Gold (and to a lesser extent, silver) has been on a tear.  Days of £20 gains are fairly common.  So it is not surprise that many pundits are calling for new ATHs – especially above the old $1920 high to the round-number $2,000 – and beyond.

So how likely is this?  As I never tire of saying – bull markets attract more and more bulls who express greater extreme forecasts as the price rises.  And when bullish sentiment reaches a climax, the bulls receive a shock in the form of a decline – and start bailing out as the pain intensifies.

Remember, market prices are determined at the margin.  Traders who already hold long positions have little power to keep the trend alive, unless they suddenly throw even more funds into the market.  And with an overwhelming cohort of bulls, some will decide to take some profits which swamps the buying of a smaller number of new bull converts.  Then the price falls.  The greater the bull/bear ratio, the harder the price falls.

So are we near that state of maximum bullish sentiment?  If the latest COT data is anything to go by (and it usually is!), hedge fund bulls outnumber bears by about 9/1.  That is about as extreme a ratio as I can recall.

And who is on the other side?  Why, the smart money commercials, of course!  And just last week, hedgies increased their long bets by a stunning 15%.  In my book, the bulls are all-in – and therefore heading for a major top.  But remember, COT data is a blunt timing instrument.

And here’s why:

The fact that gold and the dollar have been in synch for many months has been lost on the MSM.  Gold folklore says that they should move contra.  That is taught in Gold Trading 101.  So maybe the textbooks should be re-written?

But note the form of the advance – in a beautiful five wave pattern along tramlines.  And we are in the final fifth wave of wave C.  The reversal off that eventual high will be spectacular – and I plan to trade it.

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Is the virus contained?

Last week on 15 February, this was my best guess for the endgame for US stock indexes:

  • ‘Good’ news about the virus will spread and many will conclude it is a pandemic that never was.  China deaths will fall per day.  New breakthrough vaccines will be developed.  Stocks will not collapse.
  • US Stock indexes will reach new highs above the latest Dow ATH at 29,575 reached last Wednesday
  • Once major worries about the coronavirus are out of the way, either a new much stronger virus will emerge (in China again?) or a major development in the bond world will hit the headlines.  Such as a major default, a ‘surprise’ jump in short term rates, or something else out of left field.
  • A likely ‘overshoot’ of my line in the sand in the Dow/S&P and then the start of a major leg down.

and the action this past week has amended my view.  The only question I have is if the market will turn from around here, or after just one more small push up to a new ATH.

It is interesting that the main focus has been on the coronavirus drama since that is the most sensational news story that sells newspapers.  And it fits in precisely with a disaster scenario for the economy/shares that many pundits have embraced.

But is it true?  Will the global economy and shares collapse as the virus does its evil work?  In fact, the past data does not support this.

Historically, we find that stocks tend to rally when a major pandemic is feared.  For instance, here is the Dow in the 2000s when the SARS pandemic first hit Hong Kong in March 2003 but originated (but not widely reported) in the Pearl River delta in 2002

The market was in a decline up until 2003, and when the virus news went global, the market rallied sharply over the next few years.  So no big hit from the virus here.

It seems that major pandemics have occurred at low points for stocks and has not not been a kick-off to a collapse, contrary to popular belief.  And with the Shanghai Composite Index down off its 2007 high of 5,500 to the current 2,900 (a drop of about 50%), the 13-year bear market lines up beautifully with the current rally phase that has timed perfectly with the pandemic news as a marker for a low. 

But with news of today’s coronavirus now global – and fears heightened – can we expect a similar multi-year advance for US shares (a country where the virus has had little impact with the population)?  After all, with virtually no major panic there (except in the media), shares remain in strong bull markets.

And if the pandemic can be contained, that would indicate a more bullish sentiment, leading to stock advances.

But what if this is a real terror and outbreaks start popping up in the USA and UK?  Already South Korea is in the headlines for new cases. Then all bets for a rally are off the table and fear and panic would trump central bank stimulus.

So the odds do not point to a major advance a la 2003 – simply because the market is at two very different stages of wave development in 2003 to the current 2020.  Back then, bullish sentiment was weak and shares were generally not over-valued. Algo speed trading was in its infancy and QE was a glint in the eye of central bankers.  Debt levels were hardly visible to the naked eye, but not now.  Far from it.

