It’s panto season!

Just as our UK political ‘leaders’ prove once and for all that running an alcohol-fueled party in a brewery is way beyond their government pay grade, markets smell blood.

In fact, I have long considered the pantomime in Westminster very much a side-show to the main events globally. Haggling over trade terms, although moderately entertaining, will make little difference to the state of our economies.  Do you think EU businesses, who sell to to the UK a lot more than we sell to them, will idly stand by if their trade is disrupted by an acrimonious Brexit?

They will be up in arms at their political ‘leaders’ to cut the UK plenty of slack.  This aspect is rarely mentioned in the UK MSM.  Already, there is trouble brewing in the EU paradise with the French natives getting restless – and this may well be a prelude to what’s to come.

This week we had signs China is coming off the boil to join the EU in economic slowdowns.  But already their stock markets are way ahead of that game having discounted already this development.

For those investors that are waiting for confirmation of a slowdown from the official data – these are the ‘markets make the news’ boys – they are way behind (like the cow’s tail, as my father was wont of saying).

But for we adherents to the ‘news follows the markets’ model, stock markets have been signalling this slowdown for weeks.  In fact, we caught near top tick in the Dow and other indexes in early October in anticipation.

Ominously, with this sudden risk-off stance, many bond funds are seeing record net outflows of funds, especially in the sub-investment grade sector (which is growing rapidly because of a surge in agency downgrades).  The record issue of covenant-light US corporate bonds earlier this year is coming home to haunt investors who failed to read the small print in their dash for yield.

Now, fixed income investors are running scared in an avalanche of selling.  This is how crashes start – and with short term US rates still working higher, many will be switching into short term safe 3-mo Treasuries that are now surging to a record 2.43%.  As I mentioned last time, this is flattening the yield curve – and heralding a further economic slowdown.  Here is a chart of recent fund flows

Quite a switch in sentiment!  Until the week of 12 December, there was little net movement in bond funds, but the valves were cranked fully open last week.

And with confirmation last week that the ECB will cease their bond buying programme on schedule, who will be left to buy those risky Italian bonds (they have been the sole buyer recently)? I don’t give them much hope of being able to roll over much of their debt next year.  Crunch time approaches.

And now with France’s political scene in turmoil with the Jilets Jaunes in full flight, spreads are widening rapidly on French bonds.  Too bad the EU has a common currency!  With the franc and the lira, at least Italy and France had an escape valve in devaluation (which they freely used pre-euro).

No, the EU is heading for an impasse as Germany still refuses to underwrite the deficits of other EU nations (and who can blame them?). Ever-closer union?  Humbug!

One of the options is the dismembering of the euro.  Another would be a debt jubilee as sovereign debt-to-GDP ratios become unsustainable when the economies start to slide as they will next year.

Either option would be extremely bearish for stock markets, of course.

The future is getting farther away

I have commented before how in a great bull market when optimism about the future runs to extremes, all sorts of pie-in-the-sky ideas abound from flying cars to autonomous self-driving vehicles.  I have yet to see one of the former in the skies as they seem to be as rare as aerial porkers.

And now, many have given up on the hope for self-driving vehicles to be common on our streets any time soon. I felt at the time that that prospect was to be a long way off for the simple reason that there cannot be many who would relax comfortably sitting in the passenger seat.  The drive would be a nightmare for many – at least at the start.

When social conditions are less bullish – as now – people generally become more conservative and protective and unwilling to take undue risks.  And that is why I believe this latest set-back is a sure sign of the darkening social mood, which is bearish for markets, of course.

The dollar rallies – for now

I have been waiting in vain for a turn down in the dollar.  It is a very crowded trade with bullish sentiment off the scale.  The biggest component of the index is the euro and so they move more or less contra.  I saw a DSI bull reading recently of 5% – and that is an extreme alright.

But the euro fails to rally despite that – so far.  So here is my best guess for the dollar index on the daily chart

I have drawn my Fib levels off the wave 2 high and not the conventional high.  That is because I find that sometimes, this gives a better fit and a more accurate target for turns (I cover this in my text).  That makes the wave 4 high and the a wave high turn right on their exact Fib levels. That gives me confidence I have the Fibs in the right place.

The market now appears to be pushing up away from the Fib 62% and towards the next level at 76% (at around the 96.70 area) and that will be my maximum target.  But it may not reach it.  Demand for US Treasuries (and hence the dollar) has been intense in a flight to safety but I see that cooling.

So I am watching this market very closely for signs of a turn and  keeping VIP Traders Club members on high alert.  The potential gains are immense.

As it happens, this would coincide with the euro reaching an important target at the same time.  This is my outlook for the euro

The important feature is the lovely wedge/triangle in a textbook five clear waves.  Remember, these patterns only occur in the wave 4 position of an impulsive five wave pattern.  Thus, I expect wave 5 down to continue next week.  The market has already broken the lower wedge line yesterday and the omens are good.

Stocks remain in bear markets

Yesterday was a bad day for stocks (good for us!) but the purported ‘reason’ the MSM attributed the slide to was telling.  It was put down to the revelation that the stalwart of the Dow – Johnson & Johnson – has been selling its ubiquitous baby talc that contains some asbestos.  The shares were slammed by 13% in what is considered a boring and reliable Steady Eddie share suitable for widows and orphans.

These are not new revelations, but note that their impact is being felt now the general market is in a savage bear trend.  It is part and parcel of my theme that misdeeds that were swept under the carpet in the bull phase are now being revealed and punished as social mood darkens.  I am confident we shall see a lot more such revelations in the months ahead.

Incidentally, another aspect of the growing negative social mood is the current ‘climate change’ scare mania. The dire warnings about the hell we are approaching are getting shriller – and a perfect backdrop to the darkening mood.

But the general public isn’t buying it.  The Jilets Janunes demonstrations/riots are being fueled by the massive increase in ‘green’ taxes and regulations imposed by governments in thrall to the climate change lobby.  As economies turn down, rising green taxes will hit the brick wall of a resistant public unable and/or unwilling to pay.  This could get real ugly.

Already, there are moves afoot to impose huge new costs to the shipping industry with an additional massive $1 trillion increase in fuel prices.  That would be a severe negative for global trade – and reinforce the economic slowdowns already in place.  China will be hit hard. Is this the proverbial straw that breaks the camel’s back? Hmm.

The Dow closed yesterday at its low – and back in the critical support zone at 24,200 area

Although I managed to identify the wave 5 top on 3 October and advised VIP Traders Club members to take short positions, trading since then has been wild and woolly with huge swings in rapid succession.  But now with the market back testing critical support, I am looking for a hard break soon that will set my next target at the 23,000 area.

But if it can manage a recovery to last week’s high at 24,800 that event would be delayed.  Only a rally above the wave 2 high at 26,000 would force me to re-assess.

With the Dow (and other indexes) moving by hundreds of pips in minutes, it is essential to keep on top of the zigs and zags – and that is what I am doing for VIP Traders Club members. Can you benefit from my timely advice?  There is only one way to find out – take a two-week Free Trial now.