Confusion reigns!

When stocks make major highs, they do not all do it lockstep.  And I believe a major high is upon us.  But isn’t it curious that sentiment between the professional money managers and the public appears to be poles apart?  Not when you accept that uncertainty and confusion today reigns in many walks of life!

I believe I have an explanation for this disparity.  Retail traders read the MSM, while money managers read each other’s analytical reports.  The MSM has been relentlessly bearish for a long time with stories such as the BoE warnings about dangerous levels of consumer debt, a slowing property market, Brexit uncertainties – the list of worries goes on (not to mention the global tensions with North Korea et al).

On the other hand, fund reports are upbeat and point to the low inflation, continuing Fed support, increasing company earnings, and the prospective Trump tax-cutting ‘stimulus’ down the road.  Incidentally, a state of confusion has surely reached an extreme in the Trump White House with people coming and going as if in a Marx Brothers comedy.

Did I say Confusion?  It extends into larger society as well.  I know I am very near a major top in positive social mood when the UK government has just announced it will now allow anyone to opt for a gender change – just by ticking a box!  No need for inconvenient surgical operations, just apply for a new birth certificate showing your chosen gender.  I would guess that some of the new applicants will be female BBC ‘stars’ who now know their male colleagues get paid several times more than they do currently.  Hey presto – a magic pay increase just for saying you are male!

The fact is, US money managers (trend-followers) are extremely bullish while retail investors are much more cautious – and this situation has prevailed for some time.

Latest COT data in the e-mini S&P – the most heavily traded index –  shows that hedge funds are bullish by a factor of 1.25 while the small trader is bearish by a factor of 1.4.  Commercials are evens.

And the latest US AAII data on retail investors shows that bullish sentiment is still way under average and they are only weakly bearish by 5 points under average.  That means the neutral reading is a full 10 points above average.  Yes, the moms ‘n pops are confused! Are they still haunted by the 2008 – 2009 Crash?

As a measure of the bullishness of the pros, here is a chart showing the Market Vane survey (MV is the grand-daddy of the industry)

chart  courtesy www.elliottwave.com

Bullish sentiment of the pros has been rising since the lows of 2016 and now optimism is at its highest level since 2007, just prior to the Crash.  Does this suggest we are at the start of a major bull run or near the end?

Here in the UK, IG – which is the biggest spread betting firm to small traders – reports that 91% of its customers are short the Dow.  It is likely most of the other firms would show a similar result.  Of course, this is extreme – and potentially bullish of course.  Remember, these traders read the MSM, not hedge fund reports.

Yesterday, the only US index to surge to new highs was the Dow.  The S&P and Nasdaq are lagging.  And this is typical at major tops.  So let’s have a look at each chart in turn.

Here is the Dow daily

In fact, with the market trading just above the 21,800 level, we are at a critical juncture.  I have a very nice blue tramline pair with the market having pushed above the upper line last week.   But I also have a terrific pink wedge (or ending diagonal).  This wedge sports the regulation five waves and on Friday, the market made a precise wave 5 hit on the upper wedge line.

If the market is going to turn, it should do so now – and the large momentum divergence since March will have done its usual thing of pointing to a lessening of bullish force. But if not, we shall see a lot more melt-up action.  So the 21,800 area is my line in the sand for a bearish outcome.

Here is the 4-hr S&P

The blue lines are my major tramline pair and the pink line a valid line of support/resistance.  This line was support until last week when it was broken with force and now is a line of resistance.  If the market can rally next week, it may try to plant a kiss on the pink line and then retreat in a typical scalded cat bounce.  And if that occurs, the momentum divergence will likely be maintained – and be a bearish omen.

That places the 2480 area as my line in the sand.  But if the market heads south early next week, it will likely be a third wave – and that would imply a very solid decline.

And here is the tech-heavy Nasdaq daily

These are textbook Elliott waves and with last week’s new all-time high, the market has d one enough to consider the entire five up complete.  Note that the market just missed the round-number 6,000 level, which was a well-publicized target for the bulls.  One small problem is that maximum momentum in wave 5 is higher than that in wave 3.  Usually, fifth waves sport weaker momentum readings than in wave 3.  But the form of the waves is very compelling that we are at or very near the top.

Next week  should be one to remember!

Gold and silver extend gains

Last time, I noted that with both metals in strong rally phases, hedge funds were still shorting into the rallies.  But yesterday’s COT data shows that they finally have got the message and the short squeeze I projected was in full flow last week.  But both charts show an impulsive pattern that confirms we are in major relief rallies to the main downtrends.

Crude oil scores major gains against bearish sentiment

Have you noticed all the MSM coverage of electric vehicles lately?  I saw an article proclaiming the end of the crude oil market – demand will surely plummet.  It implied all fossil fuels will be kept locked up in the ground as electric vehicles take off.

Of course, what is not mentioned is how will the increased electric power be generated to cope with the surge in demand? Isn’t it ironic that Germany, who is advertising that it is hell-bent on going green is planning to build many more coal-fired stations?  Talk about epic hypocrisy!  And unit power costs are sky-high there already.

This is what the free market  (not government propaganda) thinks about the outlook for coal use:

This is KOL, the index of coal=producing companies.  Bearish trend, huh?

So is the price of crude oil – that other evil fossil fuel – likewise in a strong bearish trend, being scared off by the green fanatics?

The market certainly has been in a state of confusion with $10 swings common.  In fact, it has been a nightmare to trade this year – until last month when I detected a low around the $42 area.  Since then it has gained a solid $8 and against a very bearish sentiment.

I have a fairly decent pink tramline pair and last week, the market has broken out of the channel in what looks very much like a third wave.  On Friday it even moved above the Fibonacci 62% resistance level and appears headed for a major target at the blue trendline at around $52 – $53.  The $50 level is psychological for many traders and if we see it surge above it next week, short covering will get intense.

VIP Traders Club members are long crude, heating oil and gasoline (the latter two are in even stronger bull trends).

The euro still defies gravity but not for much longer!

Hedge funds are pushing the euro into new highs almost daily but the extreme bullish sentiment is warning that a massive reversal is rapidly approaching.  Here is a telling chart of extreme sentiment from COT data

chart courtesy www.elliottwave.com

It shows the gap between what the hedge funds think (very bullish) and what the smart money commercials think (very bearish) has reached epic proportions.

Historically, the commercials always win.  When the market turns, I expect new lows below the 1.07 level to be seen in short order.  My ultimate target is below the origin of the euro below the 80 cent level.