Is the Fed winning vs the virus?

So far, the effects of the coronavirus on financial markets has been muted. So has the almighty Fed and the Chinese Central Bank won that battle? Are shares really headed for the moon?  US investors in their droves think so – call option buying has hit record levels.  The stock buying mania is in full swing.

But I see so many facets of Alice in Wonderland financial markets that have progressively been stretching limits of credulity beyond all known bounds..  But have we reached peak madness/mania?

For the very first time ever,  the yield of the debt of 10-yr bonds of Greece has just pushed to the 1% mark – which is under the equivalent US Treasury.  Let that sink in a while.  Greece is a serial defaulter on its bonds – and had to cook the books almost to cinders to qualify to enter the eurozone.  It has been bailed out several times in recent years.

Its credit rating is junk, while the US sports the highest AAA rating. So let’s get this straight – Greece bond investors are willing to accept a lower coupon payment for a junk bond than for a ‘no risk’ US one. Would you do that (unless forced at gun-point)?  I thought not.

Maybe they believe the euro coupon payments will be more valuable than US dollars from the Treasuries over the ten years.  But with the dollar currently at a major high against the euro, that is certainly a contrarian view!

This one fact is surely the final proof that the ‘fundamentals’such as share earnings and bond yields do not drive markets.  It is the non-rational (often unconscious) ones that do.  Of course, some bond funds are forced to buy the Greek debt under their rock solid mandates that are set in stone.  And massive funds have been flowing into bond funds in recent months.  These are the price-insensitive buyers.

And the same goes for stock index funds. Whatever is going up, they have to buy if money keeps flooding in, as it has for some time.  No thought is given to ‘value’ (or even the Elliott wave picture!). Again, these are price-insensitive buyers.

This has lead to the sorry state the markets have become as genuine price discovery mechanisms between true buyers and true sellers. 

This is truly a mad world where junk debt is valued more highly than quality.  And that just about sums up the state of popular ‘culture’ today.  And the pervasive ‘rewards for failure’ among much of government and business. But that’s a different story….

So are we finally at the end of the line for these fantasy football type markets?  As with all dreams, investors will wake up at some point – and the dream will vanish in a blink.

Recall in a previous post I am calling this decade the Roaring Twenties. But it will not be like the previous one a hundred years ag when share values boomed!  This time, the roaring sound will come from the burning of asset prices and especially high tech share values.

And of course this will kick off the great Deflationary Depression scenario I have long forecast. Already, with retail sales falling off a cliff, shop and mall rents are finally dropping with the inevitable knock-on hit to landlords and their share prices.

Here is Hammerson,  one of the UK’s biggest mall operators

As all good price-discovery markets do, the share price has collapsed from £7 in 2015 to £2 – a loss of 70% to reflect the rent collapse scenario.  But the rot set in in 2015, way before news of retail difficulties hit the MSM headlines. The invisible hand at work!

Compare that with Amazon – the King of the internet retailers

Interestingly, just as Hammerson topped out, Amazon started its explosive climb.  In just two charts, this is a vivid picture of the transfer of retail dominance from bricks and mortar to clicks and deliver.

But has the divergence stretched about as far as it can?  As a true contrarian, this is a valid question.  The whole world believes the internet will continue to grow at High Street’s expense which will continue to decline.  But is that true?  Will retail in some form be re-invented and re-invigorated?

There is no question that land values (aka real estate) will take a beating in the upcoming Depression – and that will present major bargains for savvy investors who hold cash in readiness.  That’s how great fortunes were built in the 1930s in the Great Depression following the Roaring Twenties. History will repeat – or at least rhyme.

Will the coronavirus pandemic be contained?

Despite the panic among excited news reporters, the virus has had little or no effect on stock markets (so far). The bulls remain in control (for now). So let me give you my reading of the likely scenario in the days ahead:

• ‘Good’ news about the virus will spread and many will conclude it is a pandemic that never was.  China deaths will fall per day.  New breakthrough vaccines will be developed.  Stocks will not collapse.
• US Stock indexes will reach new highs above the latest Dow ATH at 29,575 reached last Wednesday
• Once major worries about the coronavirus are out of the way, either a new much stronger virus will emerge (in China again?) or a major development in the bond world will hit the headlines.  Such as a major default, a ‘surprise’ jump in short term rates, or something else out of left field.
• A likely ‘overshoot’ of my line in the sand in the Dow/S&P and then the start of a major leg down.

