Firework displays are everywhere!

Firework displays are everywhere!

The July 4 Independence Day fireworks displays will light up the US skies on Tuesday – and similar pyrotechnics are now on display in the stock markets (also in France!). A slew of ‘strong’ US economic data last week lit the rocket touch-papers and sent the S&P 500 up to new rally highs off the October low. But with bullish sentiment again at manic levels, will the markets soon spin around crazily like a Catherine Wheel (a favourite spinning firework back in my day)?

Incidentally, the Catherine Wheel was also the name given to a medieval instrument of torture – a fate almost certain for the bulls that overstay the fireworks party that is now in full swing!

While the bulls are currently in complete control, lurking menacingly in the background is the Fed/market waiting to pounce with water buckets (rate hikes) poised to extinguish the light show.

In the years I have been writing these weekend blogs, I have at pinpointed many trend reversals in major markets and all of them have occurred when most traders/investors have taken a highly confident position that the trend was firmly established, the lows were in and the only way was up. This is summed up in my oft-quoted maxim: When everybody believes something is obvious, it is obviously wrong.

Since October I have maintained that the rally off that low is a bear market rally and at times, that stance has been very hard to cling to (such as last week). Here is the S&P

Regular readers will note that I am featuring the Relative Strength Index (RSI) in many charts because I am finding that indicator is a highly reliable signal of impending trend reversals. Just admire the several arrowed overbought 70 readings that have occurred around trend reversals. And the most recent one has shot up way above the 70 level – a clear signal that a strong reversal is nearby.

That is not to say that the market cannot shoot even higher next week – it certainly can if it chooses to. But that would very likely be an exhaustion surge leading to a rapid retreat in a Wile – E – Coyote light bulb moment that may be inspired by moves in the bonds (see below).

Already the index has retraced a Fib 2/3 off the November 2021 ATH – a normal resistance area. So this area would be an ideal place for the start of big Elliott wave 3 down to new lows.

And bullish sentiment has now reached manic levels – especially for Big Tech. Last week, a record fund inflow to tech funds – twice the previous weekly record – has occurred. Such an extreme commitment to Big Tech coming after the strong sharp rally where valuations are way overstretched surely is making the final buying exhaustion phase.

And US retail buyers are back buying heavily after being on the sidelines. They have finally given in to the huge wave of FOMO especially in tech.

Finally, the Fear Index VIX has just plumbed new depths where extreme complacency reigns. Very few believe there is any risk to buying (tech) shares at these levels.

What a perfect time for a ‘surprise’ to arrive on the scene? And when it does (as it surely will), all the armies of recent buyers will be shocked when they open their screens in the morning.

Of course, being early in a massive bear market is the same as being wrong. In trading, it is the equity in the account that matters – not fancy theories of how AI (and EVs) will transform the world.

Many investors have lost big money in Tesla when buying near the tops just before a one of the huge corrections that have occurred over the years. They were right in their analysis but wrong in their timing. Yes, you can be right and wrong at the same time in the markets. What a cruel master we have!

Huge debt and rising rates – a lethal combination

Much current focus is of course on interest rates. Will the Fed keep hiking and if so what will be the peak rate before rates start falling again? Much ink is spilled in the MSM over guessing what this peak rate will be. To me this is totally irelevant.

The bulls cling to this scenario and are buying with the assumption any recession will be mild and by the time rates start falling again later in the year, company earnings will rocket, especially those in AI and Big Tech.

They point to the resilience of the US consumer who keeps spending, spending and more spending. But that ‘bullish’ data looks back and is past history and of little use in looking forward. Of relevance is last week’s Supreme Court ruling that Biden’s (vote grabbing) student debt forgiveness plan is illegal. This debt is not peanuts – it currently stands at over $1 Trillion (yes, with a ‘T’). Any forgiveness would have boosted disposable income by $10k – $20k per student and of course boost retail sales among other things.

