My New Year’s Resolution? To Make More Profits (and Cut Losses)!
Just about every pundit has now said it in their year-end copy: What an incredible year was 2022! Who could have predicted it? blah, blah, blah. So I won’t insult you with a repeat. Only to say that I believe you ain’t seen nothin’ yet in 2023 – and most pundits will say the same old things in December 2023. And by the way, yours truly happened to predict many of the great trends – and major turning points of last year – in several markets. And in advance. And was the result of the application of my Tramline methods in real time.
But my Big Miss of the Year was not going long Dollar/Yen which yielded massive gains (since reversed). Here is the impressive bull run from 114 in January to the October 152 high – and the collapse since:
Many rode that bull, but how many exited near the highs? The Japan central bank had kept interest rates on the floor while the Fed and others were raising theirs- a simple macro trading decision to short the yen.
But now Japan has suddenly started joining the others and raising rates, albeit marginally. That is a sea change for them as GDP growth, already minuscule, is vulnerable to recession. Hedge funds had been massively long riding the bull and are now unwinding positions. VIP Traders Club members are positioned for the bear.
So allow me to point out a few of the trends that I believe will dominate the year ahead.
- The EV Revolution will screech to a halt – and likely go into reverse. The pathfinder flare for this has already been laid. Next come the incendiary bombs. Tesla shares have collapsed over 70%. This company has dominated EV sales and the EV narrative for years. Now, a senior Toyota executive has publicly put his head above the parapet and said as much. He points out the obvious problem of where all the additional electricity will come from if fossil fuels are being phased out.
- The UK economy will be depressed further than most economists predict. House prices will fall for the first time in years and consumer spending will remain under pressure.
- The China economy will implode. Real estate is in a depression, global trade is weakening and the EV Revolution is dying (see above). And the misguided ZeroCovid policy is being reversed into a largely unvaccinated public. What could possibly go wrong?
- In fact, all major economies will enter depressions with stocks aligned.
- The US Dollar will reverse strongly.
- Crude oil prices will surge possibly to new highs above $200
The coming carnage I have been highlighting in recent blogs will really step up a few gears starting in January. I see several MSM pundits trot out the perennial soothing end-of-year advice to ‘Be optimistic and invest in shares for the long pull’. Yes, if you are willing to sit on major draw-downs (and a few company bankruptcies along the way) and hold for well over five years, then fine.
Personally, I see no merit or even logic whatever in investing in shares when you expect them to fall. You could instead either invest in sectors where you believe valuations will improve, or just sit on cash (in an interest bearing account). The big problem for most investors is that they have been brainwashed into believing you must always be invested in shares – the whole investment industry depends on it. That belief will be sorely tested in 2023.
We are constantly told that equities out-perform most other sectors including bonds over a 10-year period. Let me ask – does anyone today have a 10-year holding period in mind when they decide to invest in a particular share or fund? I guess very few. We all want results – and we want them now (or at least by next month!).
And does this ‘outperform’ record ensure actual profits? Of course not. In ten years, assets of all stripes could have lost value (inflation adjusted) with some losing less than others. Would you call that a success? Me neither.
In fact with today’s current price inflation, there must be precious few sectors that are yielding a positive real return. Even high yielding shares (such as the oil majors) are yielding less than the inflation rate. Of course, most expect inflation to keep falling but a resurgence in energy markets – currently under pressure) could scupper that plan.
And I note that food prices (including the US grains) are back in rally mode and could once again become a major problem for the world’s poor. Social unrest would magnify.
If the US economy remains under pressure next year, will the Fed be able to right the ship with rate cuts? That is the burning question on Wall Street. So once again, here is how the Fed really operates:
Take a moment to study this chart. It is clear proof that the Fed follows the market, not leads it. Of course, over 99.99% of market participants and pundits believe otherwise. Many make very lucrative careers out of promulgating this false myth. It’s a strange world!
Incidentally, that fact alone should cause every thoughtful person to question all of the other popular myths that are promoted by the MSM and conventional economists (such as gold always trades against the dollar, and that it is the fundamentals that drive asset prices).
The Fed Fund rate rises in this period lags the market by a few weeks. Yes, it simply notes what the 6-mo T-Bill market rate is trading at (a relatively free commercial market) – and matches it with the lag. How can it do otherwise? So forget all the learned blather surrounding the Fed.
It does this because the Fed does business at the same rate as the market and would disrupt it otherwise.
The one policy that makes a difference to the markets is in its asset purchases (QE) and sales (QT) activities. And today it is engaged in QT – a very rare event in its 100 year history (see previous blogs).
Here is the 3-mo Eurodollar chart which closely matches the T-Bill chart
It made a major low (high in rate) in November and has been in correction mode as traders became excited about the Fed being poised to pivot to ‘combat inflation’.
But I see the recent rally as a normal correction in an ongoing major bear market and if so, the Fed will match the market again. If rates stay more or less where they are, I see another 50 bps on January 26th. But if they rise this month, I see another 75 bps (or more) – and that should provoke another sharp share correction phase as the disappointed bulls would bale out big time.
That is why January should provide more fireworks to kick off the New Year.
