Fasten your seatbelts, this is going to be a bumpy ride

That strong advice was given by a tipsy Bette Davis in the classic film All About Eve (1950) in a scene where she and husband are throwing a lavish party. And as an established major actress, her career was heading downhill before she got the part of an actress going downhill. As a fan of classic movies, when Apple shares slumped yesterday and dragged the Nasdaq (and all other indexes) down, I could not help recalling that line and the similarity of circumstances with Miss Davies in the film.

The lavish party so long enjoyed by the Nasdaq – high not on alcohol but on the promise of AI riches – is winding down and the ride will certainly be bumpy. Many shares are now falling over the cliff – including Apple as the largest cap of them all – as I have been warning in these blogs.

So let the great Bear Market resume! Yes, the Elliott wave 2 bear market rally off the October lows was certainly impressive and it did reach heights I did not anticipate – far from it. And it took far longer to travel than I expected last year.

But here we are and from these great heights, the fall will be even more impressive that I first imagined and I am advising all to take measures to both avoid the great damage to come and even to profit from it.

The key for any trader is to time your entries well. That involves luck and skill – as in so much of life. You can be right and still lose money! Not only that but it is useful to have a roadmap for the way ahead in several time frames so as to avoid nasty ‘surprises’. Some traders can handle surprises better than others. For some more nervous types, it is too easy to be shaken out of a promising position before it has a chance to work.

Those more immune to the shock of surprises may be too stubborn to recognise the shift in the tide. Many investors who have seen their shares appreciate will view the next downturn as just a pause in the never-ending bull run and may even buy more.

That Buy the Dip strategy has certainly worked (but not for all shares) up until now. But if the bear has now taken over, it will be disastrous.

My VIP Traders Club members – who took short positions earlier -were well prepared for yesterday’s action. On release of the non farms data, shares initially rallied as a knee-jerk reaction to the ‘weak’ jobs data. But when traders realised that the jobs growth was fuelled by part-timers (who are being forced to take two jobs to make ends meet), the data really pointed to a weakening economy – and stagflation ahead.

This recalls the experience of today’s longer-toothed traders of the 1970s period where inflation was high and shares went nowhere – but mostly down. It ended in the early 1980s when rates started falling. I recall Treasuries and gilts were offering yields of up to 15%. Today, the opportunity of locking in an income of 15% a year for 30 years would certainly attract a few investors – yours truly included!

This was the Nasdaq roadmap I posted to members Friday morning

I offered two possibilities – either a hard down immediately or one more push up later in the day to complete an a-b-c correction before a hard down in wave 3.

This is what we got

A lovely a-b-c up and then very hard down – just what the doctor ordered. And that action has nicely set up the start of Elliott wave 3 of 3 down. So let’s now fasten seatbelts! Only an unlikely push above Friday’s wave ‘c’ high would amend my stance.

Over in the Dow, we have a weekly key reversal where the market made a new high and closed the week below the low of the previous week. Coming after a relentless rally, weekly key reversals are bear signals.

Another eyebrow-raising chart

In these blogs I like to show eyebrow-raising charts. as you know – here is another one showing the correlation between the S&P stock index and Treasury yields

Normally, Treasury yields (inverted) follow stocks pretty accurately but in May they started to diverge spectacularly so that today, they are miles apart. We have high bond yields and high stocks – an amazing situation. Classic investing 101 courses tell us that when bond yields are high, many investors cash out of shares and go into the safety and reliability of bonds. The classic 60/40 rule is advised.

Thus I see the example of last year repeated when stocks and bonds fell hard together which is normal in a recession/depression.

But The Fed’s relentless hiking of rates has had no impact on the manic bullish sentiment of the stock bulls. Interest rates making 15-year highs have been brushed off as irrelevant. They have stars in their eyes with A in one eye and I in the other.

Of course, this is unsustainable and a return to normality is surely in prospect and with the new rolling over of stocks, it will be the upper line that descends towards the lower. The prospect for yields to plunge and its inverse to move higher is low given the inflation picture and now rising oil prices as major headwinds.

On all fronts, things are stacking up to encourage cashing out of shares (and buying bonds).

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The memes are back!

Remember the meme stocks where minnows are promoted in social media by ‘influencers’ and pushed to the skies with nothing behind them and then fall back to earth as the retail caravan moved on to another target? This is GameStop – the former darling of the punters:

It rocketed from $5 to $485 in January 2021 and now is back to $20 where it has been since October. This escapade famously hit hedge funds very hard who were short. Is this a lesson for today’s punters? I fear not – yet.

Today Tupperware has taken over the baton from GameStop. This venerable company has fallen on hard times with demand for its food containers in decline. It has high debt and is in line for going bust. No=one holds Tupperware parties any more, do they? So therefore, the retail crowd has jumped in with both feet!

It has pushed shares up by 869% in days! And there are plenty more like it. But all of this meme activity points to one thing: it is the last gasp of the great bull imperative in play since WW2 (and before). It has coincided with the rise of the Fed as the agency whose aim is to devalue the dollar – and boost nominal GDP growth.

But are stocks really high? Yes, as measured against the dollar. Remember, the US dollar is not real money – it is an accounting unit fathered by the Fed and has no intrinsic store of wealth or value. Only gold is the basic unit of wealth by common agreement over the centuries. It is said that an ounce of gold could buy a suit of clothes in Roman times as it still does today.

A dollar a hundred years ago could buy ten hamburgers in a diner (and have change!). Today a dollar could buy at best 1/4 of a burger. That is how debased the dollar has become thanks to the Fed.

In real money terms, here is the Dow

The Dow made its high in 1999 and is now trading well under half (note log scale) and trending lower. Of course, before 1971 when the US terminated convertibility of dollars into gold, consumer prices were reasonably stable. But 1971 kicked off the era of a free dollar with high inflation that went unchecked until interest rates zoomed to 15%.

So now we have the immediate prospect of stagflation – a stagnant/declining economy with high inflation. And now there is another threat to economic growth – ballooning national debt levels with perpetual high interest rates.

Biden’s laughingly called ‘Inflation Reduction Act’ is pumping billions into new ‘green’ initiatives – mostly financed by national debt. This wild goose chase is lining up a tsunami of new Treasury bond issuance and is one reason bond investors are demanding higher yields that is showing up in the Treasury bear trends. Investor indigestion is assured as is higher yields as money supply keeps shrinking.

I see that Warren Buffet – who many believe can do no wrong – says he is buying bonds by the scoopful. Another prominent investor says he is selling shares and not buying bonds. For the record, Buffett can certainly make poor investment decisions (he was buying airlines just before they went bust) – and I believe this is another one. He has made his considerable reputation on the great bull markets. let’s see how he does when the great bear takes over.

My Netflix roadmap is on track

This is my roadmap from June for this FAANG Gang member

It is a textbook setup for a strong decline (latest $432). Only a move above $500 would nix this forecast. And here is another FAANG Gang member – Meta that has been one of the darlings of the AI believers

and the nine successive monthly up closes (surely an all time record?), this surely demonstrates in the clearest terms the manic level of bullish fervour towards the future and of AI. History tells us that extreme confidence in the future always meets the brutal reality of the real world at some point and disappointment sets in. And the higher they climb, the harder they fall. The shares have advanced from $110 to $310 this year!

Recent results were excellent but with a weakening economy, the next set may not be as rosy – the 11% rise in Q2 revenue may not be easy to match or beat.

This is a textbook Buy the Rumour/Sell the News event. I see Meta as one of the leaders on the way down. Fasten your seatbelts!