I have shown several facets of the current extreme manic exuberance in the stock market recently. I related how teenage traders on Robinhood gorged themselves on bankrupt Hertz stock only to google what ‘bankruptcy’ means too late. In fact, at least one such trader killed himself after the stock fell so much he lost about $800k.
And hot on the heels of this insanity, we hear that the founder of that trading platform, one Dave Portnoy, is advising his army of teen and millennium followers the new way to trading success is to take Scrabble letter tiles, jumble them up in a bag – and then fish out three letters to make a ticker symbol. Then buy it! I kid you not.
Hey, if it was that simple, why waste all those years learning technical analysis skills and just get a few board games instead! To me, the most appropriate must be Snakes and Ladders with the dice faces showing the FAANG symbols – with the Hertz symbol for the sixth. Don’t fall on Hertz though as the snake will send you back down into bankruptcy.
Meanwhile, back on earth, all of this insanity tells me one thing – we are reaching the end of the road of the Great 200-year Asset Mania. It is all too reminiscent of previous periods of irrational exuberance most recently in the dotcom mania in 2000, the ninja loans that brought the market down in 2008, and the utter complacency this February that lead to the Corona Crash.
But the degree of speculative fervour has reached new heights in the current bear market rally – and that is entirely consistent with second rally waves in a bear market. A genuine second wave will match or even exceed the bullish mania present at the ATH (while not making an ATH) – and this one qualifies in spades.
Not only that, but I have been watching for a major turn down around this time because of the well-know effect the earth’s phases around the sun can sometimes have on our actions.
I noted before that quite often, trend changes tend to occur around the two annual equinoxes and the two solstices. And this weekend, it is the Summer Solstice when the length of day is at a maximum and then starts to shorten. From growth to decay in a natural cycle. This weekend is the inflection point.
And that often describes the path of the stock market – from growth to decay as shown in the wave patterns.
The equinox is also a point of transition in the day/night lengths. Here is the Dow
The Corona Crash low in March occurred – bang on the Spring Equinox! And yesterday, markets put in wave 2 of 3 one day before the Summer Solstice. That is a beautiful symmetry.
So now we can expect the destruction in share values to really get cooking. Here is the Nasdaq, which has become the area of greatest speculative mania as it contains the big-name tech issues that most believe everyone should own and never sell:
I noted before the overshoot of the upper tramline with the result that the market swiftly declined back to the lower tramline, as is typical after an overshoot. But the final thrust up last week took it to kiss the upper tramline yesterday – and then bounced hard in a Scalded Cat Bounce down to confirm that line as a solid line of resistance. That was a beautiful final kiss goodbye to the bull market.
The large momentum divergence there adds to my confident outlook that the next major move will be sharply down – and the FAANGS popularity will start to wane.
And if this is true, it will confirm what I forecast at the start of the pandemic. That shares will start to turn down when lockdowns are eased. Today, the great battle is between the economic necessity to resume commerce and the need to protect public safety.
In today’s Telegraph, I see this headline: End of lockdown in sight as England gears up for big re-opening. Appears the 2-metre rule will be downgraded to 1-metre. (Incidentally, why was it not called ‘the six-foot rule?). That easing is a clear outcome of current bullish sentiment where many are looking forward to businesses getting back on track and make profits again. Hmm.
And that battle was always going to be titanic especially in the extreme risk-averse UK – and that is why we entered lockdown late – and will emerge late.
Along with most western nations, we are ruled by a myriad of committees where a final decision takes weeks to arrive in much watered-down forms. And only when the trend has become obvious to everyone do they feel safe in announcing policies right at the end of that trend where they are least effective in the current conditions.
Naturally, they have the ultimate excuse when things go wrong – “no-one saw that coming!” And the Fed operates in much the same committee-driven way. That is why they are followers on interest rates, not leaders.
And they certainly do not control the markets – a very common fallacy. If they did, why did they let shares lose 40% in the Corona Crash? Were they asleep at the wheel? Of course not – they had no control in the first place. And with utmost faith in their ability to manage share prices, what a fabulous time for markets to plunge again!
By the time the bear has had his/her fill, faith in the Fed will be utterly smashed. As stocks decline, more serious questions will be asked about their monetary experiments and how could they let government debt get so out of control?
Yes folks, we shall see a lot more firework displays in finance and politics.
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Buy the Dip, or Sell the Rip?
The Buy the Dip strategy has worked superbly for over ten years (if you had perfect timing, of course). All major and minor setbacks have been supported by superior buying from new positions as well as the considerable short covering of many professional firms.
Indeed, this post-March wave 2 rally has been the most disbelieved by the pros in some time. A great many hedge funds have been overall bearish while the younger more inexperienced set have been wildly bullish. They have been piling in after the Corona Crash presented them with once-in-a-lifetime opportunities (or so they believed).
The MSM has been full of stories of the ‘mom and pop’ cohort killing the returns of the hedgies.
I recently showed a chart illustrating the great disparity between share valuations and the economy. The gap is immense.
So is the solstice the turning point for reality to start emerging? Will the dip buyers now have the wrong strategy and will the rip sellers emerge victorious?
Markets have been defying the generally bearish news since March. Here is a really interesting chart of the Nasdaq and the Dow and the backdrop of news trends
chart courtesy www.elliottwave.com
During the pandemic that shut down whole swathes of the economy, shares hardly batted an eyelid and careened ever upwards. The in recent days, the US has seen riots, vandalism, looting and general social unrest with BLM demonstrations in many cities. And shares continued their merry flight to the moon.
So can anyone please tell me that if the news moves the markets – as so many believe – how can this happen? How can ‘bearish’ news cause prices to rise?
Yesterday, shares reversed sharply downwards after rising in the morning and then reversing sharply around 2 pm. Try as I might, I failed to find any news item that conventionally could account for the sell-off.
One website offered this feeble excuse: Covid concerns, Crude collapse and Quad-witch craziness spark stock swoon. That is bottom of the barrel stuff. We have had Covid concerns since February – and stocks have rallied nevertheless. So that cannot be the ‘reason’.
But we know what sent the market lower – sentiment turned!
As forecast, the dollar is rallying
Last week I laid out my case for a dollar rally and euro weakness. This was my roadmap a week or so ago
The setup was textbook with a complete five up along good tramlines and a momentum divergence at the wave 5 high. These are the kind of situations I really like!
And last week, both sterling and the euro tumbled. Nice.
Next week promises grander fireworks in many markets – come join us in a Free Trial!