My French Fry Indicator is flashing Sell!
Dear trading diary: That was a landmark week, make no mistake. A sentiment switch was flipped on Wednesday 31 July and now Bad News is Bad – really Bad. Latest jobs data was the latest to point to a severely weakening US economy that is ominous for shares (and many other asset classes). For me, the key point is that the terminal fifth waves of all degrees of scale are now complete and we are embarking on a multi-year bear market.
Last week I half-jokingly wrote that I am replacing GDP data as a measure of growth with my French Fry IndicatorTM and last week the latest McDonalds results added confirmation that fast food restaurants are struggling as debt-heavy consumers cut back on calorie-laden meals with Big Macs (and the fries) being hit hard.
But on the flip side, that is great news for the health of the nation (yes, I know, it needs it, as do we). But with the iconic chocolate bar maker Hershey results on Thursday, even chocolate consumption is on the decline. The CEO said: “consumers are pulling back on discretionary spending”.
This is a triple whammy for the consumer economy. Three major consumer-facing companies are reporting slowing sales. And the consumer represents about75% of the whole economy.
The rot is setting in from the bottom.
And finally, stock markets are catching on with major declines on Thursday and Friday with the Dow off by almost 2,000 points (5%). You have to go back many years to see such a strong two-day decline – and is a measure of things to come.
Critically, the S&P had rallied to the underside of my lower tramline on Wednesday as the FOMC words from Powell were taken as great news. That was when I became on high alert for a potential kiss and strong move down. I had flagged this in my July 20 blog.
And lo and behold, the kiss was planted and on Thursday the market fell hard in a textbook Scalded Cat Bounce (SCB). See my textbook Tramline Traders for examples.
For many, that sharp reversal was a total surprise as they were prepared for more gains post-FOMC as rate cuts were firmly on the Fed agenda.
But with a knowledge of the Kiss and SCB possibility, those in the know (i.e. my VIP Traders Club members) had other ideas. And for those trading on the news, such a sharp decline was unfathomable when all of the M7s reporting last week had really strong results with almost universal ‘beats’ and few ‘misses’.
But the Law of ‘Buy the Rumour, Sell the News’ came into full force with everyone on board the AI mania – until recently. Nvidia is now down from $140 to $102 (minus 25%) in just two weeks. I call that a crash and not a ‘normal’ correction.
In the space of one day last week, MSM commentary has turned from ideas such as ‘Dow to hit 100,000 by 2030’ (Edelman) – to gloom and doom. But bullish sentiment remains sky-high. US investors are still falling over over themselves to buy 2x leveraged AI stocks and AI indexes. Until last week, that is.
The bulls are still gripped by visions of how AI will transform everything – from society to medicine to culture to science and engineering and so on. Yes, it may in the future but in the meantime, where are the profits from AI applications? I have been asking this question ever since the AI ‘revolution’ came into prominence. Only the chip makers have seen big profits – and that is about to reverse.
But now, the negative aspects of AI are starting to surface in the MSM. On the battlefield, Ukraine is reported using cheap autonomous AI weapons to effect. And AI experts are predicting AI could destroy humanity. While that seems a tad over the top, risks to humanity are growing (‘killer robots’) – and that is a clear marker of a more negative mind-set that will propel the new bear market.
Incidentally, will the MSM now focus on chips or french fries? Both seem to be central to the bear story now developing.
When the Big Tech issues started selling off two weeks ago, investors moved into small caps as they saw better value. It was called the Great Rotation. So how is that faring now?
Taking a break? Or making a break! My analysis is pointing to the completion of a second wave upward correction to wave C on the very day of the FOMC optimistic ‘soft landing rate cuts to come’ scenario.
The subsequent sell-off of all indexes marks the abrupt switch in sentiment to a much darker hue from Wednesday 31 July. Remember, sentiment shifts from positive to negative are not fomented by any external news events. They are internally generated by unseen psychological changes in we humans. These changes follow the Elliott wave patterns as manifested by changes in overall buying/selling impulses in markets – especially the stock markets.
