The bad news keeps coming. Remember when bad news was good? Ah, those were the days! Stocks would go up no matter what economic report emerged. If the data was ‘bad’ (such as a miss on GDP growth), stocks would rise because the Fed would be relied on to keep interest rates low – and companies could borrow more cheaply to buyback their shares by the bucket-load.
If the data was ‘good’, well, that naturally boosted shares of course as the economy was doing fine. It was a win-win scenario. Buying the dips was the way to go.
But that was pre-October 3. Since then, the data has been universally ‘bad’ and stocks are not responding in the old way any more. The switch was pulled on October 3 when the Dow/S&P made their ATHs. That’s when bad news was really bad and some sort of sanity (the Law of Financial Gravity) was being restored.
So will ‘good’ news be bad now?
The news is following the market
Since the Dow/S&P made their ATHs on 3 October, I have been vehement in saying to all who would listen that we are now in a bear market that would see many days of 500-point plus Dow declines. That was no wild guess of a perma-bear. It was based on my reading of the EWs and sentiment.
In my PRO SHARES service, we have been short several major banks at much higher levels as I noted the financial sector is usually the worst performer (for the bulls) when we approach a recession/depression and as credit contracts. And it has continued to be the leader on the downside.
I expect to see a new ‘Lehman Brothers – like event next year with a major bank approaching the end of the line. That’s when markets will really step up a gear – to the downside. They will realise that the Fed will likely not be there this time around. And if they do try something (helicopter money, anyone?), markets will not be so kind as they smell a rat and ask “What disasters do they see coming down the pike?”
And now when the Dow dropped by another 600 pips yesterday, we hear the ‘reason’ put out by the MSM was the US government shut-down. As I never tire of saying, this is putting the cart before the horse. The market is in a third of a third down and bad news follows as night follows day.
I contend that in the previous bull market pre-October, that sort of news would have been pretty much dismissed. Context is key.
Here is the daily S&P
As I noted then, the final fifth waves of all degrees terminated on 3 October and the new A-B-C down that will last years began. I have marked the first three waves of the A wave – and actually set these up in October as my roadmap. Note that purple wave 2 planted a kiss on the pink trendline and is now in a Scalded Cat Bounce down, as is typical.
With the S&P back at levels last seen in February 2017, index investors have seen no gain since then. All buyers since then are in the red. Retail investors have flocked to these investments in recent years in preference to more specific funds. They are seeing they are not at all ‘safe’ and the extreme herding into them was a sure sign of trouble ahead.
Of course, I expect large counter-trend rallies and the way to my S&P target around 2300 will not be in a straight line. But these rallies will be for shorting.
I guess Santa got stuck down a chimney somewhere and will avoid Wall Street this year.
And remember, Cash is King!
Corporate CFOs have got it wrong – again
Just last week, it was revealed corporate buy-backs for Q3 (the last quarter of the Great Bull Market) reached a record, surpassing $200 Billion for the first time and an increase of a massive 60% from the same period last year. Wow! No wonder stocks were defying gravity all summer.
It was certainly frustrating seeing new ATHs being set this summer. But how gratifying to catch the ATH in early October very near top tick. But my point is that this manic rush to buy back their own shares is entirely typical behaviour of Chief Financial Officers to herd and Buy at the Top, just like most retail investors. After all, CFOs are human, too (I think).
Here is an interesting chart that shows how the cost of borrowing has rocketed since Q3
Up to the start of the year, cost of funding declined which allowed buybacks to balloon to the $200 Billion record in Q3. But note that under the surface all year, borrowing costs have been rising yet CFOs keep their fingers on that Buy button since March/April. They evidently were hell bent on levitating their share values long enough to keep their remuneration package as lucrative as possible for as long as possible.
The biggest spender in Q3 was Qualcomm and here is the result of their mammoth effort
Yes, they managed to boost share value from $56 to $73 in three months, but evidently stepped off the gas so far in Q4 as the price has sunk all the way down to$58, barely changed on the year. What’s the betting the executives will take the $73 high as their benchmark to garner massive bonuses? Nice work if you can get it. I’m in the wrong business!
But what a vivid demonstration of the distorting power of buybacks in this year’s stock markets. And that applied in spades to the Tech Titans which are now in sharp retreat. But can anyone think of a good business reason why companies would engage in massive buy backs, other than to artificially boost dividends and share prices? Surely, companies that are growing and confident of the future would invest in productive enterprises to raise the top (and bottom) lines.
Does this mean that few mature companies can find attractive additional markets to exploit? It appears so, and is one more clue that we are at the end of the current business cycle. The economy has become fully financialised. But now, money supply growth is falling fast in Q4 to add to the downward pressure and is a very negative omen for 2019.
Analysis of a recent trade in Treasuries
Although I prefer to look for swing trades that can ideally last a few weeks, I am not averse to ‘scalping’ a market for a decent profit in a few days. That is provided I see a low risk/high prob setup. And that was the case recently in the T-Bonds.
Treasury yields have been falling for some time but with the major trend still down, I have been looking for a reversal – and a major top in the Treasuries. I noted DSI bulls numbered over 90% and any further push up would embolden the bulls to add to longs in their normal ‘chase the momentum’ strategy so beloved of hedge funds.
Of course, they had a valid ‘reason’ to buy Treasuries – stocks are hard down and a flight to safety always emerges in such times. But this is where they go so wrong. They herd so much at max excitement, they run out of buyers and then the sellers take over. Many then scramble to exit losing trades, augmenting the selling pressure.
Of course, no Treasury trader handling billions of dollars worth of bonds (who talk to other such traders) will tell you what he/she is about to do! We mere mortals have to infer what they will do next – and this is where experience and reading the waves comes in.
This was the chart I posted to VIP Traders Club members last Friday
My EW analysis suggested that the strong rally was a third wave and the pink zone would hold the wave 4? decline and and the market would then thrust up in wave 5 to above the 145 area. I advised a long position using a close stop for a very low risk trade. The potential gain was over 2 handles. We entered at 142.70.
I advised members my plan was to ride the final wave up, take profits there and reverse positions to short. And on Thursday, the market followed my roadmap beautifully, rallying to 146 for a gain of about 3 handles in just a few days. That’s a profit of about £3k on a £10 per pip spread bet.
Then we reversed to short.
Here is the move off the high as posted to members yesterday morning
The move to the high is a classic ending diagonal (with textbook five waves) and on a strong momentum divergence (not marked). The move will be the first small scale five down if/when wave 3 low at 144.30 is breached. That would help confirm the new down trend.
Yesterday was the Winter Solstice in the Northern Hemisphere where the decaying sun gives way to the new growth at today’s low point. Many markets have made major turns around this date – will the current Treasury reversal go into the record books?
Not many analysts/traders can identify reversals before they happen with high confidence and accuracy. But using my Tramline Trading method, I have been able to do just that on many occasions.
But if I am wrong, our stops are now at break even and that means our worst case scenario is for zero loss. Nice.
Wishing all my readers a Happy Christmas!
With the Dow (and other indexes) moving by hundreds of pips in minutes, it is essential to keep on top of the zigs and zags – and that is what I am doing for VIP Traders Club members. Can you benefit from my timely advice? There is only one way to find out – take a two-week Free Trial now.