Found! Another pin for the stock bubbles

On the date of the Spring Equinox March 21, the Dow made a new ATH at 40,355 off the October 2023 low following the scorching six-month rally phase off the 29,000 area for a massive 11,400 pt gain (40%). And that is The Top (so far). Annualised, that is a gain of 80%.

Let’s ponder that stat for a moment. The long-term average annual gain for the US stock market is around 8% established over many decades. And we have just experienced an 80% annualised gain – ten times the average. Does anyone else think that is at an extreme valuation? And does anyone think that the reversion to the mean principle has has been revoked? Hmm.

And note the October lows at the start of the latest 80% rally phase was not anywhere close to the basement. That was reached at the Corona Crash low of around 18,000 in 2020.

Thus, shares at the October low were already elevated – and the rally off that low merely elevated them further into the stratosphere in terms of valuation with AI leading the charge.

I believe I have not been exaggerating when I have been calling this a veritable stock mania.

I wrote last month in a note to VIP Traders Club members that I have likely found the first pin to burst several bubbles and later on April 5 I posted this chart with the caption ‘It’s downhill from here’. OK, that was a gutsy call then but events since have corroborated my early call with the Dow off by over 2,000 pts to date with Friday’s weak close.

On April 5, I identified the first five down (new trend is now down) to the wave 1 low on April 2, then the wave 2 bounce and then the start of a major wave 3 down which is in progress as I write.

And note the date of the ATH – the Spring Equinox – is an astronomical event that often occurs on a major stock trend reversal. And if the 40,355 Dow high holds, this exact-date reversal will go down as one of astronomical dimensions. or even the Mother of all Reversals.

While many pundits were tying themselves up in knots trying to figure out when the Fed would cut rates and by how much, the BLS has been issuing its CPI and other inflation measures that make all the MSM huffing and puffing irrelevant. Much MSM ink has been spilled in this fruitless task.

But with consensus for a ‘no landing’ result – with the consequent mad rush into stocks in a FOMO frenzy – the inflation data are the two pins that have pricked their bubble. Yes, when everyone believes something is obvious, it is obviously wrong. And what an opportune occasion to prove that little Market Maxim.

So now I have high confidence the short term trend for US share indexes is now down. However, I am less certain of the long term outlook. Which means I remain on alert to any changes in trend – as I was last October when I was short the indexes on the sharp decline and took part profit near the October lows given a strong signal a reversal was on the cards (an understatement as it happened!).

This is my Dow roadmap on the daily

Note that the March 21 ATH occurred at the meeting of two tramlines – a region of strong resistance. And on a mom div. Although the short term wave labels off the wave ‘b’ low were very hard to interpret in real time, with the benefit of hindsight around the time of the ATH they became a lot clearer and the final weeks traced out a lovely ending diagonal with overlapping sub-waves.

But now the way is clear to a high degree of confidence – at least to me. Of course, I need to see further downside progress and because current news always follows the market, I need to see the news headlines grow even more negative than they are at present to follow shares down.

While that may be expecting a lot, given the desperate situations in Ukraine and Gaza – to mention only two of the current war zones – an Iranian strike against Israel is widely expected soon. And the longer that is delayed, the more nervous markets will become.

The Fear Index leaps out of recent trading range

The VIX Fear Index has been in a tight trading range at new historic lows for weeks and I have been on high alert for a breakout for some time. And yesterday’s explosive action has just provided me with just that

The record low fear/high complacency measure in the 12 – 16 range was another measure of the extreme mania for shares (that could only go up!). On Friday the stock slump put a rocket up the VIX and it closed above the recent range.

And a rapidly rising VIX is synonymous with a rapidly falling stock index (S&P).

This is the breakout I have been looking for and there should be a lot more where that came from. Why? Because a tsunami of cash has been rushed into newly engineered ETFs that bet on stocks going up with huge short VIX positions). I expect a massive short squeeze in these stocks to vault VIX to my targets (and higher?) in due course. The ascent could be rapid.

Meanwhile in the real economic world….

While Wall Street and the public remain in FOMO mood, belief in sunny economic uplands remains in force as visions of lower interest rates are widespread among money managers. But as I have been outlining in recent blogs, under the bonnet the picture of the US economy is not so rosy.

We are seeing huge increases in US credit card delinquencies (over 30 days overdue) with the highest on record in Q4 and climbing. It ls a similar picture in US mortgages with late payments climbing.

With latest data telling us that inflation rates are not falling (Friday’s PPI came in hot again to augment the hot CPI earlier), those living paycheck-to-paycheck and in default of their loans will almost certainly grow in number.

And there is the shadow and regional banking sector that remains highly vulnerable to the real estate sector. Already, new US median home prices are falling and of this continues, we shall see another US banking crisis similar to the Silicon Valley Bank collapse a year ago which prompted an 18% slump in the Dow from August 2023 to the October low.

In other words, there are several more pins waiting in the wings that are poised to strike.

The chips are down

The AI revolution that has lead the Big Tech/Nasdaq rally has Nvidia at the forefront as the premium maker of the advanced AI chips. But the more mundane sector of everyday components that for example go into cars, laptops and the like is being left behind in the dust.

Intel is is the pioneer granddaddy of this sector and its share performance has let’s say been disappointing

This year, Intel is down 33% while Nvidia shares have doubled. Can this differential be maintained? Hmm.

If stocks are falling, so will Bitcoin

Regular readers will know that I have several litmus tests for the state of the level of general speculative fever in markets such as selected stocks (Nvidia is prime), real estate, and cryptos. The latter being the ultimate speculative vehicle as it has no real practical value (unlike gold where it is often compared) and is in reality more like a religion among its many disciples.

In a wonderful comparison with the waves in Bitcoin and stocks, take a look at this chart going back 16 years:

While the comparison is nowhere near exact, the Elliott wave patterns are remarkably similar and today, both indicate a termination of the 5-wave impulse is here or nearby.

Many markets are at major turning points that will turn out be historic. They will move faster and faster with huge swings. I aim to be on top of them through my VIP Traders Club, Pro Shares and Phoenix Traders Club services. The latter has gained about 180% since re-launch about a year ago with a nominal £5,000 account. This was in a period of rapid up/down swings where being nimble was key.