My Risk On/Risk Off Indicator flashes Bear
Tesla and Bitcoin are my Dynamic Duo of the state of general market sentiment and last week both plumbed new lows
Each has lost about 70% off their ATHs – a remarkable ‘coincidence’ since the two markets are vastly different. Tesla makes EVs and Bitcoin is just a few lines of computer code. They could not be more diverse yet the price charts look similar and both have lost about the same.
Evidently, it is not the ‘fundamentals’ that are driving these two markets (see above).
So I have a question. If this performance is telling me the general market is feeling very negative about the economic future, how to explain the huge Fib 76% retrace in the Dow off the October lows (although the other major US indexes have retraced far less)? There is an obvious mis-match.
In terms of sentiment , just about all of the current surveys and economic data point to a weakening US economy and negative consumer sentiment. Last week I pointed to a sub-50 PMI Global Index reading that points to a sharply slowing global economy.
As I see it, the Dow contains mostly ‘value’ shares that stand in stark contrast to the massive sell-off in ‘growth’ tech shares (such as Netflix, Amazon, Meta). As tough times approach, investors believe safety lies in solid dividend-paying companies such as Caterpillar (which is actually approaching new ATHs).
Compare earth-moving Caterpillar (2% dividend yield) with Metaverse Meta (zero% yield) which is trading is at 8-year lows. What a contrast! It is certainly true that the stock market is a market of stocks.
And how better to highlight the pie-in-the-sky valuations of Big Tech compared with the real world? Maybe one day, the metaverse will yield massive income streams but so far it is an interesting toy in Facebook’s labs.
However, I have found that when a brand new concept arrives on the scene, it is readily accepted only when basic market sentiment remains positive (or manic, as was the case last year). Sadly for Facebook, Mr Z has his timing wrong. Investors are not now asking what can go right as they did until a year ago, but what can go wrong?
The glass is definitely half full – and still draining, although decent rebounds are likely. In fact for Pro Shares members, I have pointed to this possibility near term.
Will 2023 kick off just like 2022?
If you can recall that long ago, when markets re-opened for the New Year on Tuesday 4 January, the Dow made an ATH in overnight trading but when New York opened the rot started to set in and it has been downhill all the way (with major bumps!). The 4 January high marked the ATH in the Dow and the S&P. All indexes are down from that date (the Nasdaq lead the way with its ATH earlier set in November).
While that exact replay is highly unlikely – the Dow is off 24% from the ATH – but we should see a similar trend in the New Year.
To give an example of how I use Elliott waves as a critical component in my analysis, here is the updated 2-hr Dow chart with my best guess wave labels.
The wave 2 spike high on 13 December was set at 34,950 and has dropped 2,500 pts since to my wave 1 low in five clear sub-waves (main trend now down). The complex rally off that low is corrective wave 2 and I am now able to identify the pattern as a five-wave triangle with clear sub-waves. Until today, the wave 2 pattern was unclear.
If this is correct, wave 3/3 is starting now and the evidence will be to see severe breaks early in the New Year. A move below the wave 1 low at 32,800 would be helpful. Only a move above my ‘e’ wave high at 33,300 would be a slight problem.
Why slight? Simply because the trend-determining factor is the five waves down off the wave 2 high which sets the seal as the driver of the main bear trend. All rallies off the wave 1 low will be second (corrective) waves. The only requirement for this as a second wave is that it must not move above the 13 December wave 2 high at 34,950.
In this way, second wave tops can be tricky to judge and we must be open to several possibilities.
Thus, a surge in buying in the New Year could materialise to push the index up above the wave ‘a’ high at 33,500. Here is that alternate option:
The most common percent retracement for a second wave is either at the Fib 50% or the 62%. So if the market chooses to rally, these would be my targets. My wave 2 has retraced a Fib 38% to the ‘a’ wave high already which also is an area of strong chart resistance. If this holds, the retrace would be shallow – and point to a strong downside now.
Thus, my main option is for that level to hold and for shares to begin a decline near term. But my alternate option is certainly not off the table by any means.
Market action in the first week of 2023 should point the way. But in the medium term, both options tell the same story – after wave 2 tops, shares will strongly sell off in wave 3/3 as the carnage develops.
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The Ags surge
Last week I covered the Wheat market where I had a very bullish take. That was based on analysis of the chart patterns and very bearish sentiment. And as a terrific demonstration of how the news follows the market, while Wheat was advancing, news emerged last week of the ‘bomb cyclone’ hitting North America with super-low temperatures and huge snow falls.
For Wheat seedlings in the ground in the Mid-West and on the Canadian prairies, this is a shock to the system and concern was instantly raised about how much damage to this season’s US and Canadian crop would be caused. Also, Ukraine is usually a major producer and with the ongoing conflict there, concern is being raised about the size its next crop.
But as is so often the case, the market has anticipated these events by staging a rally You may ask how does it do this – does it have a working crystal ball? Are there ‘insiders’ with special powers of foresight? I will let the philosophers figure that one out.
I recently sent VIP Traders Club members a Special Report on Soybeans alerting them to the likelihood of a massive bull run ahead. This is the 29 November chart I used to base my analysis:
My first target was 1500 and second target at the gap at 1550. Yesterday it traded up to 1540.
I am very excited about our prospects for 2023 – I hope you are too!
Wishing you all a very prosperous New Year!