Treasury yields are on the rise. Word is the Fed will likely be forced to raise policy rates sooner rather than later. Energy prices are on the rise. Food prices are on the rise. Consumer sentiment is tanking. The war on the social media giants is intensifying (a minimum global corporate tax rate of 15% has been adopted), I would say that is one heck of a Wall of Worry for shares. But will it derail the major indexes? To me, it would be a near-miracle if it didn’t. But stranger things have happened in this world of heavily government-influenced markets. Free they are certainly not (but they still adhere to my Tramline methods, especially the Fib relationships between wave extremes).
Already, interest rate sensitive tech shares as measured by the Nasdaq are in decline (off by about 6% from its 10 September ATH as is the Dow). Valuations are about as extreme as at any time in history, as measured by corporation book vales and dividends. This has been the result of overwhelming manipulation of the interest rate market by the Fed in its QE schemes since the 2008/2009 Crash.
But as night follows day, the interest rate cycle is now turning as the spigots of easy Fed money are being turned off as producer prices – and then consumer prices – are rising. The advancing commodity markets are forcing the Fed to tighten, otherwise the risk of runaway price inflation looms (it might occur anyway).
Of course, the very successful investing/trading strategy of the recent past has been to Buy The Dips. So why abandon that policy now? Stock markets have climbed each and every Wall of Worry and one of the tallest was the 2020 Corona Crash from where the S&P advanced by a staggering 120% in just 18 months. With that kind of momentum, it would be a brave/foolish person to claim the tops are in with high confidence.
But I do see signs that is indeed the case. On 10 September, I noted the Nasdaq at 15,650 had likely completed all fifth waves up on several degrees of scale. I noted that if that was The Top, the index would start a five wave decline. So did it?
And lo and behold, a small scale five down was traced out to the first wave 1 low on 20 September. It then rallied in wave 2 (to a Fib 2/3 retrace of wave 1) to its high on 27 September. It then declined in another clear five down to the 4 October low and has rallied in a clear three up in wave 2 to last Thursday’s high.
The bottom line is this: the Elliott wave patterns are telling me a clear story. We have entered a new bear market off the 10 September high and I am looking for a steep decline in a major third wave starting early next week. I have high confidence in this forecast and only an unexpected pish above the 15,400 mark would cause me to amend it.
Confirmation would come if/when the market starts the decline very soon.
So are the Dip Buyers getting a little nervous now? Before 10 September, they had full confidence that all they had to do to make profits was to close their eyes and Buy, Baby, Buy! Don’t fight the Fed! Almost anything would do especially if it had a tech-y name. No other thought or analysis was required. It was all so simple. MSM articles galore appeared on how amateurs can invest in the stock market with an embarrassment of riches out there. Complete amateurs – such as WallStreetBets – were plunging into obscure loss making issues such as Gamestop and clobbering the much more experienced hedge fund pros.
In fact, having previous knowledge and experience was seen as a handicap to making money! It really was different this time!
But with the latest dip buying exercise failing, the next one will likely be the big test for the faithful. And if that fails, investors and traders will finally be rewarded for their insights and expertise and experience. Sanity will be restored. And many will switch from Dip Buyers into Rip Sellers.
I have pointed to the record stampede into global equities and out of cash this year as a clear demonstration that bullish sentiment has been on an epic scale. But with bond yields on the turn and pressure growing on short rates to rise, this is likely to be the mother of all wrong way bets. Most investors, professional and otherwise, are trend followers. That is taught in all Investing 101 courses. Never mentioned is the strategy of trading/fading extremes.
But all experience shows that when markets reach extreme levels, major corrections are never far away. The worse time to buy is when everyone is all in. The best time is when everyone is all out – and feeling extremely bearish. Such a state was reached in March 2020 when all seemed lost to he pandemic. That was a great time to buy with valuations low. Now today we are at the opposite end of the pendulum and is it ready to swing back? I believe it is.
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Facebook is poised to further losses
As one of the leading FAANG Gang that has lead markets higher since the 2008/2009 Crash, Facebook is showing signs of tiring just as a long distance runner often does in a race just before the finish. Governments have been desperately trying to find ways to restrain them and of course to siphon off more of their wealth in taxes which they see as badly needed. China is doing that quite successfully. The various lockdowns and furlough schemes have created massive deficits in public finances and with the public all taxed and spent out – and about to be more so with ballooning fuel costs, they have turned to the corporates to milk. They may even succeed this time! The public are surely for that.
Media stories about the harm social media is doing to young people appear regularly. There seems a growing bearish sentiment towards Facebook in particular. Is it fanciful to believe that in a few years, social media will be seen as a pariah? Parents can only wish it.
I pointed out a month ago that Facebook had likely reached a major high of some sort at $384 as it hit a major line of resistance joining previous major highs. Previously I had thought the $364 level has likely marked a top.
That line of resistance had lovely PPPs from last year, a likely overshoot in July and an accurate hit last month. Also, the latest wave up had a clear five up pattern and created a wedge or ending diagonal. Drawing a parallel line from the March low takes it across to last week and lo and behold I see a clear break down.
And just as in the Nasdaq, I see a clear five down to the 4 October low. That sets up my first target around the $250 region.
Of course, there is plenty of chart support on the way down and so it would be unusual to see a hard and swift down move to that level. But selling is likely to be intense if we are in a major third wave lower in the Nasdaq (see above).