I am still not buying this dip

Most believe markets follow the news and the published economic data. They are wrong – and here is a great example of why they are wrong this week. On Thursday night, there was a ‘bearish’ news report of a big miss on the closely-watched China GDP growth. The conventional expectation was, of course, is for the stock markets to decline. For years, the China GDP figure was regarded as the most accurate signpost for stock prices during the bull years.

If a normal person had been given that data just before it was issued, most would opt for a stock market break.

But overnight yesterday, the y-o-y data point came in at minus 6.8% – larger than expected – and the first contraction in over 40 years. But the Dow rose by 800 points on that ‘bad’ news.

Is that perverse? Will the usual suspects ignore that obvious discrepancy and carry on as normal? Or will they stop and think maybe their belief system on how markets work are in error? Of course not! And why should they? Simply because their job requires then to continue as before. No-one in the MSM can afford to stand out from the herd – that would be career suicide simply because their public believe the news makes the market.

It would be like someone blaspheming in church.

The big problem with this view is elementary. Every day, there is a barrage of news of all sorts. Some is ‘good’ and some ‘bad’. So which set does the market respond to? Of course, only after the market has moved one way or the other can the pundits ascribe it to the ‘good’ or the ‘bad’ news. They can’t lose! But it is of zero utility to anyone wishing to glean clues as to the next market move.

It is useful only in the context of taking the pulse of market sentiment.

While conventional pundits are unable to understand market reaction, the model I adhere to can explain that apparent ‘perversity’ – and be able to forecast the most likely next move. Bullish sentiment is now surging from the extreme lows made on March 24 when the Dow made its low at 18,200. It is surging because many believe the worst of the virus-plagued economies and markets are behind us. When overall sentiment improves, stocks follow – and vice versa.

MSM reports put the stock surge to the news that a new miracle Corona Cure drug had been ‘discovered’ by Gilead. But that was quickly denied by the company. Then President Trump had promised a swift removal of lockdown rules for the US – only to emerge with a very watery set of proposals.

So really, the market rallied overnight on no- and fake-news and it ignored the real news of China’s weak performance! How about that? How can conventional pundits explain that? They can’t with any honesty – unless they fall back on the old reliable ‘markets unexpectedly rallied despite weak China data’. That little word ‘despite’ saves face.

Now, many are looking forward to an imminent relaxing of the house arrests we have been suffering – indeed: many nations have already started that process. Many believe we can now think about getting back to normal. Whether you believe them or not, that is what is happening. You only have to read the press and listen to radio to see that there is a lot more coverage of ‘what happens after lockdowns have ended’ stories now than 2-3 weeks ago.

Back then, it was all about how many deaths and how many jobs and businesses will be permanently lost. That mirrored the extreme negative sentiment prevailing at the time. But today, stocks are reflecting the high hopes for a full recovery.

But to my mind, we are in a partial retrace of the crash in a classic second wave off the March 24 wave 1 low

Last week, it hit my main target at 24,000 on the Fib 50% mark. It then declined by 800 points and it was then that I believed the wave 2 top may have been put in. I also had in the back of my mind that the Fib 62% at around the 25,200 mark was possible, simply because 62% retraces are more common.

Also, second waves in a bear market can retrace anything up to the 99%level and I am keeping that in mind also.

I am not getting many clues when the wave 2 high will occur, except the 25,200 mark is my best guess for now. The wave pattern in this ‘c’ wave portion is not a classic five so I will have to assume it is one of the more unusual patterns.

But much will depend on action next week. There is no question that the market ran the masses of stops placed by shorts above the 24,000 area. That was an obvious place to set them – and that is why I always try to avoid setting mine in these obvious places.

So with these shorts out of the market, does it have enough fire power to advance another 1000 points to the Fib 62%? The move down in wave 3 can start at any time now.

As I explained before, retail traders have hung in there with very little selling during the crash. The bulk of the selling came from the pros – and especially from the companies that had been buying back their own shares with abandon. They were locking in massive gains and cashed out in readiness for harsher times ahead.

