Complacency returns – are US stocks poised to reverse?
When in a hole, the wisest way to get out of it is first to stop digging. This is oft-quoted but like all aphorisms, there is another popular one to counter it – When at first you don’t succeed, try, try again. Isn’t life complicated? Which to choose? Life and trading are certainly not black-and-white (as many youngsters today believe).
Thus I took the coward’s way and put away my spade and took remaining profits on my short Dow trades (taken from near the Spring Equinox ATHs) and even went long the much-ignored FTSE 100 last week to atone for my bearish sins. So, if you can’t fight them, join them. And today I wonder if I am the last bear to throw in the towel to become a (FTSE) bull?
I comfort myself in the knowledge that the FTSE is up over 200 pt on my trade. But is my ‘conversion’ now a strong bear signal?
One of the advantages of using spread betting is that you can enter and exit trades in a flash with one click. As an investor owning shares, the process is a little more involved. How can you unemotionally sell a share you have owned and nursed along for some time – they are almost one of the family.
Latest COT data shows short interest in stock index futures near record lows as the bulls press their advantage. But for how much longer? Is the opposite of a short squeeze being teed up?
In the contest between the bulls (who expect interest rates to fall and boost economies and thus shares) and the bears (who look at the dreadful economic data concerning the highly squeezed US consumer), the rate cutters are holding sway – at least for now.
One factor to keep an eye on is the now off-radar ‘rate inversion’ where short term rates remain higher than long-term yields. This has been in place for many months and is about the longest inversion period in history. One day, they will dis-invert and return to ‘normal’. I wonder where stocks will be then?
So is the day of reckoning for the US consumer being delayed once more as rates stay high? Credit card, car re-payment and mortgage delinquencies continue to surge higher. And the recent jobs data (highly manipulated by the authorities) confirm the weaker picture.
And for how much longer can house prices remain elevated with such historically high multiples of earnings? Not to mention the sky-high rents. Hmm.
The answer – for longer than we can contemplate. Until they can’t.
One clue that supports that idea is the performance of industrial commodities such as Dr Copper and Aluminium.
Just today I took a long Al position (not to be confused with Artificial Intelligence – AI).
It has been in a severe slump post-Ukraine war in common with most commodities and has been forming a long base for about a year, just as in NatGas. Now both seem to be poised to break up out of their base formations – and that suggests the global economy is set to advance.
Of course, the recent rallies in Aluminium (and Copper) can be part of the general ramping up of war tensions with Russia and China as leading contenders. And in general, wars do boost economies at first – and stocks.
Russia is a big Al exporter and the constantly-changing sanctions picture affects market prices. But it is unlikely Russia exports will increase as political tensions increase thus supporting the bullish scenario.
So it appears we are in a good place for further gains for shares such as Glencore (which I hold for Pro Shares). In fact, it supports my outlook for it a while ago when I spotted the huge bullish triangle
However, we could be near the end of a fifth wave which is looking very over-extended. But that fifth wave could be the entirety of wave 1 of a much larger five waves up to much higher levels. Or it could be the final fifth wave before a major collapse. Such are the stakes at the present juncture. That is why I am keeping a trailing stop on my FTSE trade to protect profit.
Of course it is the US indexes that attract the most attention with their massive post-October gains. Yes, I failed to spot that opportunity last year and spent too much time fighting it.
But I did manage to nail the highs at the Spring Equinox (March 21) and ride much of the the 3,00 point Dow correction taking part profit near the lows and finally last week for gains that far exceeded the losses on the way up. I am proud of that since it did take some confidence – and patience – to place my short trades in March given the relentless bull trend.
So where are we now in the US? The Nasdaq has retraced much of the April slump and this is my best guess roadmap
Strong bull markets do not give up easily but stocks are now at their most vulnerable with my wave 2 correction now running out of puff in a strong mom div. And as I mentioned above, short interest in the COT data is at a near record low. Today, everyone is a bull. But the rally is running into major overhead chart resistance putting me on high alert for signs of a reversal.
And the VIX Fear Index is back down into major support around the 14 area. Complacency rules – again.
WHEAT UPDATE – See previous blogs for my analysis of my planned campaign. With near record global stocks and absolutely little ‘fundamental’ reason not to be bullish, I took my first long position at 537 on 18 March just a few ticks from the major low of 524 made a few days earlier.
I added another position at 559 on the way up as the market continued to rally on no ‘bullish’ news. And the market closed yesterday at a new high of 660.
And this stunning and sudden rally has the ag ‘experts’ all confused as they see no rational explanation for it. There is too much wheat around and this season’s potentially huge crop is only 2-3 months away. But already prices have gained 26% off the mid-March low and only now am I seeing a more ‘bullish’ rationale in the MSM coverage – possible major Russian crop damage from the poor winter/spring weather.
Of course, as and when prices rise further, we will undoubtedly see a lot more ‘bullish’ news that justifies the better prices. We may even see Wheat headlines in the MSM. Also, I see a deluge of recent MSM coverage of the poor margins UK arable farmers are seeing – highlighted by the now-famous Clarkson’s Farm series on Amazon Prime.
And the cure for low prices is always – low prices. The ‘reasons’ for the rally only become common knowledge much later. Remember, they do not ring a bell when a major trend changes.
This is, in fact, a classic example of why a market’s fundamental background is always a poor prognosticating tool to forecast prices when the technicals are screaming REVERSAL But you need to be skillful in TA to recognise that and I believe my Tramline methods offer about the simplest means almost any trader can master.
Don’t get me wrong – I am not claiming to get every market call right (as proved by the stock indexes fiasco until very recently). My Tramline methods are certainly not infallible. Sometimes, 100/1 horses do win races. But by using the time-honoured rule to cut losses short when I am wrong (using PS) and letting profits run when I am right (using trailing PS), over time it should be well within every trader’s capacity to grow their account using these simple rules. And not to be swayed by reading too much MSM copy. They are a perfect reflection of the herd.
Yes, do follow the herd when it is growing – but not when it is full grown usually at major turning points. We are likely about there.