We shall see.  The next few days/weeks will provide major clues so stay tuned.

A lesson in swing trading

I believe almost everything you need to know for swing trading success is contained in the charts along with measures of market sentiment.  The surrounding news is mostly noise.

So let me ask you a question:  Do you believe trading success is primarily the result of:

1. Guessing the correct trend almost every time, and
2.  Reading as much about the market as possible, then taking a serious view up (or down) and when convinced you have a can’t lose trade, pile in with both feet in using no stops, and
3. When in a winning trade, just let your profits run with no limit

Sadly, many people follow this line of thinking. Here are my key points to trading success:

1. Analyse the charts using my Tramline methods (or any other highly reliable system that you have proved).  When you have a promising setup, go in cautiously using a sensible stop.  If you are wrong, the loss will be minor.
2. Read up what others are saying about the market if you wish and when there is a consensus either heavily bullish or bearish, look to take the other side.  More often that not, you will be on the right side.
3. Have definite targets for taking part or all profits – and when these targets have been reached, take the profits without hesitation.  So many traders/investors have seen a great profit vanish from their accounts because they believed it would go to the moon, but fell back to earth instead.. The old adage: Cut your losses and let profits run is not the whole story!  You have to know when to bank some of those profits.  The first part is entirely correct, though.

In fact, with my unique money management/risk rules for my VIP TRADERS CLUB, I can and do go through periods when I have more losers than winners, but usually the winners far exceed the cut-off losers.

But – it takes total discipline to pull this off!  Just one lapse (with no stop in place, say) – and your account could take a major hit.

The bottom line:  Swing trading can be highly profitable but only for those who can follow my rules with total discipline.

Here is a great very recent example from my PRO SHARES service – Deutsche Bank.

This is the 20-yr chart showing what a disastrous investment DB has been. To last June’s 6 euro low, it has lost 97% of its 1998 value. Remember, this is a major historic  bank, not some pie-in-the-sky fintech startup.  It really has taken some skill to lose 97% of a ‘too big to fail’ bank!

But don’t pity the hapless shareholders!  They had every chance to exit their holdings on the way down.  So last Autumn, after what I believed was the final low at 6 euros, I started looking for signs of a turnaround – and I found it on October 10th.

In the summer, I noted the possibility of a Double Bottom and then on 10 October, it made a lovely Fibonacci 62% retrace and I pounced at the 6.44 level.  And when the market started a rally phase, it pushed above the blue trendline to confirm it as the neckline of a H&S reversal pattern.

And it was then I set a major target in the 10 – 11 zone.  And last week it simply rocketed up to that zone — and yesterday, I advised PRO SHARES members to take some profit.  Not bad for a move from 6.44 to 10.30 – a gain of 60% (much magnified of course by a spread bet).

The point is: I researched this trade according to my Tramline methods (and noted bullish sentiment in October was at rock bottom), I set my targets – and placed a stop loss in case I was wrong.  As it happened, the stop was never in danger.

And then a few months later, I took major profits yesterday.  This was most definitely one of my Buy Low/Sell High trades.And it was in one of my favourite setups – a major short squeeze off a major low where the downside risk was super-low.

And if I have been a little premature in taking some profits – so what?  Putting major cash in the bank is a wonderfully consoling feeling is it not?  It is the just reward for your efforts. And in any case, members still have a part position working that has the potential to take advantage of any further upside.

Of course, it may become opportune to re-enter long positions later if a decent dip appears and we have capital already poised ready to be unleashed.  This is a very flexible way to trade and I recommend it highly.

Charts point higher for Crypto-currencies

Crypto trading has leveled off in recent weeks as interest has waned but Bitcoin has been building in another corrective wedge pattern that points higher

In fact it is the same pattern from 2015 – 2017 that heralded a strong surge to the July $14k high.  Odds strongly favour a repeat performance.

It has been interesting that cryptos have largely been absent from MSM headlines in recent weeks. That has been very positive for prices – and here is Ether

I have a textbook complex a-b-c correction along a tramline pair on a strong momentum divergence that heralded the sharp rally phase.  The analysis doesn’t get much better than this.

I have a sneaking feeling the cryptos will be featuring in many headlines soon.  And that may be a good time for the early birds to consider taking some profits.