And with the current rally phase, retail traders are patting themselves on the back with their sound judgment and buying more on the dip. Sadly, the time to buy was March 24, not in April after the Dow has rallied by over 50%. I believe they are setting up for a big disappointment when wave 2 tops out.

One reason is that authors on seekingalpha.com are overwhelmingly bullish (after the 50% rally off the March 24 lows, please note). Here are the three article headlines from yesterday’s roster:

Now that the S&P has bottomed, more individual stocks are breaking out

Climbing the Wall of Worry, staying ahead of the rally

Keep cash and buy the dip

Not much room for doubt, is there? I guarantee they were not so bullish on March 24 when the Dow hit 18,200! That was when we took some major profits on our shorts.

And in the telegraph last week I spotted a prominent article on how to buy shares aimed at novices. Yes, getting utter novices into the treacherous stock market always seems like a great idea when sentiment has turned bullish. I suspect they will be buying high only to sell low later on. More lambs to the slaughter.

I am fighting the Fed

This is something of a no-no for conventional pundits is it not? It is practically the first thing investors learn when they start studying the stock markets. And that is why they get it so wrong at major market turns. The story goes that with the Fed daring the shorts to sell against their unlimited firepower, why would a sane person short stocks or gold?

Surely the Fed’s thinly-veiled threat to buy equities as well as Treasuries and Mortgage Backed Securities as well as some corporate bonds in their alphabet soup of ‘support’ programmes means markets can only go up?

Actually, no. Whatever the Fed does now we are in a virus-changed world will never be enough to engineer sentiment from basic fear back to the unbridled complacency we had prior. And it is sentiment that rules the markets.

So yes, I am fighting the Fed. As stocks get back into a bear trend, more will see the Fed as being powerless as the classic Emperor with no clothes and wonder why they ever believed they ever controlled the markets. I have shown many times before they always follow the market when setting short term rates. If the 3 mo T-Bill rate moves lower by 50 basis points, the Fed follows. That’s what happened at the last change.

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Are Gold and Silver topping?

I have been waiting for signs that they have topped for some time (see past blogs) and I believe we are at or very near that point. The next major move will be down. As I mention to VIP Traders Club members, DSI bulls are reading well over 90% and at an extreme where previous tops have been made. Then crucially, I have yet to see a bearish article on Gold in recent weeks. In fact, most are rabidly bullish. To me, that is a gigantic red flag.

With interest rates staying low, zero or even negative, why am I taking such a bearish stance when everyone is buying? One clue is provided by our old friend seekingalpha again. In yesterday’s list here are some headlines on gold:

Gold’s transformation to a currency (from a commodity) has begun (The precious metals are becoming a real safe-haven asset once again.)

Gold enters a new era

Gold sparkles as the great lockdown hammers the global economy

The long term bull market has awakened

Silver to outperform gold

Gold stocks – a show of strength

You get the picture. Investors are all-in to Gold and Silver – just as they were in stocks in February just before the crash.

Yes, when gold has staged a strong rally for a few weeks/months,positive sentiment becomes so extreme that it is said gold is in a ‘new era’. It is now considered be to almost equivalent to a currency as it is widely considered a ‘safe haven’ when shares are in trouble.

Time after time, I have shown that gold is NOT a safe haven. Sometimes it rallies with shares and sometimes it goes the other way. We are entering a highly deflationary period and ALL ASSETS WILL DECLINE COMPARED WITH CASH.

With that widespread ‘safe haven’ belief sucking in so many amateurs and pros (they have little else to buy), the time is exquisitely ripe for a massive decline to start.

Recently, there has been an unusual deviation of cash gold and the next future (June) with June at a significant premium that reached over $50 at one stage. It was believed the shorts could not deliver the metal to the Comex exchange-approved warehouses due to the lockdown and would be forced to cover their contracts at the exchange before expiry.

But a simple fix was made to the contracts – and the premium is vanishing with yesterday’s difference only $15. That is removing one of the bullish speculative forces.