I have been describing a whole slew of sentiment indicators here from the COT, AAII surveys, Investors Intelligence surveys, DSI surveys and all are saying the same thing loud and clear – bullish mania is extreme.  Of course, these indicators are no magic timing indicators where you can confidently base your trading entries in a contrarian play.  For that, I use my time-tested Tramline Trading techniques. But they are saying the air is pretty thin up here and if this carries on much longer, the helium balloon will pop.

As another measure of how one-sided these markets have become, here is yet another fascinating chart I recently came across on Bloomberg of the NAAIM survey (National Association of Active Investment Managers) that very helpfully publishes the percentage of managers who always consider themselves bearish on stocks.  These are managers who are always taking a bearish stance on at least some equities.

In an amazing about-turn, its latest reading puts those bears now suddenly almost fully bullish where they were steadfastly bearish only recently.  Note that you have to go back before 2007 to find an equal bullish reading (and that period took in the previous 2007/8 highs before the Credit Crunch). What an amazing turn-around! Naturally, those describing themselves as bullish remain so.  This puts the vast majority of their members massively bullish – with nary a bear in sight.  This is highly unusual.

That folks, is the power of herding in one chart. The bears just couldn’t stand the pain any more as they saw up closes day after day and in one fell swoop, threw in the towel more or less in unison.  It follows the age-old observation that investors buy at the top and sell at the bottom.

So now many indexes are pushing up against their major trendline resistance (see charts in previous blogpost) and with the major sentiment indicators off the scale, the conditions are ripe for a major turn ahead.

But that does not mean the markets will start falling today, tomorrow, next week or next month.  Sentiment can remain elevated for some time before a turn appears,

As yet further evidence that this asset mania is reaching a peak, the yield on euro company junk bonds (issued by the riskiest of companies) now is lower than that from US Treasuries (always considered the very bluest of blue chip entities). Not only that, but the crazy eurozone central bank policies have pushed sovereign debt yields to below zero (every bond holder to maturity is guaranteed to lose money).  Does any of this make sense?  It does only if you assume the US government today is a riskier borrower than the riskiest and flakiest of EZ companies.

Also it makes sense if you believe the euro currency will be much stronger at bond maturity (in 10 years) than today.  Of course, this goes along with the current bullish euro sentiment.  But that is placing great faith in your ability to forecast where the euro will trade 10 years from now – a skill not given to many.

If the latter is true, US shares are standing on the brink of a precipice because confidence in the US economy will have collapsed.  But to me, that day has not arrived and it is the EZ that will likely crack first.

And what are the chances of the Dow and S&P pushing above their major resistance trendlines?  If the sentiment indicators provided by reading the tone of current MSM opinion is a clue, then the rallies have every likelihood of extending in the near-term at least.  I heard last week on BBC Radio 4 – that most mainstream of media – a money manager proclaiming the markets will suffer very steep declines soon.

Because it is not often that such a strong forward-looking market prediction appears on Radio 4 (usually they are pretty bland and backward-looking commentary), we should note it.  And they are not alone – many other financial journalists are of the same opinion.  That makes it less likely in the near term.

For instance, that perma-doom merchant Ambrose Evans-Pritchard in Friday’s Telegraph spells out the disaster that awaits: “The cautionary tale of 1965 – Why the Federal Reserve could be sitting on an inflationary time bomb”.  In fact, the Dow was off by 40% by summer 1965 as inflationary pressures built.

But as they say, this time is different!  We now have globalisation and QE, along with record low interest rates.  And companies have been buying back their shares avidly.  In any case, we now know that the markets do not run on the data.  By my reckoning, we have at least one more down/up in the Dow to reach my original target above 23,000.

So how are we doing on this path?  Here is latest Dow chart showing the market eager to push above the major trendline I have been running for some time:

But note the very strong momentum divergence that indicates the weakening buying power this month into the rally. All things being equal (but they usually are not), a decline lies directly ahead.  Will this be my wave 4 of 5?

The brick wall lies up just ahead.

 

Gold hits another of my targets

Last week, I showed this chart

which shows my downside target at $1260 hit with high accuracy and then I forecast a rally to at least my next target at the $1300 area, which was nicely hit on Friday.  Here is the updated chart

With latest COT data that shows hedge funds barely amending their hugely over-bought position, I believe this rally will not be the start of a major thrust to above the $1350 level soon. Even if shares start a large decline soon, the Fib 62% at around $1320 should be the extent of it.  And if shares keep the rally alive, the Fib 50% at around $1310 should be it.

At the VIP Traders Club we are also trading silver which has made slightly more upside progress last week

We caught the low and added to our established long positions taken much lower. As with gold, we have an ominous momentum divergence and trade close to the Fib 50% at 17.50 which could be a turning point.

I believe the gold and silver charts will start to look more complex with several moves in threes up and down. But in any case, we have superb positions in both and will be looking to take profits soon.

 

I expect next week to provide more scares in many markets as we run up to Halloween.

 

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