Fractured markets are here -so should we worry?

Fractured markets are here -so should we worry?

I have in my many years never witnessed such fractured stock markets as these. Many US indexes are advancing exponentially and are making new ATHs while at the same time, the internals are flashing a deep red. For instance, the number of new highs are falling while the number of new lows is rising as the indexes advance. That is because there is only a diminishing handful of Generals leading this charge. And because of their mammoth size, Big Tech is having an inordinate degree of influence on the major indexes (except for the Tech-less Russell 2000).

Last week I outlined why stocks such as Nvidia have kept advancing exponentially (peer pressure among money managers) while keeping a lid on the also-rans (liquidating by money managers to finance their Nvidia buys).

Of course, this is not a healthy market since the rising tide is not lifting all/most boats as would occur in a ‘normal’ bull market. I conclude this is not a ‘normal’ market.

And this confusion is testing the mettle of the MSM headline writers.

Here is one from February 5th: Bonds. bullion, banks, bitcoin battered as good news is bad news again after Powell.

And this from February 6 a day later: Goldman: Good news is good news and if bad news is good news too then dips will remain shallow.

In political circles we are used to constant U-turns are we not (yes Starmer, I am looking at you), but this one is a real doozy. It made my head spin. But it fully illustrates the extreme confusion many of us feel today.

But out of confusion comes order – eventually. The big question I have is this: Are we entering a whole new world in the stock markets where AI and Big Tech is the prime mover and the rest are also-rans (except the uranium sector, of course)?

To reflect this idea here is a headline from last week: Big Tech is about to change the stock market forever.

That is a pretty bold statement and in it, the author outlines why the god of Big Tech will start to rival the oil, pharma and banking conglomerates that dominated the past indexes for their ability to deliver huge and reliable sums of money for their shareholders every quarter.

Recently, Meta declared its first dividend and it looks likely other M7s will do likewise. But is this the start of ever-increasing dividends from Big Tech (and a new era), or does it mark an high water mark? After all. the blistering pace of the share price advances has been historic – and history also tells us that no share price has actually reached the moon ever.

The headline above is an expression of extreme positivity for the future – and I am reading that as another early warning sign. When I spot bold headlines in the MSM, I start to smell a rat.

Another snippet from a pundit last week: As long as we get January March May June(?), or even second-half 2024 *deep* rate cuts from the Fed, markets will remain drunk. Combine these sentiments with the total lack of bearish MSM articles, and we have the huge potential for the major reversal – unless we are truly in a new investing era (see above).

So is it new school or old school economics here? New school says that the huge sovereign debts (and growing exponentially) piles is no problem. Interest rates are coming down soon anyway, so why worry?

This chart shows the yawning gap between M7 and the S&P 500 and the S&P ex-M7 since 2019

For all of last year and this, adhering to the old market maxims to ‘trade with the trend’ and ‘the trend is your friend’ have been the winning strategies in spades for over a year. Of course, this will keep working until it doesn’t.

The M7 group appears to be in the final wave 5 of 5. It could move a lot higher in a fifth wave extension, or it could terminate at any time. What I can say is that when it does turn, the decline is likely to be very sharp. For evidence of a reversal, I need to see a small scale five wave impulse down and until that time, the trend remains very much up and it is foolish to fight it with strong short sales.

Incidentally, at times like this when the M7 are in manic bull trends, I am reminded of Alan Greenspan’s ‘irrational exuberance’ comment on the dotcom boom in late 1996. That was about four years before the top was reached in 2000 and anyone shorting on his words would have been carried away in stretchers. Thus, it is possible we have a few more years of rising Big Tech stocks before any kind of major correction..

There are many measures of how extreme is the fractured state of stock markets and here is one

Dr Copper has a PhD in economics and usually signals changes in economic trends and has closely followed stocks over the years. But not today. The gap is huge. So what is going on? Maybe it is the relative decline in manufacturing in the US that uses less of the metal as Big Tech takes over the US economy. Or maybe not.

EVs use a lot of copper and demand for them is tailing off in the US and UK. Maybe miners have geared up production on the back of the EV demand projections which are not being realised. Hmm.

What is today’s message from Bitcoin?

With the leading crypto now firmly in mainstream finance with the recent US ETFs launch, I believe we need to pay a lot more attention to this important market. Even more so with the likely launch of other crypto ETFs such as Ether.

Bitcoin has over recent history traded more or less in synch with the indexes. They both derive from the swings in social mood.

The wave 2 low in late 2022 coincides with the major lows in the US indexes and the advance since then is shadowing the 42% gain in the S&P. Note that the S&P is making new ATHs but Bitcoin is not and at the current $44k is some 25% short. I post the most bullish option above that suggests we are in a major third wave up and if so, the old $64k high is easily attained.

Many are calling for extremely high targets and who knows, maybe they will be proved correct.

Recent recovery action certainly suggests the force is with the bulls.

A lesson in MSM reading in Cocoa

My Tramline Method is in reality a variation of classic chart reading but there is another reading of the market that can yield excellent results in price forecasting. That is MSM headline reading.

I often comment on the (mostly) bullish MSM headlines for the stock markets as you know. But out in the far reaches of the commodity sector lies Cocoa – the Pluto of the financial world where Nvidia is the sun – that rarely gets a mention unless something significant occurs, such as a major crop/weather scare or a historic price high – or both, such as now.

And that is precisely what occurred on Thursday when I caught headlines all over the press such as this from the BBC: Chocolate: Cocoa prices hit record high as El Nino hurts crops. Previously, there had been few if any such headlines but the market has been in a roaring bull market since August 2022 – a fact I spotted early for my VIP Traders Club members.

So the sudden and rare eruption of news about Cocoa on Thursday was an historic market event. And applying my Headline Rule, when the public’s attention is suddenly drawn to a minor market, my bet is always on a imminent reversal of the uptrend. And after an exponential rise, Cocoa succumbed to extensive selling on Friday right after the headlines were posted.

In fact, the Cocoa chart is a dead ringer for the Nvidia chart and I am wondering if there is any connection. While the developing El Nino In West Africa probably has little effect on Nvidia’s business of chip making, both demonstrate extreme bullish investor/trader behaviour and that is driven by the common social mood.

So is it too much of a stretch to suppose that Friday’s correction in Cocoa could flag up a similar move soon in at least some stock indexes?

So here we are, stock markets are still climbing the Wall of Worry that grows taller by the week. It is ignoring the exponentially rising national debts as US long bond yields seem stuck at over 4% as oil prices recover, ignoring the escalating Middle East tensions that could flare up again between Iran and the US at any time with the US striking more Iraqi bases, ignoring the ongoing commercial real estate bust in China and the US and UK, ignoring the collapse of the Net Zero and EV revolution fantasy, and so on.

In the spirit of ‘if you can’t beat them, then join them’ I am wondering if Tesla shares are due a comeback? They have lost about 55% off their ATH and sentiment is dire.

Select your currency
GBP Pound sterling