Has FOMO mania hit a brick wall?
Bullish mania is running rampant in Pundit-land – at least it was until last week. Human nature, being unfixed probably in millennia, compels most to find easy-to-digest rationalisations for what has just happened. And since June, what happened was the strong share rally off the gloom-and-doom picture at the lows when everyone was finding reasons why shares were headed even lower (we covered our shorts there).
Now, they are finding reasons why shares are headed higher after a 20% S&P rally (we are shorting). Fund flows into Big Tech in particular have been nothing short of frenzied and that is seen by many as a very bullish signal.
I totally disagree – it is a hugely bearish sign.
Have these flows resulted in massive recoveries in Big Tech off the June lows? Here is the FANG Gang Index where the recovery has only traced out 1/3 of the entire decline off the November ATH. This weak performance is a clear indication the turn down off the November ATH will be historic in scope.
One of the features of a bear market rally is that second waves often produce bullish/manic moods that can exceed even that at the highs.
Here is a couple of recent quotes to give a flavour of the current mood:
One Bloomberg pundit claims: “For xxxxx, chief equity strategist at yyyyyy, the bounce has conviction because it has breadth: Roughly 90% of the S&P 500 stocks are trading above their 50-day moving averages. This level, he says, has historically signalled the start of new bull markets, if the rebounds of 2009, 2011, 2018-2019 and 2020 are any guide. “While this is not a necessary condition for the end of the bear market, it would increase our confidence that a rally back to the old highs will come before a return to the June lows,” he writes in a Monday note.”
“Xxxxxx points to the same technical indicator among the signals that equities can now stage their next leg of the rally. They call it the “50-day breadth thrust.” Chief US Strategist xxxxxx notes that this usually happens at a median of 1.8 months after a bear market low. And from the June low, that equated to last Thursday, Aug. 11. The mean, of 2.7 months, would be Sept. 6, the day after Labor Day.”
But the dark clouds are rapidly gathering. Here in the UK, the latest consumer confidence data shows the public are at their very gloomiest at least since 1974 (when records began). The outlook for personal finances dropped the most – and no wonder with soaring rents, rising interest rates and mortgage repayments, persistent high energy and price inflation and record high taxes, can it be otherwise?
Project Fear is back with a vengeance – with the media (especially the ever-reliable BBC) leading the charge – with apocalyptic forecasts for the Mother of all Winters of our Discontents rapidly approaching. For a growing number, choices will have to be made between heating or eating -unless the mounting calls for the government to ‘do something big’ are heard.
The UK public finances are facing a Whammy of many degrees – sterling is falling into the abyss (more expensive imports), government borrowing is set to explode and tax receipts will be in jeopardy as the economy turns down. The pressure for even higher taxes will be enormous despite that the PM may say..
So are we there yet?
Last week I issued a Flash Alert to VIP members a few moments after the S&P had hit a major upper target of 4325. At that point, all wave labels had satisfied all of the necessary conditions to consider the wave 2 relief rally off the June lows to be complete. That sets the stage for the kick-off to my wave 3 of 3 bear market.
Only a strong push above the 4325 high would send me back to the drawing board. As I wrote in that Flash, I have high conviction the wave 2 top is in.
The contentious wave has been the ‘c’ wave off the ‘b’ wave low and ideally, I was looking for a five wave pattern, and Bingo! there is is – and with a good mom div. Also, the 4325 high lay on my upper tramline – also a bearish sign.
So, even if another rally phase lies ahead, I expect the market to at least decline near term likely to the 4100 area as my first target.
So let me go back to the Big Picture for the emerging bear market. Because the almost 100-yr bull market rally off the 1929 Great Depression lows is now complete, we can set some early downside targets. Here is the Dow mthly going back to 1995:
My first main target is the 26,000 region. the second is at the Corona Crash low around 18,000 (only two 1/2 years ago!) and the main target is the 7,000 region. And that is just the start.
