesterday when overnight, the news emerged that Hong Kong was in great danger of a take-over by China. With the obvious retaliation by the US, this is a potentially bearish development.
That was another’surprise’ left field event – just when everyone was busy praising the Fed and the US government for doing whatever it took to ‘get business back to normal’ with infinite dollars.
But by day’s end, that Wall of Worry was swept aside in the urge to snap up (not-so-cheap) shares. That was a telling development – and it told me there is likely more upside next week before the counter-trend wave 2 can be in place.
The bulls tell us that with that kind of firepower possessed by the Fed, how possibly can shares fall? The logic appears flawless, doesn’t it? The very same argument is used to justify a bullish stance on Treasury bond prices.
And yet I have bearish outlooks for both as they are in massive bubbles of over-speculation. So am I crazy? Fighting the Fed, am I? Lock him up – quick!
But before you do, know that bullish sentiment towards both sectors is in the extreme range. For instance, Put/Call ratios in US share options has reached an extreme last seen at a major top in shares. Now, buyers of call option volumes (looking for further stock gains) is more than double the number of put options (those looking for a decline in shares). This is unusual.when shares are nowhere near their highs.
Yes, in last year’s bull run, this ratio exceeded the current as the trend was firmly up. But with the 30% – 40% Corona Crash and the relief rally to around the 50% retrace, the bulls have been falling over themselves in an extreme act of FOMO (Fear Of Missing Out).
But despite all the massive firepower used since March 23, they have succeeded in making only a 50% inroad into the Corona Crash in the Dow/S&P (more in the Nasdaq).
But have they not noticed the economic devastation lying all around them with 50% of workers out of work and GDP plunging? Company earnings and dividends are falling off a cliff (except for a precious few well-placed tech giants and some speculative pharma vaccine outfits) Maybe they haven’t – the bulls are computer algos after all – and they are blind and never stray from their offices anyway.
Meanwhile, real life retail investors who are in house arrest are mainly bearish but not exceedingly so (see the AAII survey).
Of course, this is not the first time stock price advances have strongly diverged from the real world economy. But given this extreme degree of divergence, when the decline sets in it will be historic – and greater than the first Corona Crash. When the trap door shuts, there will be no escape.
And if my forecast for a rapid advance in Treasury long bond yields comes to pass (will the Fed keep on buying everything?), the calculations of equity investors will be thrown to the winds. Watch this space.
Is Netflix fading?
One of the beneficiaries of the pandemic lockdowns has been that giant streaming favourite Netflix. With 50% of US and UK workers at home on their couches, what are they doing to pass the time? Streaming Netflix, of course!
So subscriptions and profits must be racking up huge gains globally, surely? Their latest results were announced a month ago on 21 April and guess what – subscriptions have indeed ballooned, but the share price has hardly budged – it is only a few dollars above the old 2018 high.
Does that sound like a strong bull trend to you? Here is the long term chart
This is looking like a complete five up bull run especially given the momentum divergence. Here is a closeup of the wave 5
And this fifth wave sports a complete five waves into the buying climax on the April report in a spike. Odds are strong a bear market has now set in.
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Has wave 2 topped in the Dow?
Since the March 23 Crash low at 18,200 (wave 1), I have been looking for a relief rally in wave 2. I expected a good retrace since there was a strong momentum divergence at the low. My main target was the Fib 50% retrace around 24,000 I set in March.
And that target was indeed achieved on 9 April and since then, it has swung in a wide 1,500 pip range. I attempted some short trades near highs but these were swept aside in the next surge. Hmm.
And with yesterday’s strong climb over the Hong Kong Wall of Worry, I am leaning to my next target around the 25,000 region, which is a target I had already penciled in. And with the latest sub-waves now in place, it has become a serious target. Here is the close up
Wave 4 is a classic wedge and if the market thrusts early next week to a new high, it will put in a textbook five up in wave C of 2. One of the features of this pattern is that this thrust should be the final one before being completely reversed.
But if there is no surge early next week and the market declines, we may have reached the end of the line for wave 2.