More clicks for the VIX!

Dear Trading Diary: Don’t say I didn’t warn you. Last week I highlighted the VIX Fear Index and how it was being well supported despite new ATHs in the major US indexes. It is highly unusual to see the VIX trade above the 20 level with shares at ATHs! Complacency (low VIX) is giving way to higher VIX as fear starts stalking the market. That is one reason why I believe the Fear Index is trying to send a clear message and to expect those indexes to top out and start major bear phases. And this roadmap is coming to pass with my call in last week’s blog “I have a low risk/high reward opportunity in the Russell 2000 of historic proportions. Of course, that applied to all major stock indexes (see S&P chart below).

Also of note is the current earnings season roster that most view as blah! at best – and a distinct break from the perennial supercharged blockbuster quarterly M7 results we have been accustomed to on the back of exponential demand for AI. That has helped produce the record complacency that is bout to be destroyed.

But now voices are being heard that echo my thoughts of a few months ago: where are the profits from AI applications? Yes, upstream the likes of Nvidia who produce the chips and AI equipment have been booming. But downstream? Billions of dollars are being invested by the AI users such as Apple with little sign of blockbuster returns yet. This has always been my primary concern for the AI frenzy.

As I outlined before, bubblicious shares in many former technological revolutions – such as the canals, autos, radio, the dotcom internet and so forth – flared out long before reaching the full utility potential for humanity of the new technologies. Will AI be any different? And if not, when will the bubble burst – or has it already?

We have now entered a phase in the financial markets where multiple major surprises are likely to occur (earnings expectations, elections, wars, etc). Here in the UK we have already seen our growth-sapping Budget last week. But next week the US is set to provide us with a plethora of potential catalysts for more ‘surprises’. Above all else the US National Election on Tuesday and then a day later the FOMC rate decision will be major catalysts along with more M7 earnings. Next week could well be pivotal in market expectations.

So will the Fed cut and by how much? Remember, the Fed follows the 6-month Treasury yield (with a lag)

On 18 September the Fed announced its first rate cut by a whopping 50 bps in many months and the market soon staged a yield rebound that shocked bond investors who had loaded up on Treasuries expecting the Fed to continue cutting. Yes, when it’s obvious to the majority, it is obviously wrong.

Yields are now creeping up but at the current 4.5% they are still under the current Fed Discount Rate at 5% by 50 bps. This means that unless major changes occur soon, the Fed is likely to lower their rates next week – and that is the consensus in the market. But with signs of inflation also creeping up, they may only adjust by 25 bps as they will not wish to be ‘behind the curve’ which they were last month. A lot is riding on what they do and say on Wednesday and that translates into very volatile markets in the days ahead (as if they are not already a lot more volatile).

One other fly in the ointment is the rising mortgage rates in the US that is having a very negative effect on house transactions. Many owners who are trying to sell homes they bought during the pandemic when mortgage rates fell hard will now be deterred by the rising rates for their new mortgage of over 7%. Gridlock awaits if rates do not drop soon. This could well mark the top of the booming housing market in transaction volumes which always recede price declines.

And with affordability (house price/median salary) in the Western economies pushing record ATHs, a straw will appear that will break the real estate’s market’s back at some point. I am amazed that straw has not yet been seen – but it will. I am wondering if the UK Budget may have landed a knock-out blow to the buy-to-let sector and is that straw masquerading as a dirty great lump hammer? I am sure many BTL owners will be forced into selling up now and perhaps force market prices lower for the lower end of the market at least. If so, this will flow through to the entire market.

The Budget has not exactly elevated the business mood and will place a burden on consumer-facing share sectors. I am short Hiscox the insurer for Pro Shares as I believe the insurance sectors will be one of the greatest victims.

And now in the US, the business mood is also on the wane with yesterday’s ‘surprise’ weak jobs numbers that contradict the current Goldilocks scenario. Here is the final wave 5 up in the S&P and the start of the bear

On Thursday the index plunged through my major trendline and early Friday it pushed up to place a very convincing and accurate ‘kiss’ on the underside of this line and then backed off sharply post the jobs data. Regular readers know what a kiss on a major trendline means — a kiss goodbye!

The clearest wave action appears in the Dow which has completed a small scale five down which helps confirm the trend change in the major indexes.

