Does the AI revolution have legs?

An interesting factoid – posted to VIP Traders Club members yesterday – at the end of Q1 2023 yesterday, the Dow was trading around 32,900. At the end of Q4 last year on December 31, it was trading at – wait for it – 32,900! Yes, it has gone precisely nowhere in three months. But what a round trip ride!

By contrast, the Nasdaq has advanced around 20% in the quarter as Big Tech became hot again as short term interest rates eased with consensus for the Fed to have only one more hike next month and then to start pivoting down.

This bullish tech action has occurred despite ongoing massive headcount layoffs. that normally signal managers expect weaker business conditions ahead. Hmm.

Maybe the AI ‘revolution’ is finally starting to impact jobs as has been long predicted. How many highly paid workers does it take to manage the servers that power AI that can replace most routine tasks that professionals currently perform?

My question is this: with the major Big Tech rally in the bag, will we see a ‘buy the rumour/sell the news’ event as interest rates are predicted to continue falling?

But what if they start rising again – or at least steady? And with crude oil advancing off major lows (up 15% in last two weeks), at-the-pump fuel prices are set to rise just as we are all getting used to the more affordable prices!

If so, the consumers will take notice and the recent downtick in the U of Michigan Consumer Confidence surveys will pick up steam.

In the background, other commodity prices are in strong rally mode also, such as sugar, cocoa, corn, wheat and soybeans, which all push up consumer prices.

Most traders are now totally complacent about consumer inflation as the consensus says it has been licked. Certainly the Big Tech investors believe it. But is it right?

Beware the Big Gurus!

In every period there are one or two highly prominent financial wizards that previously had made a big name (and a bigger fortune) predicting a huge financial collapse. One such today is Michael Burry who predicted the collapse of the US real estate market (and stocks) in 2008 and cleverly constructed a mechanism that bought credit default swaps (CDS) that rocketed in the great Credit Crunch.

He made a fortune and now runs his own hedge fund.

The story was written up by Michael Lewis in his very entertaining bestseller The Big Short.

In the intervening years, Burry has been considered a trader with great wisdom – with many followers. Of course, his experience in the Credit Crunch provided his bias for favouring the short side of markets after 2008.

Once a successful bear, you are always looking for manic bull runs to short (as I am doing today!).

His advice was to ‘Sell everything’ late last year.

But of huge significance is that this week, he totally changed his stance, admitted his mistake publicly in a tweet and now advises buying. Wow!

He felt the growing pain of holding short positions in the current buying panic – and could take it no longer. He thus threw in the towel, as many shorts are now doing.

When a prominent short seller of long standing switches to a bull – watch out below!

Now, as a fully paid-up contrarian, I ask is this a major Sell Signal? My money is on the affirmative.

The moral of this story is simple – gurus become gurus only after a big success. After that, as a new-fledged guru they become just like you and me with our wins and our losses. They are not to be slavishly followed – the time for that was just before they became a guru! But then no-one had heard of him.

My long-standing policy with gurus is simple: by all means read them but try to get a feeling for the current state of overall sentiment. If many are stating that the bank crises are over and we can get back to normal, I take that as a danger sign.

Fed to the rescue! Has the banking crisis disappeared?

See my coverage in recent posts where the shocks of a few US and one Swiss banks that have imploded has hardly impacted the overall bullish trend. In fact, the Nasdaq has been in rocket-ship mode making new highs for the rally off the October lows. Crisis?- what crisis?

But have the banking fears of two weeks ago been completely allayed? Much fear was focussed on the US regional banks such as First Republic. Here is the current chart

Yes, it is now a member of the infamous “90% Club” where most end up bankrupt. Shareholders have decided to sell – despite the support of the Fed. This is ominous for the whole sector.

The basic problem with most banks is that their liabilities far outstrip their assets. They hold masses of so-called ‘safe’ government debt they bought when yields were wafer thin (prices high) and now these Treasuries are worth far less as current yields have rocketed in the past year or so.

