Has the FBI put in a stock market top?
Just when you thought the US election campaigns couldn’t throw up any more outrageous surprises, the FBI released its Hillary email bombshell thus moving The Donald back to level pegging in the polls according to yesterday’s results. That put a fright into the robo traders – and the multi-week 18000 support level in the Dow gave way thus propelling VIX back up in a hurry. Here is that VIX Fear Index
From the high complacency levels in September/October, fear has suddenly risen – and there is plenty to get fearful about, not just the prospect of The Donald being the next US President with his finger on the nuclear button.
I showed this memorable chart on 25 October showing the yawning gap between company earnings and share prices.
Obviously, this divergence is unsustainable and at some point, reality must bite. But have we reached that point of recognition yet? Remember, madness in the markets can carry on beyond anyone’s wildest dreams (or is that nightmares?).
So will the fact of Tuesday’s election mark the top in stocks, no matter who “wins” the poisoned chalice? There is little doubt that social mood in the US has been shown to be in decline – and getting lower. The deep divisions and distrust in US society exposed by the Hillary and The Donald campaigns surely is not conducive to an extension of the amazing post-2009 stock market rally.
Bull markets do not grow when mood darkens. They turn into bear markets. And risk is shunned, meaning the riskiest investments are ditched first.
As one example of the risk-off mentality sweeping the markets, here is the Russell 200 index of small cap US shares
The whole rally off the Feb lows is an A-B-C counter-trend with the C wave rising on a declining momentum measure, Then last week, the shelf of support at the 1210 level gave way and the market has broken to the current 1180 level at the Fib 50% support. The trend is now down.
Here is another example of risk-off – a market darling, Tesla.
This has to be one of the most-hyped companies on the planet. Its future depends totally on the success of its self-driving electric vehicles -and that is not assured by any means for this game-changing concept. Incidentally, if they take over, what will the boy racers do with their feet and hands? It is unlikely to appeal to them – or to many (mostly men?) who love the experience of driving behind the wheel (see the popularity of Top Gear).
Talking of Top Gear, will we see the day when Clarkson, Hammond and May ‘drive’ old banger electric self-driving Teslas around the Amazon jungle? I think not.
Of course, all major car manufacturers are working on electric self-drivers as well and will provide Tesla with pretty stiff competition I am sure. Here is the share chart
Back in Mar/Apr, the shares surged as Musk hyped the ‘synergies’ between his mammoth battery plant and Tesla. But cooler heads finally prevailed and the shares descended the down escalator and now have lost 30% this year. Ouch.
They are now testing the Fib 62% support level (again) and if that is broken, the next stop is the Fib 78% support at around 170.
There is an awful lot of hope riding on these shares.
As Robert Prechter says, in a bull market shares climb up a Wall of Worry and in a bear market they slide down a Slope of Hope.