My new Prime Minister Indicator introduced last week has been working a treat. To recap, the ex-PM Gordon Brown recently urged us to prepare for Armageddon in the global economy and with it, the collapse in asset prices. We rarely hear anything of interest from this person, so any pubic utterance is note-worthy from a sociology perspective.
His timing was impeccable – US data remain ‘bullish’ with jobless numbers yesterday strong. And Dow and S&P moved to new all-time highs.
Although I jest, Mr Brown is not alone in proclaiming doom-laden scenarios in recent weeks – all the while US shares march northwards in stout defiance. Talk about a Wall of Worry! And the worries keep piling up, with the US/China trade/tariff wars intensifying and US interest rates inching up. Not to mention the collapse in EM currencies.
So with all this public bearishness, the markets are simply not yet ready to roll over. Yes, one essential condition for a major top is in place with terrific-looking economic data emerging. Market tops are always made when the data is good, never bad. But the essential other factor of supreme confidence in the future is not. Yes, in some areas (AI, Mars-shots, autonomous vehicles, etc) the future looks bright, but widespread public concern for their future prospects (housing ladder, income growth) is a dampener.
In terms of the technical aspects, we have a situation where the pro money managers are all-out extreme short Treasuries (expecting yields to blow out) and extreme long equities. Not only that, but there is now a massive rotation out of the Nasdaq tech issues and into the solid, old-tech Dow issues (such as the earth-mover Caterpillar, that is in a strong bull trend) . Naturally, the weaker dollar is having some positive impact on Dow companies such as CAT which have major overseas earnings.
Just under the bonnet lurks one elephant in the room – the number of new highs versus the number of new lows. I have pointed out before that the number of generals is declining and last week we saw a further sharp decline in the ratio. While the Dow index is making all-tile highs, that upward force is being provided by fewer and fewer issues. That is most definitely not a sure sign of a strong bull market. In fact, it is a sign of a very tired one.
So despite the Dow in new high ground, the rally off the February lows is very likely a bear market rally. That conclusion can only be reversed if we see a sudden rush up in the new highs count. I see that as unlikely.
I have long forecast that the next bear market will be lead by the Nasdaq which was the leader on the way up with the FAANGS leading the charge. But they are now stumbling and here is my favourite canary in the coal mine, Amazon
The upper blue line is a very solid support/resistance line in effect since mid-March. With yesterday’s close bang on the line, we have the likelihood that the trading since July above the line could turn out to be an ‘overshoot’, provided we see a solid close below it (say below 185) soon.
If it turns out to be a genuine overshoot, a rapid descent to the target area around 165 becomes highly plausible.
Interestingly, I see little comment on the recent severe under-performance of the FAANGS, especially on seekingalpha.com. Maybe they cannot come up with a convincing narrative to rationalise it. And I will take that as a bearish sign.
This will have a massive impact on the Nasdaq, of course, which has already made its high last month. Since this index will lead the way down, I am focusing on it, rather than the Dow (whose waves are less distinct anyway). I have advised VIP Traders Club members to do likewise and yesterday gave them my line in the sand for bearish positions – the lower blue tramline
And yesterday, as it was dragged up by the positive mood following the jobs data, made a superb kiss on that line and has started a Scalded Cat Bounce lower into the close.
Provided my line in the sand is not breached, I am staying with my bearish stance and looking for a major move lower in a third of a third. Only a strong push above my line would cause me to amend my outlook.
But will a Nasdaq dip induce the same in the Dow? After all, they parted company a while ago. Yes, we could still see further up/down sequences in the Dow before a major high is achieved if the sector rotation intensifies, or the Nasdaq breaks my line in the sand.
It’s the Autumn Equinox. So what? I hear you say!
The mind of man is a curious thing. Do we know everything there is to know about how it functions? After all, it is the sole organ of decision making in humans. Are we so sure that it is not influenced by factors in the natural world such as the sun, the giver of life? Factors which are invisible to us?
With this in mind, I will throw out a thought – at the equinox, the day and night lengths are equal and in the northern hemisphere (where most human activity is generated), the dark tales start to take over from the light. And in figurative terms, dark forces start to dominate. This summer, we have have had plenty of light!
Stocks have been smashing records, the global scene was relatively calm, North Korea was playing nice, and England beat India. Today, we have the prospect of a very messy and acrimonious Brexit (cable lost 2 cents yesterday), and emerging markets are turbulent.
There have been major turns of extended markets at the equinox in the past which places the current US stock index set-up perfectly as a candidate. Hmm.
NOTE TO VIP TRADERS CLUB MEMBERS
I am re-sending you Members Notes because it is always good to occasionally review our money management rules, the 3% Rule and Break Even Rule. These have become particularly important in our latest campaigns in the Dow. This is the one major market I have failed to get right since January. But my short trades in the bull market have been potentially profitable – if the rules were strictly observed.
Many of my entries were right at major highs and that enabled you to move your stops to break even quite quickly. As the market fell, I often advised taking some profits at specific places. All you needed to do was to follow my orders and move your stops and take profits along the way.
Sadly, some members like to over-ride my advice and do their own thing. That’s fine with me, but so often it results in bigger losses than I would take..
As a member, you are paying me to find extremely well-timed low risk, high prob trade entries and give you targets for profit taking in a professional service. How many times have I give a trade in the morning and the market has moved our way that same day? I take trade timing very seriously. I will not allow you to hold a losing trade too long.
All of this is more an art than science and I have spent years developing my skills. Why not use them? I can tell you that very few have them.
One further point – there is a massive difference between being a market analyst and a trader. Most analysts are lousy traders. It is rare to combine both skills, but that is what I try to do for you.