Have the markets been vaccinated before the public?

We now have two vaccines out there – they are coming thick and fast with a third on the way  Of course, investors/traders have jumped on the news and pushed many shares even higher. Many have had visions of things getting back to ‘normal’ next year but with the Christmas period throwing a likely spanner in the works with its associated mass socialising over the turkeys. Social distancing?  That’s off the menu, I’m afraid.

I am sure this will happen no matter what the lockdown rules say.  There is so much pent-up lockdown fatigue that nothing will stop Christmas this year. So we will have our attenuated Christmas – but afterwards?  Will January, February and March be the miserable months where we will all feel even more depressed than usual?

There has been much skepticism about the likely resumption of ‘normal’ economies next year (with travel and hospitality missing out).  But are the optimists right?  Well, if you go by the stock market, the answer has to be Yes.  And have the bulls pushed up share values anticipating the advent of effective vaccines and be proved right?

Now I see the NHS is putting plans in to offer the jab starting in January.  If so, that is a remarkably rapid pace of development of a vaccine that is using a novel structure.  Possibly on a par with the 1940s war-time Manhattan Project to build the first atomic bomb which they did at full tilt, although with the opposite end in mind! 

As I asked last time, is this as good as it gets?  With mass vaccinations in imminent prospect,  is there room for any more hope?  After all, investment pros are all in with a huge percentage in the bull camp.

And here is a revealing chart showing just how manic the buying by retail (small) investors  has been in recent months/years:

chart courtesy www.elliottwave.com

In the US, the Rydex mutual funds are one of the most popular ways for the ‘little guy’ to invest in the stock market.  They offer funds that short the market and the chart above shows the ratio of the weight of bull and bear investments.  And these funds are bought on margin (with borrowed money).

It is just as easy to buy a short fund as it is to buy a long one (both are just a click away), so any investor that is sufficiently bearish can enter the market with ease.

At the depths of the Corona Crash in March, the ratio reached a low around 3 where the average punter bought short funds heavily right into the low.  Of course, that was a great time to buy the long funds when they were being shunned by most others.  And since then, with bullish enthusiasm growing, it has now reached an astonishing ATH record of 35.  That is a ten-bagger in my money!

We know that retail punters always reach maximum bullishness right at market highs just before a correction (as do the  pros), so is this 35 ‘insane’ level insane enough?  Or is there more insanity to come?  I can say that when the market does turn, many will abandon their leveraged long positions as their losses will be magnified by the effects of their leverage and forced sales will drive the market lower.  That’s how crashed get started.

But are we there yet?  Have we reached Peak Insanity?

Complacency is certainly running riot – and that is not a firm foundation for large market gains.  Governments have massively increased pandemic borrowings as the authorities apparently believe they have found the Magic Money Tree (aka Modern Monetary Theory).  Debt doesn’t matter now, apparently.

So have the markets been vaccinated against attacks by the bears?  They have for those that believe the Fed and the Treasury have their backs and will simply not allow markets to crash.

But throughout history, debt has always mattered – eventually. And it is only a supreme sense of total security that has bred these wrong-headed ideas that have been created to intellectually justify these debt explosions.

Yes, debt doesn’t matter when asset prices are rising, but it does when they decline.  Government debt is backed up by tax payments by its citizens and companies.  I maintain that we are already taxed to the hilt and any sharp increases will be politically dangerous.

With economies in lockdown, tax receipts are falling and there is little prospect of an imminent recovery.  Thus, I expect something to hit the fan early next year with bond yields increasing.

Coffee perked up to my target

We have been having a lot of fun trading this wonderful market in recent weeks for the VIP Traders Club.  The Elliott waves and Fibonacci levels are being closely observed, which makes trading it a joy (unlike some other markets). Our most recent trade is shown here

In late October I noted the decline off the early September high was likely about to complete and be the prelude to a sharp reversal up based on the strong momentum divergence.  I then was able to draw in the small blue trendline and reckoned that any poke above it would very likely herald the start of that sharp reversal.

And when the market did just that, I pounced and went long for the Club at 107 earlier this month.  I was able to set a pretty close stop if things went wrong.

But I was not disappointed as the market started the strong surge I had hoped for and then set my Fibonacci levels on the most recent wave and put the Fib 62% as my best guess for one of my targets at the 122 mark which was hit last week.  And that is where we took some profit for a nice gain of 15 cents.  That hit was another very impressive reversal on a precise Fib retrace.

Betting just £5 per pip resulted in a tidy profit of £7,500.  And because of my precise timing, our stops were never in any danger.  I wish all of my trades are like that one.

Most members are using the Split Bet Strategy and have taken partial profits and still hold part of their original position.  My job now is to decide whether the Friday reversal is temporary or permanent.  No pressure then.