I know that these low targets may seen outrageous to many readers. I get that. But just consider all of the bubbles that the Fed (and others) has engineered with its take-over of the Treasury bond market with zero interest rates and the tsunami of dollars in the form of QE that elevated all boats. The money-for-nothing culture it has encouraged is now in reversal.
Now, consumers are being forced to tighten their belts as huge energy costs start impacting budgets. Discretionary spending is being squeezed – and that will hit company earnings for many businesses.
And whatever loony Stimmie Scheme the government imposes, it will be nowhere near enough to cover the energy bills increase. NatGas prices have quintupled in two years and are at 14-year highs.
Now with the reversal of the Fed policy in motion, the tide is moving out and inevitably many boats will be left stranded without an oar to paddle in the form of cash flow.
I see housing as a major casualty of the coming deflation (in credit, not so much in consumer prices). Higher interest rates is always the pin that pricks bubbles.
Did I just say ‘deflation’?
Yes, we are in for another tsunami =-this time in credit defaults. Long time readers know that I use the Junk Bond Index as a proxy for bullish sentiment. Remember, Junk Bonds are issued by the riskiest of companies and trade more or less like equities. But they can offer another angle on the state of where asset markets are headed
And last week they rallied to near the 200-day MA on a MACD cross-over and then reversed lower.
Recently, the spread between Junk and Treasuries has been very narrow that indicated total complacency for a possible reversal. That is now giving way under more stressed markets (T-Bonds slumped and yield rose on Friday).
As rates rise, more and more companies with huge debts will fold and default on their bonds. Many dominoes will fall, just as they did in the 2008 Credit Crunch, only this time the scale will a whole lot larger.
HUGE PROFIT OPPORTUNITIES LIE DIRECTLY AHEAD – WILL YOU TAKE THEM?
Huge profits await nimble and canny traders in the upcoming major bear market in stocks But navigating the inevitable sharp swings will require expertise. Even in a strong trend, it is possible to lose money even if your overall view is correct! As in most of life, timing is (almost) everything.
Come join us as a member of the VIP Traders Club as we navigate the treacherous waters of the major markets. You will receive my daily Trade Alerts Monday-Friday where I cover most of the main markets from stock indexes to currencies to metals and commodities. We have taken major profits during the bull runs and now are taking positions in the next huge moves.
King Coal is back!
Reports of the death of the coal mining industry have been wildly exaggerated.
In another totally expected result of the fantasy goal of Net Zero by 2050 (27 years away – and several lifetimes away in politics and the economy) – we read this headline: “Across the World Coal Power is Back”.
Yes, demand for coal has never been higher and prices are reaching records. Why? Simply because the much-subsidised ‘renewables’ have failed to supply our needs.
Net Zero dreams are dead
In a partial rational return to sanity forced by the economics of the real world, coal prices are surging as demand far exceeds supply (for reliable electricity generation). The so-called’ renewables’ (are they not in reality ‘unreliables’?) cannot supply the energy needs of today. The War on Fossil has been a complete fiasco and in reality should be called the War on Consumers (and businesses).
And because of official government policy of discouraging oil and gas production, we are in this current state of very high fossil prices all the while our glorious leaders are now begging oil companies to pump, baby, pump. My Irony Meter has just recorded an 11!
And by the way, I happen to believe the essential food crop yield booster carbon dioxide in the atmosphere is a benefit to humanity, not a ‘pollutant’ That lie will be eventually exposed as economies turn down with stocks. Eco-mad politicians beware!
The euro is plunging – will it reach parity again?
With Treasury bond yields rising again and the Fed’s oft-stated intention to keep ramping up interest rates, there is little wonder the US dollar is again flavour of the month. And I read that a BoE governor has stated that UK rates need to rise to 6% to ‘calm inflation’. Wow! UK rates ate still under 2% so that would be a massive hit to over-borrowed consumers – and house prices.
Thus, bullish dollar sentiment remains ascendant – so would taking a contrarian view on the euro here make sense?
I may well have something for VIP Traders Club members this week on this interesting notion.