Interest rates – have they topped?

The most influential market in the world is the US Treasury market. Since the Covid Crash ATL yield (the famous zero bound) of the 30 yr T-Bond of about 0.5% in March 2020, the yield has moved up to around the 5% mark and the bond price has lost about 50% in value in that time. So much for the ‘safety’ of government bonds.

And the T-Bonds last month made a new low of 107 which was fairly close to my target at 105. And the action last week has helped confirm that was indeed a major low with reasonably high confidence.

Sentiment had become uber bearish as traders pointed to the weakening demand as the Fed is no longer a buyer but an overall seller (QT operations), and the looming tsunami of supply from the Treasury to pay for Biden’s Trillions of ‘green’ schemes as well as pay the ballooning social security costs.

Also, China was reported a relentless seller as it tried to defend its currency which had weakened too much for the PBOC’s liking.

But hold on – aren’t these the very same extreme conditions that are ripe for an ‘unexpected bolt out of the blue’ market reversal? It seemed the vast majority had bought the above macro scenario with hedge funds building very large net short position.

Remember, when everyone believes something is obvious, it is obviously wrong. And nowhere does this maxim apply more fully than in the financial markets.

So on Thursday I issued a Flash Alert to my VIP Traders Club members alerting them to such an event. And lo and behold, yesterday’s Non Farms was the rocket fuel that sent the market up to my first major target at the 114 area.

It also sent shares zooming higher – much higher than I had expected (and thus I have radically changed my Elliott wave labels in the S&P – see below)

T-Bonds have yesterday achieved my first target at 114 – now what? Great question! If my wave labels are correct, the bonds are starting a major rally phase. The alternate option is that the rally is an a-b-c leading to a new wave 5 of 5 of C low -perhaps at the first-cited 105 mark. Let’s keep this option in mind.

As is usual when a major bear trend reverses, the first sign is a short squeeze – and that is what we had last week in spades in both stocks and bonds.

Although I had anticipated a stock index reversal some days ago when VIP Traders Club members took a very large part profit on our index shorts, the strength of the reversal took me by near-complete surprise. But despite last week’s huge index gains, our stock/bond campaign was successful. Let’s see how.

We had taken a decent profit on our short T-Bond trade from August at 120 all the way down to 114. Then, we took major profits on our short index positions on 26 October near the lows and protected remaining shorts with our stops at Break Even which were elected last week. Overall, a very successful campaign.

[I am sure many members who were more alert than yours truly covered index shorts last week for a better result].

My only regret was that I failed to ride last week’s index rally (but not that in the T-Bonds). But I have missed many great trades before and I know I will miss many in the future. I believe all traders can claim that. For me, the key point is that trading is a marathon and not a sprint.

But what now?

The decline off the Elliott wave 2 top on 27 July I can now label as a leading diagonal in five waves to the 27 October Elliott wave 1 low. Previously I had the decline as a series of 1-2s leading to a strong wave 3 of 3 down. That was wrong and the Elliott third wave decline is merely delayed – but what a doozy that will be (much stronger than I has pencilled in before).

I now have a large wave 1 low on Friday 27 October – one week ago – and now we are in a strong wave 2 up with a possible target at my upper tramline at the 4400 area (currently 4360). I would prefer to see an a-b-c form before it terminates. The maximum extent of this wave 2 is the July high at 4600 under my bear thesis.

After yesterday’s release of the soft non farms, the bulls excitedly claimed the Fed had now hiked rates enough to cool the economy and the next move will be lower. Bad news was really good! The MSM are suddenly using the word ‘Goldilocks’ to describe the new super-bullish era they claim we are suddenly in. A week before, they were full of gloom and doom with no bottom in sight.

While lower rates may indeed occur in the short term, I maintain that falling rates would eventually indicate weaker demand for loans and a weaker economy. When wave 2 tops, I expect bad news to become bad again as investors realise lower rates means sluggish business conditions, weaker earnings and thus lower share valuations.

I believe the more accurate (and non-political) rival establishment survey of US jobs will likely show a very weak jobs picture ahead and induce a more bearish attitude leading to my strong wave 3 down. Unemployment rates will now turn up.

Remember, second waves in a bear market reproduce the same (or greater) feverish positive feelings evident at major tops (such as at the 27 July wave 2 top). It is their job to suck in newly-converted bulls to tee them up for another major disappointment.

While stocks and bonds soared, the dollar was hit very hard as expected. We had been sitting on the sidelines as the picture appeared cloudy with zero trend for the past month. That was broken yesterday. But I am not getting too excited about joining the bear dollar party. I believe this may be a bear trap and simply indicates long hedge fund liquidation.

For an extremely historical look at interest rates, here is a very tongue-in-cheek 5,000 year chart!. The latest section covers US rates but goodness knows how the data from pre-1720 were obtained (about the time the Bank of England was established).

The key point is that there has been only one time in history when rates dropped to the zero bound which was during the Great Depression of the 1930s. Over most of history, rates have been positive as they have duelled with inflation. Then when the global economy started to recover, rates were sent shooting higher to reach the 15% region in the 1980s – fifty years later.

From that Volcker Fed era when price inflation hit 15% or higher, disinflation took hold and rates started falling to reach the Covid Crash lows (see above) of negative rates in some countries (Japan still has them).

So we are back to where we were in the 1930s with rates moving smartly up from the zero bound. So will history repeat and will they keep rising as they did from the 1930s to 15%? Hmm.

Is gold still needed as a safe haven?

While stocks and bonds surged especially yesterday, we might have expected gold to decline dramatically as its safe haven appeal would lose its shine. That’s pretty obvious, isn’t it? After all, the market had already advanced strongly and was close to its old $2,000 high. So major profit-taking should have occurred yesterday.

But it didn’t. Gold was totally unfazed by the furious stock/bond rallies – and that could give us a clue as to the next move in stocks and bonds – as well as gold.

Of course, gold responded positively to the dollar set-back but its stability yesterday impressed me. I remain with the view that gold will shoot into new ATHs shortly, especially when the US indexes enter their Elliott wave 3 of 3 down.

Even more exciting times lie directly ahead.

Coffee is perking up

As a respite from the mayhem in the financial markets, I always recommend trading some of the soft commodities, especially the tropicals, which are little influenced by the Fed, if at all. And they are far from sending you to sleep! We have been successfully trading sugar and cocoa in recent months and have turned attention to our favourite beverage, coffee.

Another advantage is that they receive few official data reports and we are rarely surprised by market moves.

The London market trades the Robusta varieties used mainly in instant coffee, while NY trades the finer quality Arabica varieties. We trade NY and the long range chart is looking very appealing

The market is currently moving off major 150 support and is about to test my upper tramline. I have the old 260 high as a longer range target area.

Brazil is a major producer and recent rains in coffee growing areas have held back upside progress, but with stockpiles at a near-record low, I believe it only a matter of time before the market forcefully responds. After all, in the more tropical parts of Brazil, orange juice futures have exploded on lack of rain there. All of this is the result of the powerful El Nino I mentioned previously.

For us old-timers, this is very reminiscent of the fictional orange juice setup in the classic comedy Trading Places from 1983, but where the largest OJ producer then was Florida and the characters bet on a hurricane to damage the crop to score a monster win.

Plus ca change….