Only yesterday, we were greeted with the news that the IMF has just issued this pronouncement: “IMF issues bleak warning – global growth to fade”.
Most of us know how wholly inaccurate forecasts from the IMF routinely are – remember the horrific crash predicted for the UK economy if they/we voted to leave the EU two years ago? With lashings of egg perpetually on their face, I am surprised they have the brass neck to keep making stark forecasts such as this. They have become more a contrarian’s delight than otherwise.
Incidentally, for economists to make frequent erroneous forecasts is no impediment to career advancement. In fact, it seems to be a requirement. How very different it is for traders where that practice would devastate an account. There is no justice is there?
So now, the economists have changed tack by 180 degrees – recently, they were calling for massive global and especially EM growth, but not now.
But given this proviso, I still believe it an important measure of the one thing that drives markets – pubic mood. And with this late-to-the-party acknowledgement of the worsening mood globally, how is this being reflected in that most sensitive barometer of global mood – the Emerging Market stock index?
Yes, it is in decline already – and is way ahead of the game, having topped in Janaury (along with the Dow and S&P)
This has to be one the most elegant demonstrations of the rule that Markets Make the News. As I have been tirelessly reminding my readers, the news does not make the markets. That is putting the cart before the horse. Here, we have a well-developed bear trend and now we finally get some ‘bearish’ news that seems to confirm the decline. The news has followed the market which is already down.
But I have a rule that when the MSM news wakes up to the market trend- as it has just done -, it is a sign the trend will likely pause and stage a rally. For unenlightened investors, they will take the IMF warning as a reason to unload shares – usually right at a low.
Of course, my rule is counter-intuitive for the vast majority of economists and investors alike. If you were at a party and talking to a conventional academic economist (perish the thought!) and suggested that the news follows the markets up and down and not the other way around, he/she probably would run off and seek another drink to escape such a deluded person.
The reason many fail to make profits in the market is that they trade on the news and let the emotions of the news flow guide their decisions. In other words, they herd. Successful traders monitor the likely emotions of the herd – and act in the opposite way.
If the majority are very bullish/bearish, I seek a reason to trade against them, not to join their herd. You do not want to be joining them when about to fall off a cliff.
As always, there are many cross-currents in society. While the investment pros are exceedingly bullish, the general public are getting more nervous and anxious. Here is a recent piece in Bloomberg highlighting the various things people are doing to escape the news that is ‘freaking them out’.
We have reached peak optimism in stocks
In my post of two weeks ago, I asked the question about peak bullishness and noted that sentiment had reached an extreme – and this was the chart I posted of the S&P against the put/call ratio
This chart shows that options traders are buying more calls than puts as they believe the market is headed much higher.
That was a most timely post because a funny thing happened on the way to those new all-time highs – it didn’t happen! That’s what happens when the whole herd are poised on the edge of a cliff.
Instead, this is what did happen.
I managed to nail the wave 2 top in a classic ‘overshoot’ of the major blue trendline.
A stand-out feature of second waves in a bear market is that bullish sentiment becomes as extreme – or even more so – than at the start of the first waves down. This is showing up in the COT data where managed money (hedge funds) hold an even larger net long S&P futures at the wave 2 high than they did at the January peak.
That is a massive divergence at the lower high of wave 2 – and portends a massive slump in the current wave 3.
VIP Traders Club members are holding short positions taken near the wave 2 top (as well as shorts taken 100 pips from the all-time high back in January). As I explained at these entries, I expect to be holding some shorts for months and perhaps years to come.
Some cryptos have hit zero
Several months ago, I ventured to suggest that many crypto currencies would fall to zero when the bloom would come off the rose. I felt then that many were simply scams and not worth the paper they were printed on (!!!).
Even the leaders Bitcoin and Ether are descending at a rate of knots.
But the real lemons are the minnows – here is a Bloomberg piece where they estimate that over 1,000 have hit rock bottom – zero.
I have been using the crypto mania as proxy for the animal spirits in the financial arena that affect all public markets. And those spirits are on the down escalator.
Are North Korean peace hopes fading?
In May while stocks were riding high, I posted this chart showing the temporary outbreaks of peace over the years with NK have occurred near market peaks. And the latest one last month with Mr Trump meeting with Un in Singapore is no exception.
chart courtesy www.elliottwave.com
In social mood terms, this is all perfectly understandable. Reduced war tensions coincide with extremes in optimism – and it is these extremes that mark major highs in stocks.
But today we learn that NK is not really intending to ‘de-nuclearise’ at all. According to reports, it is actually ramping up nuclear bomb material production which is totally contra their agreement with Trump!
So will this latest set-back to peace in Korea coincide with another major peak in stocks? With the lurch downwards in many stock indexes since that meeting, it certainly appears so – and what a peak! The Dow/S&P/Nasdaq rally since the 2009 low has been exponential – and reminiscent of the crypto mania (until recently, that is). There is plenty of room at these giddy heights to see a major re-rating of the global risk premium by investors.
Is another American Civil War possible?
Zerohedge.com is a great source of off-the-MSM-radar news and has just posted an analysis of what they see as a dark mood rapidly sweeping across the US. Anger stalks the land. And anger begets protest that begets riots that taken far enough begets civil war.
Also, I read that more affluent sections of US cities are splitting off from the less affluent sections to form their own small political unit in an effort to escape the municipal debt obligations that mainly fall on them. They see falling local revenues and increasing taxes ahead. Sound familiar to UK readers?
A major feature of a bear market is that once unified societies start to break up into smaller units. This is just the latest example of a process already underway.
Of course, the EU is the world’s largest such political unit and that is on the brink of its own destruction, which the immigration crisis will help move along as well as Brexit.
As stock markets continue their relentless wave 3 path down, expect to see more disruptive forces in societies at play. In fact, with this knowledge you can predict the news headlines to come!
Is Crude heading for my $80 target?
Two years ago, when crude was on its knees under the $30 level, I set a major target at the $70 area with a subsidiary target at $80. A few weeks ago, after a complex wave pattern, it hit my lower target.
And in recent days, the uptrend has come back to life with a bang and has now elevated my upper target into focus.
Yesterday, after a few $2 up days, it is testing my upper tramline resistance, which is the moment of truth for my bullish scenario. But note the lovely potential five-wave continuation(FWC) pattern (see my text pp 38 – 39, 145) that would be verified on moves higher next week.
If this is a genuine FWC pattern, I can target the $100 area as possible goal – and that would put my $80 target in the shade.
I offer a Free Trial to my VIP Traders Club. I have managed to pinpoint major turning points (sometimes to just a handful of ticks) for members. Details here.