That insight places all/most MSM commentary on market movements entirely as spurious. They try to explain the moves from the wrong end. It is the markets that make the news, not the inverse.
And anyone trading on news events most often come a cropper at just the wrong time (for them). The recent rush to buy Big Tech (and leveraged at that) is surely a great example of the Buy High/Sell Low school of investing.
Update on my USD/JPY campaign: This currency cross has been in the news for some time as the yen kept making new lows above 150 (the previous ‘ceiling’) and I have been trading the late stages of the bull and into the new bear phase.
I was fortunate enough to identity a major reversal in the great yen bear market last month and position short USD/JPY early on. I took my final profit last week at the 150 area – at my original first target zone.
Note the similarity of this chart with that of the US majors such as the S&P. The key point is that all fifth waves are now complete and the bear has taken over. On Friday the market overshot my 150 target and is deeply oversold which is setting up a likely bounce next week in wave 2. When that completes, I expect a savage third wave to accompany the third wave down in the indexes.
I can’t wait.
Update on my Gold campaign: I have been trading the long side for several weeks and on Friday it pushed up into a new ATH. Because we are in a new deflationary scenario, I have the feeling that Gold may be in a tug-of-war between the upward forces of ‘safe haven’ status and the downward [pull of deflationary forces (lower money supply). So far, the safe haven interpretation is winning out.
But we are getting closer to the wave 3 of 3 top before the wave 4 downward correction enters.
I am on high alert for such an dip. Remember, hedge funds are massively long (about 4/1 bull/bear) and a small dip could turn into a much larger one.
When stocks enter a more savage selling phase, I am not sure of Gold prices can be maintained in the face of such a deflationary surge. Of course, I will let my reading of the charts and sentiment to guide my trading, as always. Remember, I am a bull so long as prices keep rising (and a bear when they look like falling).
Update on my VIX campaign: I have long maintained that when shares started their bear phase, the VIX would explode to the upside as Total Complacency would morph into Total Fear/Panic (in time).
These were my charts from my 20 July blog:
It had just made a new low around 12 but had opened up on a huge gap. Normally, huge gaps only open up when shares tank, but not this time – shares were hardly moved that day. That was a major clue that some serious investors were buying cheap insurance in size against potential stock losses. I decided to join them at the 16 area. And here is the latest chart
As Elon has just tweeted: Wow!! What can I say? Extreme Fear – here we come. At the current 22 level, it has gained a massive 83% off the July low. That certainly beats my ‘puny’ 5% dip in the Dow – and justifies my contention that the VIX is the market to be in for extreme price appreciation in this early stage of the bear.
Update on my US Grains campaigns: Most retail traders have lost interest in trading Wheat, Corn and Soybeans as they keep plumbing new depths. That is understandable as they have fallen a long way down from the heady 2023 days when Russia invaded Ukraine and threatened to disrupt supplies from that region. As trend followers, the hedge funds have built up a huge short interest (3/1 short/long in Wheat). So far so good (for them).
But they are storing up a huge potential short squeeze if and when sentiment changes. And that is exactly what happens when the fickle global weather patterns spring a surprise. I await that event and remain poised to re-start a bull campaign. Meantime, I am flat. And remember, the cure for low prices is low prices.
One final thought this weekend: Now we are in the grip of a new bear market where the news follows the market, so with the darkening social mood we will see a lot more public demonstrations (and worse). And right on cue, it is reported that the UK will witness a surge of violent protests in several cities this weekend. These will not be isolated events but will set a pattern. Many will blame ‘Far Right hooligans’ but this will be a cover for a general feeling of public helplessness in the face of an over-bearing (and over-taxing) government structure that has been building for many years.
It is the low earners who are feeling trapped. This is in the great tradition of the Peasant’s Revolt (1381) and the French Revolution (1789)
The Peasants Revolt was started by the overbearing tax collectors of the day while the elite (land owners) escaped their harsh treatment (sound familiar?). The French Revolution occurred during an economic collapse in France (an omen for us?).
In bear markets, bad things happen. Be prepared.
