Stock indexes have truly lost contact with reality, as did Alice when she tumbled down into Wonderland. All of my upside targets for the Dow/S&P/Nasdaq/DAX have been exceeded and we are in outer space and out of the influence of economic gravity. It reminds me of the last legs of the Nasdaq in the 1990s when the dotcom mania rocketed tech shares up accompanied by astonished disbelief by more feet-on-the-ground observers. But up it went. Until it didn’t. We are at that point today.
Once upon a crazy time, when the latest economic reports from the US were anticipated with bated breath, from the quarterly GDP to the unemployment stats and in between, they moved markets. Not any more – not even Middle East conflicts nor the China Trade talks put barely a dent in the march northwards. It’s all about the momentum and Fed repo operations (aka QE4) – and squeezing the shorts.
That proverbial Wall of Worry is sky high now – and there is plenty to worry about (if you were so inclined). They are all discussed online. But as Keynes famously said: “The market can defy reality longer than you can remain solvent”. With those words ringing in my ears, we in the VIP Traders Club use strict rules to limit any loss on wrong trades. I would say this is a prime reason why members stay out of serious trouble – and reap rewards on the right trades.
Although we have probed the short side of the stock indexes, we have in fact made only small losses. But over in my PRO SHARES service, we are holding many long positions in defiance of my overall bearish stance – and here is one very recent addition, Beyond Meat.
I had been tracking it as it collapsed from $240 just after its IPO last year to the December low of $71 as the initial extreme mania for the next big thing dissipated. Investors were truly carried away with the idea that the War on Meat was already won (see my previous blog).
But I was stalking it closely and pounced last week when it gave me a very strong buy signal
— and what a signal! The wedge pattern was a textbook five-waver and all it needed was to poke above the blue trendline. Nice. But you had to be swift to catch it – the market was running very fast. Seems McDonalds will be placing large orders after tests.
And our British American Tobacco position (bought at £28 and at £30) is up to £35 and close to my target.
Taken overall in both services, members are in major profit – and here is another great trade we closed out last week for major profits – gold and silver.
We took major profits in Gold/Silver (but keeping Platinum longs)
When Gold/Silver surged on Wednesday above $1600, it seemed everyone and his/her dog was on board the bull train. Latest COT data showed the large specs (mainly hedge funds) were a very impressive 8/1 long/short, so the hedge funds certainly were. I say impressive because as a contrarian, I get really excited when I see such a lop-sided market. It tells me to take the money on my longs off the table and run. That trade had become ridiculously over-crowded.
And one other pointer of note was a recent article claiming that the COT data is useless in gold as a timing tool. Hah! That was it – I just had to take profits as stories that ‘this time is different’ always raises my eyebrows.
Yes, trading with the herd is good ,but only near the start and middle of a trend – but certainly not after an extended run. That’s when the amateurs feel it is safe to join the bandwagon, spurred on by the excited bullish headlines in the MSM.
And here are just two quotes I saw last week as a measure of the bullishness:
Gold spiked after last Friday’s drone strike that took out a top Iranian military official and is trading at seven-year highs. Yes, the news was dramatic and made a major impact. But geopolitics is just one factor driving gold. Even without the latest geopolitical tensions, gold is poised for a historic run.
…and on Bloomberg:
I just love it when some office junior at one of the big trading houses appears (very smartly dressed, of course) on Bloomberg TV and states the bloomin’ obvious – not so obvious when gold was trading much lower in a bear trend, of course! That is when they fail to show up to the studios. And if they do, they will put forward a terrific case for shorting.
These guys can’t lose. If they get their timing (and direction) wrong (as they usually do), they have lots of company and can always defend their position with a simple: ‘Nobody saw that coming!’ But he would be wrong – a few of us did.
And the first quote forecasting an historic run for gold is probably correct – just not in the direction intended.
One straw in the wind is the much-noted trend that central banks are loading up on gold in a big way. Most goldbugs believe central bank buying is very bullish. Not so, as this chart demonstrates:
chart courtesy www.elliottwave.com
Net purchases have doubled in 3-4 years as the price has advanced and now is at a 50-yr extreme. Now refer to an identical setup in 2000. Huge net purchases the from a low base leading to the landmark $1920 ATH in 2011. As gold price collapsed, the banks bought even more into 2016 (the price low) in a falling market.
Right at the Jan 2016 low at $1,045, they held the least amount – just when they should have been loaded up ready for the recovery! So they act just like amateur traders – buying high and selling low. I rest my case – and the chart is telling me we are at or near a major high.
Long time followers of mine will know that we managed to get long gold and silver last year when gold was trading around $1,200 and more recently around the $1480 region. That was long before the headlines in the MSM appeared urging us to ‘buy gold — it’s going to the moon’!
And that is why I advised VIP Traders Club members to take their huge profits and run in stages into strength, bagging gains from the $1200 and recently the $1480 areas to exit close to my $1600 target.
Our first profit-take was the previous week, long before the thrust this week from the Iran affair. It was already approaching a major target and this prudent move is typical of my trading style. It is best to take something off the table into strength near a major target than have to scramble following a sharp reversal, as we saw Wednesday.
Those traders still long and not taking profits are likely kicking themselves and are wondering what to do with gold off by $50. I try to avoid those tricky situations. I am perfectly happy with the profits in the bank on the way up.
Another key feature that pointed to the reversal was the huge divergence between gold and silver prices. Gold made a new high last week but silver did not – and by a country mile. This is often a recipe for a strong reversal – and so it proved. This is our Gold campaign:
And as a hedge, we are keeping long Platinum positions in case Gold/Silver do the unexpected and rally hard. There is a solid resistance layer just above the $1,000 area which will be a huge test for the bulls.
Crude also reverses
Just as Gold/Silver were topping out, so did Crude in conformity with my long-standing bearish outlook. The range on Tues/Wed was a massive $6 (about 10%). Here is the long term picture
We are at the start of a third wave down and only a push above Friday;s high at $65.50 would alter my stance.
And if I am correct, with T-Bonds, Gold and Crude oil in decline together, this is the classic recipe for Deflation – provided stocks can join the party.
The air is thin up here
With bullish sentiment stretched to the limit, is the bubble about to burst?
The Dow has reached my upper blue tramline at the round-number 29,000 (as did the Nasdaq at the round-number 9,000) on a small momentum divergence.
Yesterday was a pivotal day as both the Dow. S&P and Nasdaq made key reversals (higher high and lower low than previous day). This is so often a sign of buying exhaustion. Next week will be revealing.
And this occurred right on cue as I was starting to hallucinate that the Dow would reach 30,000, then 35,000 and then 50,000 (as a few have stated). Of course, anything is possible in the markets, but some things are less likely than others. One sure thing is that asset markets will return to earth with a bump eventually. Will it be sooner rather than later?