It’s the M7 versus the Rest and is no contest, so far

The Marvellous Magnificent Magic Seven rules! Forget the rest (except my favoured uranium sector. of course!) – the M7 is just about the only game in town. Despite dotcom-type measures of valuation (P/E over 50) the shares surged last week to new highs. And just ahead of the Q4 reporting season!

Yes, a buying panic in the M7 just ahead of results. What could possibly go wrong?

This action in the M7 alone was responsible for the Nasdaq, S&P and Dow to surge to new ATHs late last week. Notably, the small cap Russell 2000 (that contains not one of the M7) remains well below its 27 December high.

In fact, this divergence is a stark demonstration of the dominance of the M7 in the indexes that contain at least some of them. For members, I have been setting the Russell 2000 as my favoured index to trade in this period. These small caps are immune to the AI frenzy surrounding Big Tech and more in alignment with the real world of high debt with still high interest rates that is slowly working destructively through the base economy.

One of the main factors behind the 2.5 month index rallies post the October lows is said to be the general expectation that the Fed will lower short term rates this year with some enthusiastic bulls quoting March as the first cut. That helped push the Dow to its highs at the turn of the year.

Recent ‘strong’ jobs data has put a slight dent in their enthusiasm and stocks sold off as I forecast in the Dec/Jan cycle high pattern. Crucially, the move down to the Dow low on Thursday traced out a three down.

This is always the big test of whether the three down is corrective to the main trend (up), or the start of an impulsive five down indicating a new downtrend.

If the market reverses strongly upwards from the three down, then odds swing to the corrective interpretation with higher prices to come. But if the market plunges lower. we switch to the impulsive conclusion.

Thus, the market will offer us a binary option – up to new highs or down to deep lows.

And with Thursday’s session ending with a sharp rally of several hundred points to a top tick close, we had our answer. Higher. And that was confirmed on Friday with a move to new ATHs.

That is one of the values of using the Elliott wave theory to make sensible forecasts given current market action. The dip off the December high is either a three down or the start of a developing five down – and market action offers heavy clues as to which option becomes dominant.

Members were short going into Thursday but with protective stops at Break Even, little if any damage was suffered. Yes, in these very volatile times with sudden reversals/whipsaws appearing, using one of the Club’s Risk Management rules is an essential tool to keep members out of trouble.

So with investors having panic bought M7 ahead of results next week, are they setting up for a disappointment? We shall soon see. Whatever happens, I do expect major volatility on a grand scale. Trade timing will almost certainly be a tough task.

Are bonds signalling a new equity bull run?

Since bond traders are said to be a lot smarter than equity investors, here are two very telling charts of how large investors are positioned in the bonds. The first is the percent of large investors expecting lower long rates in long bonds. It has reached a large extreme – far more than at previous bond reversals. Yes, they do occur at major reversals in bond yields.

If this is not a big red flag for equity bulls, I am a monkey’s uncle

Note that at the 60% level, 40% are either neutral or expect higher rates. Thus, the 60% level could conceivably move higher before reversing.

And here is a survey of the same money managers for the percent expecting lower short term rates over the next 12 months:

Again, a record 90 percentage points and is well above previous extremes. Extreme bullishness for lower rates is the current position in the market. This 90% level must be about as high as it could possibly get. Thus, a high confidence bet is that short term rates will move higher or at least stabilise.

So is is it possible the market is getting rate expectations all wrong? They always do at extremes. Remember, when everyone believes something is obvious, it is obviously wrong (eventually).

Note that the T-Bond yield remains around the 4.4% mark – up from the December 17 low of 3.95% in a second (or B) wave correction.

Because of my uncertainly now as to the next short term move, we took some/all profits on our short T-Bond trade for a tidy 5 handle gain.

Winter is showing the downsides of EV ownership

A major test for EVs last week with a polar vortex severe cold in Canada and the USA (-45 degrees in some places) was humiliating for them. Many Teslas were left abandoned at charging stations that couldn’t handle the extreme cold. Tellingly, this news did not appear on the newsfeeds of the rabid ‘green agenda’ outlets (yes BBC, I am looking at you!).

It took more than twice as long (over two hours) to charge in the low temperatures. And if the driver wanted to stay in their car while charging (assuming they were not last in a long queue), having the heater on would make that time even longer.

This publicity couldn’t come at a worse time for the company

While the EW patterns are unclear (to say the least), I do have a reliable internal trendline where the shares rose to plant a kiss on the underside on the 28 December at $264. It closed on Friday at $212 (down 50% from its 2021 ATH) and down $52 this year (20%) off the kiss.

Some would say the 20% decline is enough o call this a bear market, let alone the 50% loss.

It’s an open secret that Tesla is a major beneficiary from the carbon credit scheme where it is allocated free credits by the US and other governments and then turns around and sells these so-called ‘green’ credits to go straight to the bottom line boosting reported ‘profits’ Billions are involved.

But is this scam game up?

I have been following the European carbon credit market for some time and with the slowdown in EV sales in recent weeks (sales not helped by the above negative publicity).

We have been short from last year but last week the market fell heavily and is now testing my lower tramline. After a possible small bounce, I expect this tramline to be penetrated to much lower levels.

These carbon credit schemes are deeply flawed, not to say corrupt, and with the long-delayed justice in the Post Office scandal seeing the light of day (see last week’s blog), is the tide for the truth turning and will the carbon credit schemes (taxpayer-funded) be revealed for the distortions to the economy they have produced?

With EV sales flatlining and all makers being forced to savagely cut sticker prices and Chinese vehicles offering huge lower cost competition, are we seeing the end of Phase 1 of the EV Revolution involving a clean-out of the weaker makers?

If electricity prices can be lowered (going back to coal?) then Phase 2 in the years ahead may be the game-changer they greens have always wanted – provided the current low cost of lithium can translate into much lower batter costs.

I am not writing off the EV sector entirely and for ever, but it has to go through its current Slough of Despond first before possibly rising Phoenix-like in the years ahead. But ICE technology still offers the most efficient, convenient and cost-effective mode of transport for the vast majority of vehicles today.

But can the politicians get over their obsession with harmless CO2? And their determination to socially engineer our societies? I very much doubt it.