And today, tracker funds and ETFs only chase the high momentum FAANGS where tech valuations are sky-high with bullish sentiment off the scale.  Many value sectors and shares are in solid bear trends (such as retail).

Just as it was no coincidence the coronavirus emerged in China following a stock market bear trend (high bearish sentiment), the same can be said for Japan, where the docked virus cruise ship on Thursday reported more deaths.

The ATH at 24,500 was put in on October 2018 and since then, the market has been in decline and currently in a rally that has taken it to the underside of the major support/resistance line (on a momentum divergence). This is very much kiss territory. Note the virus has hardly impacted the market (so fat).

So will we see a Scalded Cat Bounce down?

It appears that with the much-anticipated extra anti-virus stimulus just announced by China, bulls have been energized to load up even more.  But will the disruption to the economy that is widely being reported trump the stimulus?  We shall soon find out when data is released over the next few days.

STOP PRESS  Yesterday the US PMI data showed a huge downside miss on estimated and a dreaded contraction in economic activity.  That, of course, is very bearish over-valued stocks and an indicator of a looming deflation.

And what a perfect time for a correction to get under way.  Here is a very revealing chart of the action of traders in their call option operations

chart courtesy www.elliottwave.com

The small traders and institutions alike have been filling their boots with call options, expecting shares to continue advancing.  Remember, this is after the year 2019 when the S&P had one of its largest gains in history.  And that, after a stunning eleven-year bull run off the 2009 low!

As noted above, when a bull market has been extant for years, more and more people believe it cannot go down (remember the Fed, right?).  And that is when it does – big time. 

The mania for financial products is in full swing and the scene is set for a massive correction.

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Will SpaceX and Virgin Galactic shoot for the moon?

As a measure of this mania, speculative fever is running at steam heat for these battling space tourist companies – one with the all-conquering Elon Musk (Tesla) at the controls, and the other with Richard Branson (of the Virgin East Coast train success (not!)). 

Extreme bullish articles are appearing all over – and here is one – The Space Race Gets Real.

Here is the Virgin chart

and is yet another of the many examples of exponential moonshots (see Apple, Amazon, etc).  And they will all fall back to earth in the same way – and it won’t be a gentle downhill slide, especially the above.

The space tourism ‘industry is in its infancy but bookings are high for the $250k round-trip fare.  What would happen if there was a sudden ‘failure’ of some sort with many high-profile astronauts (aka ‘passengers’) on board? It really doesn’t bear thinking about – but the bulls definitely should do just that.

 

Crude Oil rallies against ‘expectations’

Most pundits who follow the data are completely bamboozled by the current rally – but I am not.  And here’s why

The market made a high in early January at the $65 mark and from there, it entered a savage bear trend with talk of usage declining as solar and windmills would take the strain. And EVs would conquer the world.  Even electric planes were being developed.

But with the collapse to the $50 area earlier this month – a stunning drop of $15 (23%) in only one month, it entered the well-established zone of strong chart support (pink bar).  That $50 region has been massive support for a year – and odds favoured it would stop the rot this time as well.

And so it did – and this week continued the rally despite four consecutive small weekly draw-downs. Conventional ‘experts’ are amazed – how could the heavily over-supplied crude market even think of a rally under these obviously bearish conditions?

Of course, we know the answer to this!  Markets do not trade on the data or the news in a cause-and-effect way.  In everyday life, we are used to a cause having a definite effect.  If I run out of fuel, my car stops.  I have never known a case where someone runs out of fuel in all the tanks and keeps on motoring (unless it is a hybrid!).

With rigid cause-and-effect thinking dominating most peoples’ expectations in the financial markets, it is no wonder so many are caught flat-footed when a market turns in a seemingly perverse way.

Of course, the vast majority do not examine why they get it wrong.  Most will ascribe their failure to the well-worn word ‘despite’.  “Despite the data, markets recovered”.  And go on repeating the same errors.  Very few will employ critical thinking – a skill not too many in the financial – or any other world – employ.  If they did, they may come up with a different model not too far from the one I use.

Perhaps the lack of critical thinking today is down to its omission of teaching it in so much schooling today – but that is another story.  

One factor is the looming contraction in shale oil extraction rate as the number of new wells and US production tapers off.  We could see a more more rapid advance than many expect.

 

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