Do we finally have the mother of all Wall of Worries?

I have commented on the totally surmountable Walls of Worry for stock indexes over the months.  Every time, the Dip Buyers have triumphed by pushing the leading shares to new highs.  But do we now have the Mother of all Walls of Worry facing us?  Last week was a busy week for reporting the mammoth earnings of the FAANGs (the undisputed leader of the pack) – and the response was completely underwhelming.

For instance, although Amazon not unexpectedly reported huge Q2 growth, the shares hit the skids and lost a stunning 10% in a flash.  And over in China, as I mentioned last time, the authorities are cracking down on some major tech companies and the China A50 index is off 25% from its February ATH (Tencent is down a whopping 45% in that time).  Some would call that a bear market.

I also commented on Facebook recently and noted it was likely tracing out a major topping phase.  It too fell hard following its results. So perhaps investors that cried wolf (the wolf being the US regulatory authorities) smelled trouble for social media ahead and decided to take profits while the going was good. Perhaps a similar fate to those in China awaits. Maybe the wolf will bite this time after many false promises.

Another straw in the wind is the growing public push-back against the prospect of higher taxes to pay for the Net Zero agenda adopted by most Western governments.  Suddenly, these higher costs are being put into sharp focus with the huge cost of replacing domestic gas boilers by inefficient heat pumps (that consume much electricity anyway).  And now the EU green carbon border tax for imports is in the limelight. If adopted, prices for just about everything will rise in the EU.  We remember what happened in France when the Gilets Jaunes rioted in the streets against a proposed new ‘green’ tax on fuel (that was quickly cancelled).

Adding to this inflation expectation is the real cost of living inflation currently in play.  Food prices are rising, as are materials costs for DIY and the traditional driver of consumer inflation – crude oil – is also rising. And with Natural Gas prices in a bull trend, many will find this winter’s heating costs will be a lot higher than before.  That is sure to displease the public – and lose votes.

All in all, this does feel like we are at a pivotal moment in history with stock indexes at ATHs.  Adding to the angst is the growing feeling that the economic effects of the pandemic were largely unnecessary.  I see a report that a quarter of Covid patients in UK hospitals were admitted for other conditions but were counted as a ‘Covid’ statistic. Earlier, I did suggest there was very likely a massive over-counting of Covid cases and deaths (for political reasons?).  So were the draconian restrictions on our travel and entertainment truly necessary?  Or has there been a plan all along to kill the holidays abroad/aviation sector to ‘level up’ the domestic staycation industry?  That would kill two birds with one stone.  It would improve our balance of payments when fewer Brits would spend abroad and more at home, and also reduce the carbon dioxide emissions when fewer aircraft would be flying.  That would help get us to Net Zero quicker.  A cunning plan eh, Watson?

Have we reached the end of the line with the FAANG Gang?

I have been posting the chart of the FAANG Gang for members since this group has been the undisputed leader of the pack – especially during the pandemic when many non-tech companies have been suffering.  As such, any swing from the supreme confidence/complacency embodied in the stock indexes thar are at or near their ATHs will show up first in the FAANGs.

Last week (and also in my COTW for Interactive Investor) I suggested Facebook was entering a topping phase and with last week’s stuning results, it made perhaps its final surge to the final high.  And what a fitting place to do so – right at a time when the news was super-good!

There are several relevant features.  First, I have an impressive ‘ending diagonal’ in the requisite five waves.  Second, the fifth wave appears to be a classic buying climax ‘overshoot’ where prices shot above my internal trendline and then fell back below it.  Third, I can count the entire move complete with a valid fifth of a fifth top at the $378 high.

If this is correct, I expect a test of the ending diagonal lower trendline around $345 and a break of this level would help confirm the new bear trend.  

So what could be the background for such a bear trend?  For one thing, the US authorities  are still working on punishing social media for the negative content on their platforms.  They have used to old excuse they are not publishers and thus not responsible for the content posted there by the authors.  How much longer they can keep to this justification is anyone’s guess, but my guess is that when social mood turns down, the tables will be turned against them.

And this is Amazon, which reported stellar results last week

And despite this, the shares fell heavily.  On this weekly chart, I can count a complete five waves up and on a very strong mom div.  Of note is the fourth wave pattern which shows a complex three down correction.  Also my fifth wave can also be counted as a five, thus potentially topping off the entire bull run.

So with this huge mom div (that demonstrates a sharp loss of buying power in the fifth wave), we have plenty of fuel to propel the shares much lower in the weeks to come.  Only a massive buying spree could change this picture.  And with economies starting to re-open, has Amazon reached the limits to its growth as the pandemic eases?

And has Bezos signalled that limit by his well-publicised recent ‘space’ day trip?  Was that the big ‘sell’ signal that marked the top?  After all, where can he go next?  To the moon?  To Mars?  The effort would be immense – and would cost probably more than his worth.  No, that is bout it for ‘space’ voyages – and for the shares!

Adding al of the above up, I feel we are at or very near a major turning point in the markets. If so, then 2021 will go down in history as marking a return to earth from the flights of fancy engendered by cheap money created by the central banks.  And when markets begin their descent, the Fed and others will be vilified and become a much-hated organisation.  But that is months away….