The bonds they hold still yield zip and when they mature, the proceeds will be far less than what they bought them for – a brutal mark-to-market event that is killing not only their P/L but their capital base. Haircuts, anyone?

This is the fatal reality in banking today and will bring down a lot more. We will see more bank runs as depositors try to find safer havens once they sniff trouble. The outlook for gold appears bright.

Just one more major bank/insurance company/hedge fund scare will be all that is required to collapse the whole house of cards that is the global banking system.

Is crypto the answer?

Crypto true believers cling to the notion that the answer to fiat currencies that will bring down the banks lies in adopting crypto ‘currencies’ that are designed to be separate from the banking system and free from their dangers.

But after years of trying, even the grad-daddy Bitcoin has not been widely adopted as a medium of exchange – a true test for a viable universal currency. Here is the chart

The plunge low of last December was met with a sharp rally phase which is getting crypto believers very excited. According to Bloomberg, it was the best performing asset in Q1 so there is plenty to get excited about – especially for momentum chasers.

But the relief rally has carried only to the first Fib level at 23% and on a clear three up with RSI showing a marked divergence.

Recall, a three up following a sharp downtrend is in Elliott wave theory the normal reaction for a correction to the main trend. It does not confirm the start of a new major rally trend. That is one of the great benefits of using Elliott wave theory – the form of the waves offers great insights into the likelihood of the waves to come.

A relief rally such as this engenders a more positive investment confidence – and this is being confirmed by the recent (manic?) bullish action in shares. I use Bitcoin as one of my overall sentiment indicators along with Tesla.

If we have reached the top of wave 2, the next major move will be hard down – and will drag shares along with it. Only a major advance – unlikely -from here would suspend that forecast. One possibility is that BTC could push up to the Fib 38% level around $36k (current $28k) in a final burst of short covering and manic buying.

Have share indexes reached a buying climax?

Last week saw almost vertical climbs in some indexes which is typical of a buying panic. This is partly fuelled by FOMO (The Fear Of Missing Out) and by epic short covering.

Here is the popular Dow

Correction – the above is the 4-hr chart

Since March 20, it has climbed by almost 2000 pts with last week sporting a near-vertical climb that typifies manic buying. FOMO meets a Short Squeeze!

And with long-standing bears (see above) throwing in the towel, the end is nigh. The market has now reached the critical Fib 62% retrace with Relative Strength Index (RSI) at an historic extreme overbought reading.

The odds are now high that a major reversal is approaching. The current momentum should carry it somewhat higher into next week and I will be looking for signs of a spike high in all indexes.

But the current rally is being lead by only a few of the Big Tech shares such as NVIDIA (chip maker for the currently hot AI sector)

This is an extreme example of the Elliott wave theory concept of a five down/three up pattern. It could push up this week to meet the Fib 76% retrace but at this thin altitude, the chip-fired balloon should experience its own Wile-E-Coyote moment.

Did I mention Gold?

The PMs have been pulled this way and that recently and has been tricky to analyse using my Tramline methods. In the background, the dollar has been weak and this is helping support. Then, it has been hurt by the share rally that has lessened demand for safe havens such as gold. A real see-saw picture.

But when shares begin their hard down phase, the safe haven aspect will come to the fore

Silver has lagged badly but it too should continue northwards. We are long Fresnillo for Pro Shares.

Meanwhile down on the farm…

We have been bullish on the grains – Wheat, Corn and Soybeans – and yesterday the USDA released its much-watched annual March Intended Plantings Survey of farmers for the coming crop season.

And the biggest reaction was in the beans – a market we are watching very closely for the VIP Traders Club

The large stocks from last year are being worked off. Argentina is the leading crusher for meal and oil to export (a major dollar earner) and is now importing record high shipments. Stocks are being would down and a weather-prone US season ahead could ignite the grains.

The wave ‘c’ low at 1400 should be the final dip leading to a major bull run this year.

Yes, things are stirring down on the farm.