Last time, I outlined the price levels in the S&P (and hence in the more popular Dow) which defined the limits I placed to determine the start of a new trend. And in fact, these levels have been remarkably accurate and useful in setting trades. If you knew nothing else about the stock market, any one could have used these levels as trade entries. That was a freebie for my loyal readers!
Actually, I maintain knowing nothing much about the stock market is a great advantage to investors and traders alike. How many of us avidly devour all the news, comment and analysis of individual shares – and even bone up on economic theory and follow the many pundits out there – in an effort to have the essential ‘edge’ in making smart investing/trading decisions?
And how many times have we been fooled? That is because one of the essential missing elements is timing. We can all be right on a trend, but if you are buying near a major high or shorting near a major low, you will suffer a loss. And make no mistake – a ‘paper’ loss is still a loss in your account. Yes, you may be lucky and the trade comes right but in my world, luck/hope is not a rational strategy. But my tramline method is.
Here is the S&P chart I posted to VIP Traders Club members last week as the S&P was attempting to make a new high – and possibly nix my wave 2 label
At that time, the index had just pushed slightly above my upper line in the sand (heavy blue line) in what I labeled wave 2. But with the sharp retreat, it created a likely ‘overshoot’ that heralded a sharp move down to the lower blue wedge line in a third wave.
That was when I issued a Flash Alert to VIP Traders Club members to short US indexes (as well as the DAX). Catching a major move very near the turn is an art I have developed.
And this is the current picture as of yesterday’s close
Not only has my lower line in the sand been broken, but we now have a weekly key reversal which often heralds a major reversal. All of the way along my wedge, the advancing waves have been highly overlapping, which indicates a lack of conviction of the bull.
I am now bearish against the high at 2941.
Every month, all eyes on Wall Street are fixed on the monthly Jobs data – and yesterday’s was considered very bullish for the economy (with upward revisions for prior months). And in a superb illustration of why the stock market is not the economy, shares took a major hit – especially tech. And it seems my long-established forecast that the next bear stock market will coincide with a rapid increase in interest rates is coming to pass.
2018 will go down in history as an historic year
Make no mistake, last week’s market action is marking the end of a very long era – the era of investment manias that have grown to mammoth proportions since at least WW2. And with central banks ballooning the money supply (out of thin air) over the last ten years, the whole concept of money and wealth has become massively distorted. The convention is fiat money has to be ‘invested’ and cash deposits shunned.
Yes, Cash was Trash but now will become King.
Over the years, the cult of common share ownership has become solidly entrenched among not only the institutions (pension funds, insurance companies, mutual funds) but also the ‘man on the street’. And in general, that has been a profitable strategy during the long bull market since the thirties. Now that it has become the ‘obvious’ road to riches and wealth accumulation for almost everyone, the game is now changing.
I forecast that in a few years time, shares will be considered toxic, as will property ownership. In fact, the only ‘smart; investment will be cash money. But with economic turmoil directly ahead, who knows which currency will flourish? Today, it appears the US dollar as the world’s reserve currency will continue to dominate – but for how much longer?
Last week marked a very clear sea change in risk tolerance, of which the stock market is the most accurate barometer. One of my favourite markets to display risk-on/risk-off behaviour is the Junk Bond Index. These equity-like bonds of the most risky companies offer a higher yield than can be obtained from the ‘safe’ US Treasuries – and the spread has narrowed to a whisker as investors/gamblers stretch ever further for a little extra yield.
But last week, I believe we have seen a major top in these bonds and yields are set to rise dramatically
Note the overlapping waves in the final advance – similar to the action in the S&P.
Watch out below!
Wheat is now poised to resume rally phase
We have been trading this commodity for some time and in a very difficult period! Many of my budding rallies have been thwarted but I believe a more sustained rally phase is under way
We managed to ride the superb rally earlier in the year to the $6 high in early August as hot dry weather hit many growing regions. Since then, the bears took over as they pointed to record stockpiles but the down-ward action appears corrective with highly overlapping waves (which are the trickiest to navigate for a trader!).
But now I have an excellent tramline pair in place and with the break up out of the channel, odds are high the rally can resume.
Note the resistance bar on the momentum indicator. When that gives way, we shall see giant leaps.
Some sentiment observations
If I am correct and US indexes have put in major tops last week, then these highs have coincided with extreme sentiment measures, as I pointed out last time. US Consumer Confidence Index hit an ATH, jobs are being created at a rate of knots, inflation expectations are high (demand high), yield spreads are very narrow, small business owners are raising wages, and everything in the garden is fine.
I repeat – markets make major highs when times are great and virtually no-one sees trouble ahead. A while ago, I posted the results of my Google search for the terms “recession in 2019” and “economic growth in 2019”. Today, there are 12 million hits for the former and 144 million of the latter.
But that is a swing from the 4 or 5 hits for recession I found earlier this summer! So under the surface as the stock indexes were making new highs last week, not only was there a growing fear of recession but the advance was being lead by a diminishing number of generals. Now the generals are giving up too.
I’m sure the pantomime of the Tesla saga is entertaining you as much as me with Musk pitting himself against the world. So many have bought into his ‘genius’ and ‘vision’ and his current flame-out is timed perfectly for a major market turn. His investors will lose faith in him as the shares slide – and another messianic figure bites the dust as the bear growls. That’s what happens in a mania after the peak.
And the phenomenon of Trump likewise continues to entertain. He has had a good run with tax cuts (but not for his supporters) but as the markets slide, he will rapidly lose any popularity he has left. He may not even survive his full term if the collapse is deep enough.
Over here across the pond, Brexit negotiations are apparently going swimmingly with a boost to sterling, but any deal agreed with the EU will find it very tough going in Parliament and I foresee major bust-ups.
Over in my Pro Shares service, we are still short UK banks including Lloyds and Barclays which still lead the way down for the FTSE 100. Not many observers have noticed this, but when banks lead the charge lower, it spells curtains for the rest of the market (as it did ten years ago)
Yes, the scene is set for massive upheavals to the status quo and we are fully prepared for the changes to come.