With companies and consumers stuffed to the gills with debt (much of it taken when rates were at or near zero pc), rising rates and bond yields are having a severe impact on the viability of some companies and a growing number of consumers.

Here is the UK, ballooning mortgage rates is a subject of great concern. And in the commercial real estate sector in the US and UK, valuations are plummeting – a situation well established in China in its commercial and residential RE sectors.

Any further rate hikes would surely tip many over the edge as large debt loads become unsustainable. Already in uber-socialist Britain there is talk of a government bail-out for mortgage holders a la fuel cost bungs last year. With a General Election looming, that cannot be ruled out.

And bond yields have surged to such an extent that now financial advisors are widely putting clients into gilts with the 10-year yield over 4%. Over in the US, Treasury yields appear poised for another surge higher:

chart courtesy

They have been consolidating since last October from 4.3% when stocks made their major lows and are now edging up in the final Elliott wave 5 to well above that level.

And here is a very interesting chart of the state of Treasury sentiment:

chart courtesy

But note the record (by far) extreme spread between bullish sentiment and the price. While the trend in bond prices is hard down, bullish sentiment is at near record highs! That situation usually occurs when markets are trading at highs, not at lows. Hmm.

So investors have been scooping up bonds all the way down. If yields continue to follow the upward path (prices down) that I have suggested, the large pension funds and insurance companies that are the biggest buyers (along with foreign institutions), will be losing value on a mark-to-market basis.

And that would re-ignite the banking crisis that banks such as Silicon Valley Bank experienced recently.

So not only will consumers feel a great pinch from rising rates, so will large institutions and commercial companies. This has all the makings of a recession at the very least.

Already it is reported Germany has already entered its own downturn. This nation is highly inflation-sensitive. It is exactly (!)100 years ago that the infamous hyperinflation of the Weimar Republic struck when a person famously needed a wheelbarrow full of banknotes just to purchase a loaf of bread.

And inflation unexpectedly rose last month to 6.8% – a level that should scare the living daylights out of many Germans. My advice: Buy shares of wheelbarrow makers (do they make electric ones today?

And German business confidence is slumping. But what’s this? German shares are making new ATHs – in a recession! If that doesn’t describe the topsy-turvy world of finance today, I do not know what does.

One aspect of this is the recent period of negative sovereign bond yields of some nations as the tsunami of QE swept across financial markets that blew away normal relationships. The legacy is very much with us with sharply rising rates and yields.

Of course, German industry is geared for exports especially to China but that nation is faltering under its own weight of rising interest rates and massive debt loads.

I see the German market as a big accident waiting to happen given also the likely move up soon in the euro/dollar.



We are preparing for a major bear campaign in stock indexes which should be under way soon. My analysis here strongly suggests the historic and hugely destructive Elliott wave 3 down to new lows is approaching. Timing entries will require skill (and a lot of luck). Several false starts are to be expected and that is why we are trading small at first.

And we have major campaigns running in other markets especially the dollar and currencies and the energies.

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Gold finds support

The PMs have been tough to trade in recent weeks. They have been trending jerkily lower for two months with Gold off $160 from the $2080 top early May. For those that believe Gold follows moves in the dollar – I have news for you. In this period the dollar has made a significant move up and then down.

I have good tramlines working on the daily with RSI now at the oversold level with a momentum divergence – an ideal combination for a reversal up.

Bullish sentiment has remained very high in the downturn and I am seeing fewer headlines that proclaim a massive bull move soon. Of course, gold bugs are perma-bulls but go quiet in bear phases. And these quiet phases are often signals to expect a trend reversal when least expected.

VIP Traders Club members are now long Gold and I am looking for at least a push up to kiss the underside of the lower tramline in a $40 – $50 potential trade. After that, odds favour a resumption of the downtrend but a strong push above the tramline would shift the odds to a more bullish stance.

And would a more bullish outcome be associated with a sharp drop in shares in a ‘flight to safety’? We shall soon see.

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