Bears have thrown in the towel – are the tops near?

This year, the hedge funds that shorted Tesla shares have been crucified, as I have been relating these past months.  Yes, we all know that a P/E ratio over 200 is ludicrous, and with huge competition in the EV sector, it is surely unlikely that the company can maintain its star status for long.  All of this shouts “Overvalued!” from the rooftops.

Yet the share price still defies gravity and is making new ATHs at $670 (from $82 one year ago).  Surely, this is a true miracle. But totally understandable when you consider the forces at work in this era of manic speculation and the effect of extreme herding.  And it is not the only share that defies ‘fundamental’ logic.

The two major IPOs the previous week – Airbnb and DoorDash – saw first day’s gains at a record yet neither have posted a profit in their lives.

Social herding is an overwhelming force in society and explains the rise of the Nazis in Germany in the 1920s/1930s, the current ‘religion’ of global warming/climate change, and many other great social movements.  Basic logic has no place in their formation.  They are products of an extreme mental and emotional state widely shared.

I am now going to show a few charts that demonstrate this current extreme herding effect:

This is a measure of short interest in the S&P – and is plunging into new record lows.  The speed of the decline this year is apparent as even prominent bears have publicly turned bullish.  This has induced a serious state of complacency in the bulls.

Just as the climate ‘skeptics’ have been routed by the true believers, so have the market bears.

And this is a chart of the AAII investors who believe shares will be higher in six months.  AAII represents the US ‘little guy’ and historically, this cohort has been through a few recessions and is naturally cautious and bullish readings rarely go above the 45% level – except now.

Apparently, the above older investors have held off from turning bullish as they turned very cautious after the March Corona Crash and only now do they feel safe to buy – after the Dow has risen by a stunning 64%, please note.  These investors usually are zigging when they should be zagging and if they are repeating their errors this time, they will be marking a high soon.

And this chart of small time option buyers (a younger cohort) have no such inhibitions. Call options are bought when the buyer has a short term time frame as the options have a time limit for exercise.  If not exercised in this time frame, they expire worthless. Thus, these are among the most speculative of vehicles and appeal to a younger set.  A record high here as all caution is being thrown to the wind.

Powering this surge in option interest is the no-commission platforms such as Robinhood where bored teenagers used to playing computer games switch easily to call option buying.  It would be interesting to discover how many are buying put options!  Likely very few.

All above charts courtesy www.elliottwave.com

But what are those that know something about individual companies’ business outlook; the insiders/executives?  Surely, if conditions are truly set to get better next year, they should be buying their company’s shares by the bucket-load?

Ah, no.  In fact, they are dumping them at a record rate!  Note that in March at the height of the general selling at the end of the Corona Crash, the insiders were very bullish and were filling their boots – the correct stance only seen by the insiders.  So with the high level of insider selling today, do they know something Wall Street – and every pundit and investor and his dog – doesn’t?

Putting these trends together, I have full confidence that consensus expectations for a bullish 2021 will not occur.  In fact, all signs point to a very bearish year. If shares continue their rise into the New Year and when the expected US stimulus programme is made public, my best guess is that this would likely be a major Buy the Rumour/Sell the News event.  We shall see.

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The dollar is near a major trend change

It is a fact that major trends in the currencies usually stretch farther and last longer than many expect – including your truly.  Of course, trends are powered by a simple universally-accepted story – in this case, the widespread belief that the dollar is crashing because of the huge efforts of the Fed and US Treasury to ‘stimulate’ the pandemic-bound economy and flood the world with dollars.

It’s a simple and easy-to-understand idea. It follows the almost universally-accepted cause-and-effect model of financial market mechanism.  Print more dollars and as night follows day the price declines, just as it would when discussing the market for bread or eggs.  A glut of eggs usually puts pressure on the supermarket price.

But as I have shown time after time, financial markets do not operate in this way. A currency always trades against another fiat currency. When the dollar declines – say against the euro – some traders are betting the dollar’s prospects are worse than that of the euro. 

But what about those traders who are buying the dollar?  After all, every trade has a buyer and a seller. Are these people idiots, mis-guided or worse?  Can’t they see the dollar is falling and every pundit agrees it will collapse?  

What many fail to realise is that not only are there speculators trading, but also commercials who need dollars to fulfill genuine economic trade obligations.  Any foreigner buying US Grains needs to convert his local currency into dollars to make the trade.

But remember, when everyone believes something is obvious, it is obviously wrong.  The penny will drop – it is only a question of when.

And with sentiment currently very much against the dollar – DSI bulls number a near-record low of 9%, and the number of futures bets against the dollar (COT data) is also at a near-record high.  But the value of the Index is nowhere near historical lows

In fact, it is not below the ‘a’ wave lows of January 2018 when stocks were making a huge wave 3 high into ATHs. But with stocks now also at new ATHs, the dollar has gone the other way.  Amazingly, some pundits still maintain there is a firm connection between the two.  You often read the FTSE did this or that because of sterling’s strength/weakness.  Rubbish.

My wave labels strongly suggest the ‘c’ wave is coming to an end and with the momentum divergence building, when the bottom arrives, the reversal will be extremely powerful.  I am preparing VIP Traders Club members for such a great opportunity.