One step closer to the edge
With the US earnings season about at an end, there have been many ‘beats’ with banks at the fore. Here is the daily chart of the venerable JPMorgan Chase bank shares
The decline off the November 2021 ATH is in a clear five impulsive waves and the rally off the October 2022 low has a clear three up look. The recent results has encouraged investors to push the shares up to the Fib 76% retrace but to very overbought levels (the RSI reading is at the most overbought on the chart since 2020 ).
And according to EWT, the next big move from here will be down. Shares may advance a little more in coming days or they may not. The key level is the ATH. So long as shares remain under that, we have a bear market rally that will end with a sharp decline lasting many weeks and months.
And retail banks have advanced in tandem – and this in the face of rising mortgage rates, rolling over house prices and rising company bankruptcies especially from commercial real estate. The outlook for the economy appears murky at best and bank earnings do more or less move with the state of the economy.
So can bank shares continue advancing if conditions worsen with a fall into a recession? Many see a mild recession as no problem – the recovery will be swift as interest rates will top out and then fall as the Fed acts to cap the hikes. That is the bulls’ theory at any rate.
So as I laid out last week, manic bullishness has reached extreme levels with nary a bear in sight – most of the prominent bears have thrown in the towel in the face of the relentless buying. Here is today’s Bloomberg take on the state of play:
Less than 20 months after it began, the bear market that engulfed the S&P 500 during the pandemic is a mere 260 points from being completely erased. Chart patterns tracking everything from cross-asset momentum to transportation companies are painting a picture of burgeoning economic vigor. That said, some signals coming from the US economy are nowhere near as buoyant—and Federal Reserve policy makers sound only slightly less worried about inflation now than they did then, despite it having slowed precipitously this year. But investors aren’t worried: they just pushed stocks up for the eighth time in 10 weeks. Should the optimism persist, last year’s bear market has a shot at being unwound faster than all but three of its predecessors since World War II. “I’m shocked that the Fed has really pulled off the soft landing and everybody is caught underweight equity exposure,” said Dennis Davitt, co-manager of the MDP Low Volatility Fund, who recently adjusted its positions to prepare for more market upside. “As people have to get right sized on their portfolio, they’re going to have to come in and buy, and every day gets harder.”
You really can’t get any more positive than that, can you? Yes, this is herding to the max and now everyone believes that shares will keep advancing. It’s obvious, isn’t it? The Wall of Worry will be overcome!
Do you have to be an idiot to believe they will start to fall – and fall hard? (Remember, Joe Granville would suggest that the majority is obviously wrong here.)
Before you answer than question, keep in mind that in every and all cases, bull markets end when bullish sentiment is positive – and the more extreme and manic and more sure the bulls become in their stance, the harder they will eventually fall as some event appears out of left field. History tells us that. So is this time different?
The AAII organisation of mom ‘n pop US investors is a well-established treasure trove of the state of stock market sentiment. Basically, when they become in love wish shares (a rare event as they are mostly conservative older investors who like income). This week, the poll of their members revealed that only 18% are bearish – a record low. This compares with a figure of 23% at the November 2021 ATHs. So they are even less bearish than at the peaks 20 months ago.
In addition, the bullish percentage of AAII investors has just last week exceeded that at the November 2021 ATHs. Another extreme.
Above I mentioned that investors are extreme herding. This is an unconscious and irrational urge to belong to a group that all humans possess. Just go to any music festival this summer and see this in action for yourself. If your friends think a certain pop group is great, you will tend to agree if you want to stay friends with them! This produces a snowball effect that for a chosen few performers leads them to the top of the heap with armies of fans.
And most members of armies believe it is the brotherhood that keeps them banded together – fighting for a common cause (whipped up by the politicians, of course).
It’s the same effect with investors and the media (who egg them on). Add in the FOMO effect and the need not to be left behind with sub-standard performance and you have the recipe for the classic manic bull market that we are seeing.
It is those that can step back from the mania and rationally conclude that the excesses today must end as all parties must that can assess the perilous state of today’s markets.
We have bubbles of massive proportions and none more so than the AI revolution.
Last week I pointed out that the leading share of the current AI obsession NVIDIA had rocketed up from $150 in January to the current $480 – a gain of 220% in only seven months. But it was potentially forming a topping pattern I showed in last week’s chart
The key pattern is the tramline pair that contained the lovely five-wave pattern with wave 5 forming an overshoot (bearish). The implication last week was that if the $480 wave 5 high could not be exceeded, this overshoot would signal a sharp move down to at least test the lower tramline. This is what happened last week:
And sure enough, the shares moved down as forecast by the overshoot to approach the lower tramline. Now the pattern is a clear ending diagonal in five waves with all the necessary mom divs in place. And a break of critical tramline support around $430 would cement my bearish message and herald a sharp move lower. Only a move above $480 wold nix this forecast.
Are there any more clues that stock markets have reached major tops? Here is the Nasdaq that has lead the charge higher with the Magnificent Seven up front:
On Wednesday it surged up to a high at 15,930 on the back of great tech results and then started a decline to Friday’s low that looks very much like a five wave impulse of 500 pts. Remember, all bear markets start with a five down then a partial rebound and then an almighty decline.
Putting all of this together and I have a solid case that stocks have very likely topped and are at the forefront of a savage decline phase. If I am right, huge rewards await for those that can see through the current bullish mania.
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It’s hot out there! (except here)
The MSM is full of headlines of ‘record-breaking’ temperatures in the Northern Hemisphere – you can’t escape them. And true to form, the BBC is weaponising these overseas weather events to bludgeon us into signing up to their Net Zero war on fossil crusade. But where I live in the UK (sadly, on the wrong side of the jet stream), the weather has been more like winter than summer – but naturally this gets no attention from the eco zealots.
So is the war on Fossil working? If it was, you would be tempted into thinking demand for oil – and prices -would be falling as the wonders of the ‘renewables’ of wind and solar would be displacing fossil with much cheaper energy (a faint hope).
We had a very strong bull run to January 2022 on the back of solid demand and the Ukraine war Russia sanctions crimping supply. But then, with Russia sanctions easily broken (yes, I’m looking at you India and China) with huge discounts, Western demand fell off and the market fell to a stunning 50% off the January 2022 ATH.
So did this sound the death knell for fossil? At the same time, NatGas lost even more with a stunning 80% decline to the April lows. It looked like it, but since it is the market that drives prices, oil demand has picked up (it is the US driving season) and the high temperatures in the US (and elsewhere) has boosted demand for air conditioners and hence demand for NatGas, the main source of electrical energy in the US.
Once again, the cure for low prices is always low prices. And the cure for high prices is likewise high prices (see stock market discussion above).
So now prices are rising and are on the verge of breaking up above the trendline. I remain bullish.