Nuclear is going nuclear
The Magnificent Seven (M7) has now become just about the only game in town (except for our Uranium shares for Pro Shares). At 30% of the S&P 500 market cap, they dominate the Nasdaq as well – but notably not the small cap non-tech Russell 2000 that lags. Investors have latched on to the ‘soft landing’ scenario with visions of much lower interest rates soon.
This is all part of the general extreme optimism that the US has avoided the deep recession that was flagged by the wide yield curve inversion that has been now in force for many months. But since history tells us that it is only when the yield curve inversion corrects (de-inverts) that a recession becomes almost certain. And that hasn’t happened yet.
But will a recession occur in 2024? Some major sectors already have, if not a depression. The sector with the highest hopes for an economic advance is our old friend the New Electrical Age, powered by ‘renewables’ and phasing out fossil. I have highlighted the total disaster that ‘green’ investments have been with shares in wind and solar crashing. Likewise the price of lithium carbonate for EV batteries is crashing (off 78% from peak) from over-supply and weaker uptake of EVs than planned around the world.
So how is the flag bearer for the EV revolution – Tesla – behaving?
With shares having lost 44% off their high, can we say Tesla is still a ‘growth’ share in the same league as, say, Nvidia? This latter share has been the major focus of attention for momentum chasers and with last week’s Q3 blockbuster earnings report, they had plenty of ammo to fire up their enthusiasm to the skies.
But since economic data is always backward-looking, have we seen the greatest part of their earnings curve with China now slowing from Biden’s sanctions? Here is an interesting idea – could last week’s $509 high place a Double Top on the charts?
So far, Nvidia is the only supplier of the advanced chips needed for AI – and they are cashing in. But does anyone think that situation will remain for much longer? I am sure others have been working on producing these lucrative components and next year should see such developments. By that time, perhaps Nvidia shares will have given advanced warning they will have competition coming.
I gave the same reasoning nearly two years ago for Tesla when it was about the only major EV supplier, arguing that many more brands would appear to supply the new market. That was about the time of the Tesla ATH. And we now have hundreds of EV makers.
Another sign the EV revolution has failed is the performance of two other manufacturers. Nio has lost 90% off its January 2021 ATH and Lucid has lost 94% off its ATH. Both are plumbing new depths. The question is: How low will Tesla reach?
Incidentally, last week was a clear weekly key reversal pattern for Nvidia – a usually reliable signal to expect at least a decent correction directly ahead.
Has nuclear gone nuclear?
While the obvious limitations of wind and solar to power grids become ever more apparent, the focus is now on how to supply baseload power in its place after fossil fuels have been eradicated. And ever so gradually, the penny is dropping of the benefits of nuclear to policy makers (they are terribly slow to change course. Doing so involves work and thought).
Here is the largest miner the well established Canadian uranium operator Cameco
That’s what I call a bull market! It has gained over 700% off its 2020 low but note that the market got wind (pun!) of today’s change of heart towards nuclear over three years ago when there was no appetite for building any new nuclear plants. That is what markets do – they forecast future events.
Incidentally, this 700%+gain matches that of Nvidia over the same period. Surely, a coincidence?
US Economic indicators are weakening
While the stock market is not the economy, markets do operate under the constraints of the macro trends – eventually. I believe we are in a momentum blow-off in the stock indexes as the gradual pull of economic factors will change investors’ behaviour.
And recent data from the Fed shows that their Leading Economic Indicator (LEI) declined again for the 19th successive month. This is the longest streak since Lehman (remember 2008?)
This does not suggest a ‘soft landing’ does it? In fact, it strongly suggests a pretty hard one given today’s extreme investor optimism and higher interest rates.
Since the US GBP comprises about 75% consumer spending, retail sales is a vital component of the economy. It therefore pays to watch trends in retail – and that is not so bullish.
Walmart is the largest retailer in the US and is considered its litmus test of retail
Latest earnings were weak and sent the shares down hard. That is the latest Key Weekly Reversal signal from its ATH. Note that all other major highs were marked with this pattern. Although this is not a definitive 100% sure thing bear signal, it would take a move to new highs to cancel it out.
