If we are not there yet, we are very close

The strong bear market rally in stocks continues – but is on over-borrowed time. We may or may not be there yet, but are getting much closer. One of the signs of an end to a second wave bear market rally is that bullish sentiment has built up to almost manic levels that try to match – or exceed -that at the ATHs.

Despite economic data that is deteriorating by the week, bullish hopes are pinned to the belief that any recession this winter will suddenly morph into the sunny uplands of a glorious 2023 when inflation is tamed and investment unleashed as tech industries have become leaner and meaner with the recent shedding of staff.

One of the most potent indicators of a likely coming recession is the Treasury bond yield inversion. In every case going back decades, every US recession has been flagged by such inversions where the 10-yr Treasury Note yield trades under that of the 2-yr.

Currently, the inversion sits at a 30-year extreme. Note all of the intervening recessions (grey vertical bands) were preceded by inversions. The strength of the current one implies a deep recession to come – deeper than all others post-1982. And that included major setbacks in stocks including the 2008 Credit Crunch and the 2021 Corona Crash.

Bullish hopes are so extreme that some pundits are even claiming that ‘it’s different this time’. But that is a stuck record (78 rpm records often got stock between grooves). Yes, when you feel good and positive about the future, you will excuse and deny every adverse indication. It’s just human nature at work.

Some all-weather swimmers who take a dip in the lake in January claim it’s really great!

So what happens when there is an inversion? Conventional thinking would normally suggest the 10-yr yield would be high in this period of high price inflation. Bond investors usually demand a higher yield to compensate for the risk their capital invested would lose value over the life of the bond as the ravages of inflation does its evil work. That is clearly not happening. So something else is going on.

Many pension funds and insurance companies have mandates they must buy certain Treasury Notes and Bonds no matter the price.

And with the 2-yr yield higher (price low), that implies demand for loans is weak as the economy loses steam – the very backdrop for a recession (that should morph into a depression). Modern economies demand positive loan growth to sustain economic growth. They go together like ‘Ant’ and ‘Dec’ or even ‘politicians’ and ‘failure’.

And yesterday’s non-farms jobs data emerged with huge question marks about its accuracy. The ‘managed and massaged’ (for political purposes) headline rate was seen as supportive to shares initially but digging under the surface, a huge disparity with a more realistic Household survey stood out. That survey painted a much more bearish picture.

The ‘official’ rate of US job creation since March has 2.7 million new jobs created while the Household survey points to a tiny 12,000 increase! This in a period when tech companies are shedding workers in their droves with at least a loss of 34k in November alone. These are among the highest paid of all.

Recall the definition of a recession is when your neighbour loses his/her job. A depression is when you lose yours. Of course, today with state ‘handouts’ almost freely available, few will go straight to the breadline or soup kitchens – although that may still happen when governments run out of money from taxpayers and/or Chinese lenders. That is when sovereign yields will skyrocket.

And remember, the Big Tech sector lead the 120% S&P gain charge up the hill post-Corona Crash – and just like the Grand Old Duke of York will lead it all the way down again as it is so doing.

One of the most vulnerable indexes today has to be the Euro Stocks 50 index which includes 50 largest public companies in the EZ

From my wave 1 low last July, it is tracing out a classic A-B-C (not marked) in the wave 2 rally taking it to the Fib 62% retrace of the move down off the November 2021 ATH. Although this is a substantial recovery, I have seen much larger retracements especially in the US indexes over the years.

But note the action in the RSI (Relative Strength Index) which has traced out a large poke above the ‘overbought’ 70 level. You have to go back to the ATH a year ago when the index was as highly extreme. In addition, the momentum is showing a divergence that indicates the rally is losing some steam.

In the background a recent report from Deutsche Bank states that the German economy is very likely already in a recession. Not helping its industry is the highest electricity prices in Europe, thanks to its ultra-green government policies that has kept energy prices sky-high. The EU has now set a price cap on Russian oil at $60 so we will see how easily that can be overcome.

And its export sector is now battling a stronger euro from the sub-parity levels of a few weeks ago.

Thus, for EU shares to be riding so high in the face of this background shows investors are ignoring the message from the real world and simply crossing their fingers that all will turn out alright in the end (the Pangloss approach) The problem is that there is never an ‘end’; just a perpetual battle between bulls and bears for market dominance. And all is driven by changes in sentiment, or mood.

Currently, the mood on Wall Street is very positive while that on Main Street is deeply gloomy. I am sure you can draw your own conclusions as to how this will play out in the markets.

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Gold – is it back in bull mode?

VIP Traders Club members have been trading the PMs to good effect with Silver out-pacing Gold. Many still cling to the notion that PMs are always in favour in times of financial turmoil such as we saw this year until the mid-October lows. But for most of the year from March, Gold traded with shares lower, losing about 20% to the low.

At the same time, T-Bonds also traded with shares (lower) as did Dr Copper and most industrial commodities. This is a clear demonstration that we are in an overall deflationary period of reducing money supply and loan demand where all assets (except for a few outliers) trend lower. A key posterchild for this is clearly in the crypto sector (see below).

Gold has since rallied and many believe this is the start of a new bull run. Hedge funds (COT data) have been moving to the long side in recent weeks.

But to me, it remains in a bear market and the current rally is a similar one to that in the stock indexes – a wave 2 bear market rally that will run out of steam shortly and resume the bear trend.

Not only do we have an ‘overbought’ RSI reading but a clear mom div at the Fib 38% retrace. Odds are high that the end is nigh for the rally even if we see one more push into a new high near term.

Silver has been doing even better, but it too appears to be near the end of its bear market rally

VIP Traders Club members have been riding the rally off the ‘b’ wave low and taking profits on the way up. But my best guess is for possibly one more push up to meet or slightly exceed the Fib 62% level around 23.50 (currently 23.15). We have been long from 21.40.

The end is nigh for the cryptos

Call me old-fashioned (and I am), but I never believed the hype around crypto currencies, especially when very few avenues opened up to use it as currency to pay for (legal) stuff. The very word ‘crypto’ means hidden away from sight, concealed and secret. That fits perfectly with its assumed value to the world – it’s a big secret (for a reason).

But that is not to say they are not great trading vehicles, especially the highly liquid granddaddy Bitcoin. You can trade it almost 24/7 if you wish on spread bet platforms. But as an ‘investment’ it has been a great big dud since the ATH at $69,000 last November (not co-incidentally just when the US stock indexes were making their ATHs). It has lost a stunning 84% to date.

A further nail in the coffin of the sentiment picture is of course the infamous FTX fiasco which will drag on a little longer before taking its last breath. Its FTX token coin (FTT) has lost almost all of its value and now trades 98% under its ATH. Fancy buying it? It’s cheap!

Yes, cryptos were flying high during the great bull markets post-Corona Crash when the Fed and others were flooding the world with no-cost money. But now central banks are (except for a recent BoE blip) selling assets (at a loss, please note) and shrinking the money supply.

Incidentally, the Federal Reserve is a private bank owned by the commercial banks. As such, they can suffer losses and they are doing just that as they sell off bonds they bought at much higher prices (to force yields down which they did very successfully). But banks are very sneaky at ‘massaging’ their profit/loss statements as they do not need to mark to market transactions – until that asset is disposed of.

I believe as yields move higher from their temporary dips, these Fed issues will become front page news. But that is when stocks will be trading much lower than they are today. Yes, 2023 is shaping up to be a most exciting year.