My 2013 Wrap

In this final week of 2013 it is a time both for reflection and of anticipation.

First, the reflection.  What were my successes and my failures?  I managed to catch the immense bull market in USD/JY – my Trade for 2012 and 2013 – which rallied from 78  (when no-one was paying attention) to last week’s 105 (see later).  But I missed the great stock index bull market, which I managed to correct by my long trade/investment in ALCOA (which I initiated based on the ‘buy low, sell high’ theory of trading).  ALCOA has moved from around $8 to last week’s near -$11 quote, a rally of almost 40% – double the rise in the Dow!

Also, to alleviate the pain of missing out on the stock index rally, I managed to catch some great short trade profits on the big dips of the year.   All in all, a decent year.

Now, the anticipation. As we approach 2014, the bulls are in full cry as they chase the fox up the hill.  The thing about hills is that they do top out at the summit, and the only way is down from there.  I had thought bullish sentiment was extreme in November, but this week it is totally off the scale.  Now, even the previously-reticent public US investor is fully on board with the pros with a record high bullish reading in the AAII survey.

At an almost 4:1 ratio of bulls to bears, bullish sentiment is at nosebleed levels. Last week’s swing was huge – as they really got into the Christmas spirit.  The Santa Rally has been a self-fulfilling prophecy this year.

But can the bullish mania for stocks push them even higher?  Of course it can.  After all, the use of debt to purchase shares is also at an extreme. and there is plenty more where that came from (thanks, Ben).

But I believe we are at or very close to the extreme in the indexes.  For one thing, there will be an increasing number of longs who will want to lock in some profits.  Some of them might even recognise that conditions are very similar to that pertaining at the two previous mania peaks in 2000 and 2007/8.

That will increase selling pressure from here.  Then,  the bears will be coming out of hibernation when they see a good reason – and there are plenty of those around from the rapidly rising US interest rate environment to the collapse in emerging market currencies and bonds (see Turkey this week).  Not to mention the delayed US budget wrangle to come.

The other major factor is that tech has been among the hottest sectors with Nasdaq in an exponential rally. Yesterday’s COT data reveal that the hedgies hold 140k longs and a measly 14k shorts – an absolutely staggering  10:1 ratio, which is about an extreme as I have ever seen in any market – far higher than that at the $1920 gold top in 2011, where there was no bear to be seen.

Do you know what this means?  When the longs start to liquidate, there will virtually no short covering to cushion the decline!  There are no shorts!  This is setting up as an historic opportunity to position for the waterfall declines to come.

Can you sense that I am getting excited by this prospect?  I hope you are.too.

One other clue is that the other major liquidity bubble, the USD/JY trade, is also nearing the end of its huge run (see later) – and the Bitbubble has burst.

We know that bull markets climb that Wall of Worry.  But where is the worry? Everyone is on the bull side of the boat. As Robert Prechter says, when the boat starts to capsize, stocks will descend that Slope of Hope.

NASDAQ

The rally has entered its final exponential phase:

There is a looming neg mom div -a warning that the rally is running out of puff.  And with virtually all traders on one side of the boat, a capsize is imminent.

Here is the hourly:

From the November low, I have a five up which could be complete here – there is a stark neg mom div here also.

This is my bottom line for all US stock indexes: if the top was not  made last week, it should be put in very soon after one more down-up over the next few days.

EURO

It made one final last gasp last week above the 1.38 area (my line in the sand) and was knocked back hard:

It did manage to hit the Fibonacci 62% level where now I fully expect the dollar to embark on a strong rally into 2014.  My larger EW labels are for the 2012 low to be w1, the C wave rally is w2, and now we are at the start of a huge w3 down.  I shall be looking for strong down legs from here.

USD/JY –My Trade for 2012 and 2013

My long-standing target zone of 105-106 has been hit!

This is an absolute textbook EW impulse pattern on the daily chart.  You will not see a finer one anywhere.  And we are now in the fifth and final wave up for this move with momentum weakening and hedgies still massively  long by a ratio of 7:1.  This is yet another historic mania that is about to go pop.  I have ridden the mania but it is time to jump off this boat before it capsizes.

My projection for 2014 is for the market to top out near here and decline to the 95-98 area in an A-B-C where it could mount another rally leg taking it to the 120 area.  But the manic bullishness needs to be erased before this level can be approached.

GOLD

See last week’s post.  The rally is edging higher and my immediate target is the tramline:

The rally will really get going if the w4 high can be taken out – and this could occur when stocks begin their decline.  Also, the rush of funds out of EM (see Turkey) could turn into a flood and into gold as a safe (and a lone undervalued) haven.

ALCOA

And finally, Alcoa.  I have been bullish since the summer, but there are two rules I employ.  The first is not to get married to a trade and forever love and cherish it till death do you part.  The second is to get progressively more bearish as the market rallies.

I have another textbook complete EW motive wave up and we are in the final fifth wave.  Where it ends, I cannot say, but I will be taking profits off the table very soon.

As with the USD/JY chart, I expect a decline in an A-B-C to perhaps the $9 level which would neatly close the gap just under w4.  That is when I will be looking to resume long trades.

MY TRADE FOR 2014

I promised you my Trade for 2014 and you will not be surprised by what it is:

Short Nasdaq/S&P/Dow/Nikkei/FTSE/DAX/CAC

In the early part of 2014, I have another one:

Long Gold/Short US stock indexes

I also like long US Dollar for all of 2014.  And interest rates will ratchet up and the Fed will be forced to amend its ZIRP.

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Wishing you a most prosperous New Year!