Now, even the bears are bullish!

Thursday was a pivotal day in the ebullient financial markets. The Dow had made a record-setting 16 consecutive up closes in the US trading sessions up until Wednesday – but then ran into a brick wall and closed lower on the day. And the S&P rose to meet my upper tramline target that I have had in place for the past few weeks and so achieved my major upside target at the 4600 level. And the US dollar reversed sharply to up and has started a major rally phase.

Bullish sentiment remains off the scale with all of my measures showing manic extremes, lead by Big Tech as it chases the AI dream. Of major note is the latest revelation that even the professional bears have now turned bullish – here is a revealing chart

Today, the Most Bearish are net long and the previous times when that occurred was at most of the previous major tops. The odds are that this reading coincides with a major top area.

And one more clue that investors are so committed to the bull in this from Bloomberg: This cheery outlook has sent the S&P 500 to the brink of its sixth advance in seven months and pushed prices in the Nasdaq 100 to almost 35 times profit. It’s heaven for bulls—even as it leaves them with precious little wiggle room should anything in the economy or monetary policy not unfold as hoped. “It’s dangerous and consensus, but it’s late July, so who feels like fighting it?” said Peter Tchir, head of macro strategy at Academy Securities. “We are now at stage where people feel obligated to fully commit capital.”

In other words, the FOMO Effect has totally gripped investors as no-one can afford to be left behind in the performance tables. That would be professional suicide. But this is coming after a major runup – not near a major low where the FOMO Effect would be most useful.

And so the scene is set for one heck of a major disappointment. I am not sure if it will be early next week or perhaps a little further down the road – I need a little more chart development to give me some more clues.

And here is one more quote: “UK economy left behind as the US heads for an immaculate soft landing“. Yes, we are all now bought into the ‘Goldilocks’ scenario where the economy is not too hot nor too cold as the Fed has miraculously engineered the just-right interest rates and money supply to tame inflation, calm the markets and keep GDP up (latest Q2 data was positive).

Of course, we know that consumer and producer price inflation is largely a function of oil prices. And following the recent plunge to the $64 May low that lowered recent inflation figures, it has since risen to a new high at $80 (a jump of 25%) and climbing. This will produce higher inflation figures in the autumn and winter – and impact investors’ thinking (negatively).

The Nasdaq certainly appears at or very near the major wave 2 top of the rally off the October lows:

Either we shall see an immediate turn lower from Monday or a push to a new high to meet the upper trendline and then the reversal. That is my best guess. Of course, if it can push substantially above the16,000 mark, then all bets are off. But the extreme sentiment picture places this at lower odds.

Is China about to surge?

Most investors have given up on Chinese equities with talk of a weak economy, high youth unemployment (some say 25%) and a disastrous housing sector. Evidently, China has the opposite housing problem than the UK – they have built too many hones and are suffering a glut with collapsing prices. If only China and the UK could get together and exchange ideas!

Of course, the modern Chinese economy is very young and is suffering the usual growing pains exacerbated by the massive and unsustainable headlong all-or-nothing GDP growth of well over 10% pa for the early years (until recently). And Chinese shares have reflected the current slowdown in growth with massive falls.

But in the West, our economies are very old and suffering the creaking pains of old age with governments being the dead hands bearing down on the real economy (high taxes and regulation) while the e-economy is left as the only sector that offers hope for massive growth potential for investors. That is why Big Tech investment is the only game in town today.

But I see signs of a renaissance in China – take a look at the A50 index of the 50 largest cap companies:

The ATH in early 2021 lead to the 2.5 year bear market as GDP growth slowed to less than 5% and property prices crashed. Sentiment plummeted. The index lost about 50% in value to the October 2022 low. Many early investors in China lost a heap of money and professionals turned their back on China.

But note the very choppy overlapping waves on the way down – nine of them in fact. And this nine wave pattern is a recognised corrective pattern in EWT. And last week, the market pushed up above my upper tramline – a highly significant event. With the momentum indicators below showing a likely solid reversal of trend with a mom div in the Stochastics, odds are very high we have a new strong bull phase under way.

So with the US showing manic bullish sentiment and China still remaining under very bearish sentiment (but advancing), I am making a case for buying China/selling US. For Pro Shares clients, we have been buying Alibaba – the mammoth Amazon-like Chinese operation.

We are also long NIO – the Chinese EV maker which has surged this week as it prepares to enter the UK (and other ) market with ‘cheap’ vehicles:

It made a 90% loss to the $7 June low abut since has rocketed up to the current $14 – a gain of 100%. It appears there is more to come and could surprise to the upside.

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Last week, the dollar likely reversed

Bearish sentiment on the US greenback has been building in recent months as its value has declined relentlessly off the October 2022 high having lost 15% in value.. But last week, it plunged to meet the Fib 62% retrace and on a very strong mom div indicated by the MACD and Stochastics.

This is a textbook setup for a major reversal up in a bull phase that should last weeks/months. If so, this should coincide with a turn lower in US equities. In fact, while the dollar was making its high back in October, US share indexes made their lows. There is a good correlation between them.

And if this correlation continues, as I expect, a higher dollar should deter international investors from investing in US shares and even induce liquidation especially of the very expensive Big Tech names that have produced such massive gains. Such as Tesla:

It is off its late 2021 ATH and has made a possible three up to the precise Fib 62% retrace but has moved above the upper tramline. Any move below the tramline would set up the false breakout and herald a move lower.

So will the ‘cheaper’ Chinese EVs knock Tesla off its perch? Tesla has succeeded by selling its very expensive vehicles to mainly corporate and wealthier individuals but has hardly penetrated the mass market where the Chinese will certainly dominate. With lease costs high as high interest rates dominate, unless Tesla can somehow find a way to produce much cheaper vehicles, its fate may be sealed and Mr Musk can devote more of his time to making the Twitter name change work.

One further thought on the Net Zero fantasy – the UK government is starting to row back on its commitments as voter backlash is now a significant growing factor and follows my prediction that its current law to outlaw sales of new fossil fuelled vehicles after 2030 will be ‘amended’. Already, it has tweaked this law by allowing the use of ‘synthetic’ hydrocarbons after 2030, although such fuel is hideously expensive at six times that of petrol.

They are boxing themselves into a major corner as no new magical new ‘green’ cheap plentiful fuel solution has yet been found (and is highly unlikely to be so). With this major flip-flopping by governments (as some see the brick wall looming), investments in new fossil fuel sources are being deterred – with the inevitable result that oil prices are rising.

This is the usual traditional ‘unintended consequence’ of their Net Zero policies. And with the Net Zero concept a very malleable one – but what does it actually mean? The UK is said to be lowering CO2 production but that is due to the off-shoring of industry to places like China whose CO2 production is increasing.

You can bet our boots that politicians will find lots of weasel words to claim victory no matter what the real situation is.

So when will a major US politician stand up against the consensus of a ‘climate emergency’? With the US elections a little over a year away, time is running out to put the brakes on the mammoth Save the Planet gravy train that will destroy the world’s economy (except possibly for China as it builds ever more coal-fired plants to keep its factory lights on).

The premise of the Just Stop Oil fanatics is wrong. Without oil and its many benefits (transport, electricity, plastics, pharmaceuticals, building materials and so on) the world will go back to the Stone Age, or at least the Iron Age (provided we can smelt the ore using wind power alone!).

And the carbon dioxide emitted is truly green as it is an essential plant food and increases crop yields to feed the world. So will we see a Bring on Oil movement soon?