Levitating stocks – what an act!

The stock market levitation act continues. Last week we had more dreadful US economic reports.  The all-important retail sales for March came in at minus 0.3% (consensus was plus 0.1%). Less autos and gas, the figure was plus 0.1% (c0nsensus was plus 0.3%). This compares with the Feb figures of plus 0.6%, so a marked slowdown in sales in progress.

Then, Producer Price Index came in at a dreadful minus 0.1% (consensus was plus 0.3%), with the annual index down 0.1%.  Where is the pricing power that producers would dearly like to have? It’s obviously a buyers’s market out there.

Then, Business Inventories to Sales ration has kept climbing into the stratosphere:

Unsold goods are being stockpiled in the hope of better times when sales pick up (they are falling).  That feeling of hope (a bull market aspect) permeates society (see later).

And yesterday, Industrial Production data was truly dreadful with slowdowns everywhere.

But did that stop the relentless rise of stocks? Of course not! And the MSM were floundering around to find any speck of ‘good’ news to explain it and hence waste many column inches in the process.

All they could come up with was JPMorgan’s rise in earnings (actually, there was a decline), and a rebound in China’s exports (there wasn’t one).  Read David Stockman’s demolition of these two fairy tales.  He reports that S&P P/E ratio has now climbed to a heady 24x – almost a record.

No, the real ‘reason’ for the levitation in stocks lies in the still-elevated social mood which can be revealed in the wave patterns in stock indexes. As I explained last year, there was a valid case to be made that the Dow and S&P could make new all-time highs based on the long-term wave structures.  That was my least-favoured view, I admit.

One of the give-away signs of a positive social mood is for groups to come together and work in some kind of harmony.  The formation of the massive EU is a wonderful example of that – and is my litmus test for changes in mood this year.  During bull markets, nations joined and during the next bear market, nations will leave.

And the result of the UK referendum will tell us what is the state of social mood.  If Brexit wins out, then stocks are in danger of collapsing.  But if Brexin wins, stocks should remain in a bull trend – and go on to those new highs.

And the timing of the referendum is about right – June 23, which gives the markets time to adjust to the eventual result.  That would still allow time for an assault on new highs.

I happened to watch a TV programme last night on super yachts and the lifestyles of the rich and famous. A big UK firm that makes these behemoths costing £15 Million and up is reporting record sales. Positive feelings are alive and well at the top end, apparently.

But cracks in this scenario are appearing – London is starting to see houses over £10 Million needing 20% lopped off asking prices to close deals now.

So how is this playing out in stocks?  This is the weekly Dow since 2009 with the most bullish interpretation labels:

This satisfies all the EW rules and guidelines and also the entire post-2009 rally has traded withing my tramlines.

So, we are in a very large wave 5 up which should carry above the May high of 18,365 (roughly 500 points up from current).  And that level will still be shy of the upper tramline, which crosses the 20,000 level around mid-year.

If the rally extends to year-end, the potential upside is to the 21,000 level.   Heady valuations, indeed.

US Corporate earnings are falling and GDP growth is slowing with the Fed needing to make big cuts in estimates from last year’s forecasts.  Does this sound like a likely scenario for another 2,000 Dow points?

The US Dollar

The dollar is the linchpin of all financial markets.  It is my view that it is on the verge of another powerful rally phase.  Sentiment conditions are right with hedge funds still bullish the euro.

When the dollar surges, it will hit many over-loved markets very hard – and perhaps mark the top in stocks.

Here is the hourly chart of the Dollar Index:

I have a good momentum divergence at the spike low with wave 4 (in an A-B-C) in progress.  I expect wave 5 to punch above upper tramline very shortly.  When it does, it will mark the end of the bear trend and the start of a new uptrend that will take the Index towards the 100 level again.

Remember, my long-term target is the 120 level.