Is the Fed the final Wall of Worry for shares?

Last week I asked if omicron was the last Wall of Worry for shares.  But last week I have a new contender – none other than the Fed!  Yes, last Wednesday the Fed announced confirmation they would escalate the pace of QE reduction as they will start tapering bond purchases next month.  They also intend to raise rates three times next year.  If we subscribe to the old adage ‘Don’t fight the Fed’ (as has been generally wise since the 2008 Credit Crunch), should we now heed its advice?

But what utter confusion last week as they announced this. Stocks initially fell, then rallied hard back to near the previous highs and on Thursday, a change of heart and fell hard.  This is the market-leading Nasdaq showing the roller-coaster ride last week.

But if we are really at a major high as I suspect, this behaviour is entirely typical.  Viewed on the daily and weekly scales, this rolling over appears quite gentle.  Stock indexes tend to roll over gently while commodity bull markets tend to end in large spikes but rarely in share indexes.  

And not only that, but the leaders – the Tech Titans – have started major corrections.  On Thursday, the most followed leader of the FAANGS – Apple – dropped $10 in one day – the largest one-day fall in a very long time (since Sept 2020).  I believe this is a clear signal that we have suddenly entered a major risk-off phase and the Great Asset Mania is on the turn.

Confirmation of last week’s change in mood/sentiment was made by the BoE on Thursday was they unexpectedly raised their policy rate a tad.  Yes, the amount was little more than a hair’s breadth, but it gave a clear signal of the coming direction of rates – up.  Remember, the BoE has always acted in harmony with the Fed and this is no exception. I fully expect US rates to rise hard next year as inflation is getting the attention of the central banks.

I had expected the pink resistance are in the Nasdaq (above) might give way on last week’s push up to complete the large wave 2 top, but it was not to be.  Instead, the market tested it as traders believed they saw a bullish Fed signal – and failed.  Odds are very high that this was the final attempt to push through it and shares are now starting wave 3 down.

This is my roadmap on the Dow

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While the Dow and Nasdaq did not make a new ATHs last week, the S&P did – just. But it quickly realised the error of its ways and fell back hard with the other major indexes.  But that non-confirmation of the S&P’s new ATH reveals another aspect of how disjointed the share markets  have become.

We all know that the overwhelming leaders of the post – 2008 Credit Crunch have been the Tech Titans such as Amazon, Apple, Netflix.  But there are a great many smaller tech outfits that are trying to be the next Alphabet/Google in their own tech field.  We have seen an explosion of start-ups in electronic advancements in recent years, but very few are making serious money – or any money at all.  Back in the 1990s as the dotcom era was building, these loss-making companies were said to be ‘burning cash’.

And as the bullish mania reaching its climax in late 1999, investors went all-out for those companies burning the most cash!  What an astonishing display of hope over rationality!  Of course, we know how that ended. Does this sound familiar to the position today with ‘meme’ stocks? Or those favoured by the WallStreetBets crowd of amateur ‘investors’?  

Here is an astonishing chart displaying the record – bar a long shot – of the huge valuations of loss-making tech companies.

chart courtesy www.elliottwave.com

Just take a second to admire the unbridled hope and manic positivity that investments in these companies will reward their investors in time. 

Of course, any change in mood will bring these valuations down to earth (with a bang) as many investors are over-leveraged and are unable to weather even moderate draw-downs.  Margin calls will proliferate and will exacerbate the bear trend.

Already, we are seeing large draw-downs appear in some of the FAANGS with Apple losing $10 on Thursday – a daily loss of size not seen in a long time.

Net Zero is a dead duck – and will get dead-er!

I have been arguing that this craze mandated by politicians with huge penalties and rewards is at or near the end of the line.  And what a day to make that contrary claim!  Today, much of the UK is covered with fog (no wind) and no sunlight.  The wind and solar power contribution has plummeted.  And note that coal use is at a record high in many countries as NatGas is being priced out.  The Low of Unintended Consequences lives!

And one major signal that the so-called ‘renewable’ revolution is at an end is in the Carbon Emissions (CE) market.  Companies that emit carbon dioxide have to buy these credits while companies that on balance ‘absorb’ this trace gas can sell them.  It’s a cap-and-trade scheme. Tesla has been a major beneficiary of this scheme as much of its ‘profits’ have been made by the huge carbon credits it is paid, not on the manufacture of actual cars.

I have been tracking the exponential rise of the CE market of late and have been poised to capture the peak which I expect to lead to a huge correction.  That process has now started with a vengeance with a whopping 19% loss since the Thursday ATH.

I believe this market has sent a clear signal to investors – no more Net Zero hype.  Reality is re-emerging as pie-in-the-sky magical thinking gives way to a more sober mood.

As politicians have been universally mandating, they have been ratcheting up the regulations on the ‘polluters’ and awarding more support to the ‘good guys’.  But one day, the money will run out.

So not only do companies that actually make things have high carbon emission costs, they now have to contend with high energy prices.  This double whammy will undoubtedly discourage production of goods and lead to a lower GDP.  And the late-week collapse in CE as well as the slump in tech shares is a clear signal economies are not likely to expand next year.

And with the prospect for rising interest rates – and pandemic lockdowns again in the works – we seem to have a quadruple whammy here as inflation bites.