And with the critical Christmas season approaching as consumers are cutting back with credit card use at records just to pay for essentials, the odds for a blow-out retail season are slim. And Walmart shares are priced still for perfection (as are so many others).
Also of note is the record high stock buy-backs last week from the US Big Names that have helped propel the M7 and others to greater heights . The CFOs of major corporations are mostly human and obey the same laws of human behaviour as do most of us, including GroupThink and extremes of confidence. But historically, when companies buy back large chunks of their shares on the market, that coincides with tops of some sort. Very few companies can keep buying their shares ad infinitum.
Another aspect of share buy-backs is that the company boards cannot find a more profitable use of capital in building their businesses with revenue-generating investments. They instead reduce the number of shares outstanding boost share values and hence attract more share buying by momentum investors at higher prices – with the added obvious benefit to officers and employees with enhanced values of share options. What’s not to like?
So where are we now?
The number and strength of the negatives are piling up while the US indexes sail on to new highs over the towering Wall of Worry. Bad news has been very good for shares – as it often has in the past. But a Day of Reckoning must come – unless the economic picture suddenly reverts. Is that likely?
One way in which it can is a sharp decline in interest rates. As I have shown many times, it is the market that determines rates, not the Fed. The Fed follows the market ALWAYS. That makes all of the screeds of Fed prognostication in the media virtually pointless (unless for measuring sentiment purposes). Of much greater relevance is the charts and what they can tell us.
The 30-yr Treasury bond has rallied (yields lower) off the late October lows as short term rates have eased and inflation worries subside. This has given heart to the stock bulls who have been calling for a rapid easing of rates.
But the form of the rally is a clear three up to a Fib 62% on a strong mom div. That is corrective. That places immediate odds high for a resumed ‘surprise’ resumption of the decline (higher yields). Of course, that would be a negative for shares.
Also of note is the now surging Gold and Silver (flagged here recently). Yesterday, Gold came within almost a Handful of Dollars to a new high in the sudden turnaround from recent low of early October after a very quiet phase. The rapid $200 advance suggests something new has entered the market, such as a flight to (perceived) safety.
So what could be frightening the new Gold Bugs? It seems much of the buying is coming from China which has a well-publicised real estate disaster in progress. Asians have always had the most developed love for Gold and this could be re-surfacing as a flight from their economic woes.
In addition, the US still has the small and medium banks crisis bubbling away that blew up Silicon Valley Bank earlier this year. Money is still flowing out of many of these banks and putting them in greater peril. I believe it is only a question of time before another large institution’s problems hit the headlines. And if interest rates begin another round of Treasury-inspired boosts (see above), that will happen sooner than later.
Next year, many bonds and mortgages that were taken out with near zero rates will need to be rolled over – but at much higher rates. That will put a strain on personal finances as well as on companies. And of course, sovereign debt piles keep growing with strain on public finances, especially here in the UK.
Of course, all of this could leave stock indexes unaffected as Bad news could still be Good for a time.
Here is an alternate option in the Dow (suggested by a subscriber):
In this scenario, I have an excellent tramline pair from 2019 with multiple touch points and my ‘old’ wave 5 high of November 2021 is now wave 3. We are now in a large wave 5 up and about to break the upper wedge line. If the market is destined to meet the upper tramline, my target is around 45,000.
But with the strong MACD mom div and the record overbought MACD, it would take a massive degree of buying power to overcome these hurdles.
The Hemline Indicator – does it still work?
This venerable fun indicator has been used for years when skirt lengths were extreme – when skirt hems are low, the bears are in charge and vice versa. Few women wear skirts these days, but they do wear leg coverings – sometimes!
At a recent fashion show, the ‘designers’ jumped the shark and sent my Hemline Indicator whizzing aimlessly around maniacally. Hot pants were coming back from the 1960s but the ‘designer’ has gone one step further. Where’s the hem? For that matter, where are the pants?
With no pants, this look is sure to command a very high premium in the topsy turvy world we now inhabit.