So will next week’s action help confirm the bear has arrived? I will use the kiss as my fail-safe. Ideally, I would like to see sharp declines all of next week in a major third wave to confirm the SCB. Maybe the US election will provide one. I remain short.

Some comments on the Age of Revolutions we are living through: Just as in the political and social scene, major paradigm shifts are taking place in finance. There is the bearish turnaround in the formerly high-flying China economy from boom to an emerging bust (with failing stimulus efforts along the way). The semi-communist revolution there is failing the people. And that is what starts revolutions as the Chinese well know. That is why the elite has developed a rigid police state.

Then there is the failing EV and Net Zero revolution that is failing the consumer (much followed in these pages). Our electricity prices are the highest globally despite the UK ‘boasting 80% is derived from ‘cheap-to-free’ wind/solar’.

And cheap(er) Chinese EVs that could benefit the consumer are being tariff-ed to death and killing the budding EV revolution at birth. Western car makers are in crisis with VW shutting German plants as EV take-up lags targets. Will governments relax their draconian penalties for missing their mandated EV sales targets? It’s a toss-up.

And the Net Zero fanatics are starting to get desperate. I see a huge tax-payer funded ‘carbon capture’ project in Iceland (with almost free thermal electricity) is trying to demonstrate feasibility when scaled up around the world. It turns out that to reach Net Zero and building one of these giant units per week, it would take 19,231 years to achieve the CO2 growth reduction.

And how much power would be required? It turns out that about twice the current annual global power consumption is all that is needed. And all just to keep CO2 levels steady.

Of course, when they demonstrate this impossibility, they will try to move to the next step and ban all use of fossil fuels which always has been their ultimate goal which lies at the heart of their power grab all along. What a fool’s errand! One day the people will see through all of this as they recognise their taxes have gone into these failed projects. It is only the public’s lack of proper scientific education that is holding them back.

The CO2 levels are rising mainly because the earth is in a giant post-glacial warming epoch that is releasing more CO2 from the oceans mainly. The climate crisis is in their brains – and in their bank accounts.

In the investing/gambling world, in the US hordes of amateurs are being seduced into buying the “100% Return” magic money tree ETFs that promise zero risk and whose numbers are mushrooming. Bees to honey. Record money is flowing into into them, A recent headline: ‘100% yields are fuelling a retail boom in new quick-buck ETFs’

If this is not a sign of maximum risk-taking by the ‘little guy’, please tell me what is. A few years ago, the appearance of the Non Fungible Tokens (NFTs) was also a major topping signal.

Yes, Investing is becoming more ‘democratic’ with the ‘little guy’ taking centre stage. In Costco stores you can buy gold bars from vending machines. It’s that easy. And the explosive growth in ETFs and cryptos is attracting the younger inexperienced gung-ho investors that do not believe values will ever fall in their lifetime.

Remember, the public have always been late to all financial boom parties and they go full-in at the tops. And now they are falling over themselves to snap up shares with the recent Conference Board survey finding that a record pc ‘expect shares to be higher in 12 months’ And the latest AAII survey of usually very conservative mom ‘n pop investors are placing a near-record pc allocation to shares. All of this with valuations at or near record highs.

But under the bonnet, company insiders are selling their company shares in record volumes. Their Sell/Buy ratio has just made a new ATH above 5. if there is one cohort of investors that should know the value of their companies and its prospects, it must be their top executives.

When the bear really starts to wake up, these hopeful ‘investors’ will learn what risk really is.

Update on my Crude Oil campaign: Last week the market confirmed my view that this market was entering a highly volatile phase. In two days last week it surged by $3 and on Friday, it lost $2. I remain long but have raised my Protective Stop to Break Even. It is highly unlikely we will see a major trend develop soon and I plan to reduce my involvement in favour of the stock indexes and currencies – and VIX. Of course small swing trading opportunities will sometimes arise!

Update on my Gold campaign: Last week’s action has helped confirm that we have started a decent pull-back to the exponential rally phase off the August breakout. Odds are low that we will resume the uptrend soon and I am planning for another buying campaign on further weakness.

The bottom line: I expect major reaction to Tuesday’s US elections with markets ramping up their volatility. Large swing moves lie directly ahead.