It’s now a Turkey shoot!
A few days ago, the MSM was focusing on the trashing of China’s currency. Suddenly, it’s now Turkey’s lira making major headlines. What will it be next week? Of course, there is not a shortage of candidates, as euro weakness demonstrates. But what strikes me is the rapidity of bearish events unfolding in this ‘slow’ month of August. Before, traders could set off for their family vacations safe in the knowledge that markets would be relatively calm until the trading season resumed in September. Not this year.
Another thing that struck me is the effect Turkey – a nation with a very lowly ranking of 68th in per capita GDP – is said to be responsible for last week’s mayhem. At least with China having a per capita GDP ranking of Number Two in the world, it does seem to be a rather more substantial culprit.
So my question is this: Is Turkey the straw that is breaking the camel’s back? After denying gravity for so long, US Stock markets finally got the message last week that maybe the strong dollar (and very weak emerging market currencies) may not be too great for profits from overseas operations.
As an ’emerging’ economy, Turkey is perhaps suddenly at the leading edge of the continued nervousness in Emerging Markets, who have huge dollar debts. And as the dollar advances, the interest payments on these loans look extremely vulnerable to a slowdown in their economies. Many of them depend on firm natural resource markets, such as oil and metals.
And the current position in commodity markets does not inspire confidence. Odds are high that the economies of US, China and Europe will not grow at the current rate for much longer. I expect growth rates to decline in the US for Q3 and Q4 from the blistering 4% of Q2.
So with the prospect of a slowing global economy as we approach the end of the current business cycle, stock markets are facing a Perfect Storm.
As I have mentioned before, bullish sentiment towards equities remains historically high. Funds are 103% invested – meaning they have borrowed on margin to buy shares. And US margin debt of retail traders remains sky-high.
Does this chart square with reports of investors getting ‘nervous’ and some gurus calling for a crash? Of course not. Talk is cheap (surveys and articles) but money talks (market data).
Like a stopped clock, perma-bears will be proved right eventually, but without a great timing bag of tricks, traders are unwise to follow them slavishly. But mid-week, a few sell signals were being flashed (more later).
But if interest rates are in a rising trend, as so many now believe, why are T-Bonds now back in rally mode, pointing to lower yields?
In fact, we at the VIP Traders Club anticipated this rally and are holding long positions. I suspected a Head and Shoulders reversal pattern was forming earlier this month as I noted the large momentum divergence at the 152 low and the extreme bearish sentiment with hedge funds. Time for a nice little short squeeze?
But as all EW students know, the China and Turkey currency stories are simply the effect, not the cause, of a darkening mood – and the most immediate barometer of that is the stock market. Here is the S&P daily
Last week, the rally made one more hit on my very reliable trendline to make it a highly unusual fifth accurate hit. I have rarely, if ever, seen a line of resistance (or support) have so many accurate hits over such a long multi-month stretch. Remember, I did not really form that line 0 the market did.
The crucial point is that that fifth hit occurred on a large momentum divergence and on no other hit did that happen. That sharp weakening of momentum last week ties in nicely with the chart of New HIghs/New Lows I showed last week. As I pointed out last time, the FAANG generals – who have been responsible for an incredible 98% of the S&P’s gain to end-July – are getting very lonely at the top with the troops falling by the wayside.
It will only take a slight loss of faith in one or more of the FAANGS to topple the whole deck of cards over (already Facebook has been hit) – and there will be no Fed to pick up the pieces with interest rates already at the floor. In any case, the Fed has gone public with its intention to tighten. I reckon it would take a stock market collapse of at least 30% to make them re-consider.
So that hit at mid-week in the S&P was one signal, but I also had one in the Nasdaq.
On Monday, the market had pushed above my upper tramline in wave 2 and was in danger of making a new all-time high above the 25 July top at 7517. It came within a whisker on Thursday at 7498 (10 points or 0.25%). That was close! It had to close under 7517 to retain my wave 2 scenario. If it had pushed above it, I would have needed to go back to my EW drawing board and figure out a new wave labeling.
But I was on high alert for an ‘overshoot’ to emerge – a move down below the tramline and crucially, a close below it. And yesterday, I was not to be denied for that is what appeared. Now, with all the other evidence and the very massive momentum divergence on the Nasdaq chart, my confidence for a rapid descent has been taken a few notches higher.
Of course, even more confidence would be provided by seeing a nice clean five small waves down in the Dow/S&P/Nasdaq
US Grains whacked by USDA report
We have been trading grains – wheat, corn and soybeans – in the VIP Traders Club as markets have been in strong bull markets, but in yesterday’s Trade Alert, I advised taking at least partial profits because it is always dangerous to go into a much-anticipated major USDA report too heavily exposed. And that little nugget of wisdom was fully put to the test as markets fell on the news. Here is the bean chart
But we knew well ahead of time that the rally into the $9.00 – $9.20 area was hitting both Fibonacci 38% and chart resistance and thus was vulnerable to at least a correction. But the 40 cent smash yesterday took it beyond a slight correction!
So now I will let the dust settle before I can find anything meaningful in terms of a sensible trade. But with some profit in the bank taken near the highs, we can take our time over that.
Cotton is unraveling
We have been trading this market from the long side and have taken good profits but last week, I smelled a rat and yesterday’s USDA report confirmed what I had been thinking – the trend was now down and this is my scenario
I now have a textbook setup for a bear market that should last many months. We managed to sidestep yesterday’s plunge by taking full profits beforehand and I will now try to locate a low risk short trade for a campaign to bet against hedge funds who are an incredible 15-to-1 bullish.
The potential for huge losses from long hedge fund liquidation is intense.
The Almighty Dollar surges – but is near a top
In my last post, I showed my roadmap for the euro which is proving correct with EUR/USD reaching the sub-1.14 area in wave 5. Here is the Dollar Index (almost but not quite a mirror image)
I now have lovely tramlines with the market pushing up to test the upper tramline next week (?). With DSI bullish sentiment now well over 90% on most days, I expect the top will arrive in a spike – and may even produce an overshoot on the upper tramline. Curiously, the wave pattern since June looks remarkably like that at the lows in Feb-April.
As I said last time, the summer is anything but uneventful.
