Is good news now good?

Remember when bad news was good and vice versa?  When an utterly dreadful set of US economic data was released (a pretty common occurrence last year), investors cheered – and drove stocks ever higher.  The thinking was that the Fed would then be moved to lower the Fed Funds rate and pump even more QE into the economy (which of course went into stocks and financial engineering instead).

But has that narrative now changed?  Will bad news be bad?  And good news good? One straw in the wind was yesterday’s US GDP data showing the economy growing at 0.7% in Q3 and a jump in exports (despite a strong dollar).  Previously, such strong figures (strong at least compared with the anaemic growth since 2008) would have sent shares hard down with the prospect of higher interest rates.  But Dow stocks shrugged and ended the day about unchanged, although the higher-risk Nasdaq did end lower.

Is this a sign that the widely-anticipated Fed rate increase in December will not be a negative?  I sense that MSM opinion is aligned there.  At least one financial advisor believes so and suggests that when the Fed does raise rates, it would be a bullish sign because it would demonstrate the Fed were confident a rise would not harm the economy.

This may be so and stocks would indeed  respond by moving higher.  In fact, one of my options is for a Dow rally to a new all-time high.  But that should be the last hurrah for the incredible post-2009 QE-propelled rally in assets.

Last time, I showed the lovely five wave impulsive rally in post-WWII UK house prices with the market now in its fifth and final wave up.  Also in the USA and Canada (Toronto house prices are zooming up almost vertically in the fastest-growing market in North America), there are signs of indigestion at these stratospheric levels.  is sentiment finally turning in real estate?

Remember 2006 – 2008?  That was also a time of sky-high real estate with house flippers almost day-trading Florida condos?  Of course, such manic activity was unsustainable  when funds dried up – and the rest is history in the form of bankrupt lenders in the Great Credit Crunch and the biggest decline in stocks since the Great Depression.  Will history repeat with real estate leading the Great Unwind in shares?

With US Treasuries (viewed as the very safest of assets) yields now rising fast (prices declining), has the QE-driven Bond Bubble been pricked?  Here is the weekly chart  of 30-yr yields

We identified the July low in yields based on a nice five wave pattern on the daily T-Bond chart (and extreme bullish sentiment).  Yields have now risen by 25% – and many have not even noticed.  But with the yield now in the Fibonacci 50% retrace of the wave down off the June 2015 high and running into the 50-week MA which is still falling, further gains will be hard won.

In other words, I expect a pull-back in yields near-term and a rally in prices.  And that would be exquisite irony since mainstream opinion now says that inflation is rising and the Fed will now almost certainly raise rates in December (or even November?) on the back of a strengthening economy.

But that’s OK.  VIP Traders Club members went short at the 178 area (and 174 region) and last week took major profits off the table at the 162 area for a superb 16 full points profits.  In spread betting terms, that is a profit of $16,000 for each £1 bet.  At no point was our stop loss in danger. Nice work for a three month campaign  In fact, I will hold it up as a textbook swing trade.

Is there inflation and deflation at the same time?

What a crazy thought!  How can that happen? Well, for a start, commodity prices are on the rise with the shock rally in coal, iron ore, copper – and now US grains (corn, soybeans especially).  I suggest that the rally in Treasury yields is partly down to the increase in inflation expectations on the back of commodity price increases as well as rapidly increasing health care costs in the US (Obamacare going wrong).

Markets are responding to the prospect of an increase in inflationary pressures next year.

For example, here is the Iron Ore chart (VIP Trading Club members are trading this)

In fact, this little-known market is trading like a dream with precise Fib retracements and excellent Elliott waves.  Given time, I am sure the tramlines will look textbook as well.  When we started trading it, sentiment was at rock bottom – my ideal scenario.

Looks like steel prices are headed higher – a completely opposite forecast to that of the mainstream who narrowly focused on the near-term build-up of stockpiles that would pressure prices of ore.  But the big miners such as BHP Billiton and Anglo American closed some mines quickly – and now there is a shortage of ore.

But on the other hand (a well-known cop-out phrase well used by economists), the major supplier of goods globally is China – and the Chinese currency is falling hard.  Here is the weekly chart of USD against the Chinese yuan

Basically, a cheaper yuan translates into disinflation/deflation (at least for the US) – and this trend has been encouraged by China, of course.  They are desperate to keep the GDP growth mirage alive.

But look at the final wave up – it has a textbook five impulsive waves (long and strong third wave) and there is a momentum divergence in this final fifth wave.  It is flashing a very big amber light.

I have been bullish on this market for some time and VIP Traders Club members hold long positions in good profit.  I am starting to advise taking some profits off the table here.

I also forecast a small euro recovery which seems to be in progress.  The US dollar has run into resistance and should decline further.  If the decline does run a little deeper, what could be the background in macro terms?  MSM opinion holds that the dollar will remain strong as the Fed raises rates several times in December and into 2017.

But if that scenario turns out to be somewhat a dud (not an unusual event), the dollar will be hit.

As a measure of the extreme bullishness surrounding the dollar, here is latest COT data on the Dollar Index

Wow!  Hedgies are nearly five-to-one bullish (small specs are not far behind) while the smart money commercials are an incredible nine-to-one bearish.  What an incredible lop-sided ship they sail on!

This is an accident waiting to happen.  That is why I am taking the money are running.

Another reason is the looming US elections next week that could stir things up somewhat. I am advising caution and spread betting firms are raising margins on many markets.  This is not a time to be a hero.

If you wish to be trading like this, I invite you to join my VIP Traders Club.  Full details here.