Is it me or is the market crazy?
I confess the post October 27 stock rally has been a major surprise to yours truly, not so much in form or timing but in scale which has been huge. But the form of the waves off the November 2021 ATHs clearly point to it being a counter-trend wave 2 rally and not the start of a secular bull market, as I have maintained all along.
But there are so many cross currents with a very small number of issues leading the charge and in contrast complete sectors in severe bear trends.
So this is the macro picture as I see it today (in part):
- Since the major pivotal October 27 low only five weeks ago, stocks are in a roaring bull trend with the Dow up 12% in the month. Investor sentiment has turned massively manic with visions of inflation licked and a Fed rate pivot sooner rather than later. Soft landings ahoy! No recession in 2024! A Goldilocks scenario!!
- But under the surface of the indexes, a major growth sector -The Net Zero fantasy – is collapsing (more later) weighing on investor sentiment with ‘green’ shares in deep dives – as well as ‘woke’ ESG issues. EV sales growth rate in the West are falling fast. And the vitally important USA market has the lowest EV adoption rate in the West. I guess the Cleveland apartment dwellers on the fourth floor just cannot quite squeeze their EVs into the elevator to charge it on the cheaper domestic tariffs in their spare room.
- But the public sentiment remains bleak with cost of living pressures and high and rising personal taxes dominant and maxed out credit cards. Consumer spending outlook remains subdued – and many retailers are forecasting iffy Christmas trading. And the Fed’s measure of forward Consumer Sentiment has declined for 18 months in a row. Wealth managers’ sentiment sky high, consumers’ sentiment down in the dumps.
- Gold and Silver are in strong bull trends – and although these normally signal lower short term rates to come, they can also signal trouble ahead in the financial arena (another banking crisis?) and higher inflation (a suit now costs almost $2,100 in gold.
Investors large and small suddenly see absolutely no problems ahead for the economy. Remember, back in October, they were seeing huge problems in a ‘higher for longer’ scenario.
One reliable measure of public sentiment is the well-established AAII survey of US small investors – called the Mom and Pop crowd. This cohort are very conservative as the median age of members is well above that of Millennials! They want safety and solid income from their shares. And last week, they were at their least bearish/most bullish in recent years – probably ever:
Only a couple of weeks ago their sentiment levels were in the ‘normal’ 40% – 60% range, but they suddenly got the AI FOMO urge and went all-in as they could stand it no longer watching the likes of Nvidia and the other Magnificent Seven (M7) soar to the skies on visions of untold AI wealth to come. Also note that the latest reading is even lower (more bullish) than that at the July 27 wave 2 high in the S&P – a bearish divergence.
So is all this manic optimism that inflation is licked and rates can now start falling hard being signalled by the Fed? After all, the market is supposed to follow the Fed’s every word, isn’t it? . Here is a headline from yesterday: Fed on standby to raise interest rates further, says Powell.
What? Did not investors get that memo? The Dow closed the week at a new closing high as they chose instead to focus on Powell’s less hawkish comments.
I repeat: Is it me or is the market crazy?
My bottom line: I may be crazy, but so too is the market – crazy for a very optimistic 2024. And none more so than the M7 which now comprises a record 30% of the S&P market cap. The remaining 493 shares have appreciated this year by less than the return on safe US Treasuries and even bank savings accounts. So 98.6% of S&P shares have lost ground to a simple bond/savings investment. So tell me, is the stock market booming?
What a stark indictment of the bifurcated stock markets we have.
As my regular readers know, it is when bullish sentiment and excitement have reached fever pitch after a strong run, as they have, that a massive surprise in the form of a strong reversal looms seemingly out of nowhere. And that is when the headline writers will be tested to come up with a plausible rationale for the sudden collapse.
They will have a drawer full of stories to choose from! From a suddenly closer war with China over Taiwan, escalation of tensions in the Middle East, or even a ‘unexpected’ Fed rate rise (or even a pause) at the upcoming December Fed meeting. Shares are now priced for perfection and as we all know from experience, perfection is rarely if ever achieved in real life.
Has the dollar bottomed?
I seem to have been asking this question for ever! A month or so ago, the dollar was riding high with shares down on the back of rising interest rates and booming bond yields and had reached my target at 107 where we took profits. But as forecast, that was the top just as shares began their wave 2 rally (see above) and bond yields fell back.
I was looking for a wave 2 pull-back and targeted the two usual Fib levels of 50% and 62% where I believed bullish sentiment would be on the floor and the ideal setup for a bullish reversal.
Of course, most traders trade the EUR/USD cross as a dollar proxy and yesterday, I had my first small scale five down to give a strong hint that indeed, the dollar was very likely reversing.
The wave 2 high was put in Wednesday and from there, the five down is very clear. That five down is the entirety of a larger wave 1 and we are now in a wave 2 upward correction that will reverse soon and lad to a large wave 3 down.
Note that this two-day reversal pattern has occurred as the stock markets have powered ahead in a complete disregard to Mr Powell’s message (see above) and the new one of the dollar.
You can’t have it both ways (unless you are gripped by FOMO for the M7 of course). The dollar’s advance since Wednesday suggests not an imminent reduction in rates but simply at least a holding pattern. That destroys the stock bulls’ arguments, does it not?
Gold has just made a new high
My wave 3 of 3 thesis of a few weeks ago is proving highly accurate. Remember, this is the most powerful wave in the book and it takes no prisoners. It sweeps all before it.
The wave 3 high was put in August 2020 over three years ago and in that time has made a massively powerful base from which to launch a very strong wave 5 as it moves above the Triple Top Ceiling.
Many pundits are saying that as new ATHs are created, a massive wave of hedge fund buying will enter the market. I see from the COT reports that the funds are already very long and this makes decent (buyable) dips all the more likely now. That is my plan for my VIP Traders Club members.
Incidentally, I could not resist mentioning the extreme irony of the COP28 Climate Catastrophe Conference being held in an oil-rich country when our mercuries are plummeting here in the UK. And here is a headline from the Telegraph: My name is Helen and I am dying. Of cancer and of cold. Sadly, a lot more people die of the cold than of any effects of the modest warming of the planet (about 1 degree every 100 years). Most of us enjoy warm weather and some even enjoy escaping the winter to be closer to the equator. I know of no-one who goes out of their way on holiday to move to colder climes (unless skiing, of course).
And I see that Chargepoint Holdings (a top US EV charging operation) shares have just made a new low of $2. It made its ATH at $50 three years ago at the height of the EV revolution frenzy three years ago. It is the poster child of the Net Zero bust that is coming to an economy near you!