I feel very privileged being active in the markets in these historic times. Just as the pandemic is said to be a once-in-a-century event, so is the new bear market which started in February.  I hope you feel the same way.  We will have stories to tell our grandchildren!

Last week I titled my blog: Patience is a virtue.  And waiting for the bear market rallies to top out was certainly an exercise in using that rare quality (rare among traders, at least).  But it took just 28 trading days to unfold off the March 23 Corona Crash lows to last week’s highs.

And by a strange coincidence (or is it?), that period matches the number of days taken for the Corona Crash to unfold!  A beautiful symmetry.

But what an historic week – and month!  With the Fed reporting the week before and many high profile company names also reporting Q1 results, it was bound to be so. 

Stock indexes made one final lunge into my target zones – and then rapidly retreated Thursday and yesterday.  Thank you again my friend, Sr Fibonacci!

And please note I forecast that markets would turn lower just about when lockdowns are about to be lifted as bullish sentiment reaches a maximum. As for bullish sentiment,  I see in today’s news that Tui – one of the largest tour operators in Europe – is predicting ‘cruising will be back in a year’.  Such confidence!

Yes, it may be back in some form but memories are long about the Diamond Princess and will the public wish to be cooped up with others with no means of escape?  We shall see.

For VIP Traders Club members, I managed to pinpoint the wave 2 tops at High Noon on Thursday only a few pips away from the actual Dow high at 24,900 – which was a sliver away from the round-number 25,000 target that many pundits had fixated on.  Yet one more to add to the list of just-failed target near-misses.

This has been my Dow roadmap since the March 23 low

and on Thursday, it almost made it to the 62%.  So the wave 2 high in the Dow lies between the Fib 50% and the 62%, while the S&P overshot its Fib 62% by a touch.  The average lies right on the Fib 62%.

I have long maintained that we are heading for the mother of all Deflationary Depressions.  Here is the last one – 90 years ago

The wave labels are different but the initial Wall Street Crash was the ‘a’ wave and the recovery was the ‘b’ wave (our wave 2).  That puts us at the forefront of a much larger crash than we saw in March.

In the really big picture, the 1932 low was the Grand wave 4 low – and the Grand wave 5 top was made in February this year – 88 years later (which is a Fibonacci number minus 1).  With the final wave 5 set in Fenruary, we are now starting a Grand Correction (in an a-b-c) as per the EWT.

Note in 1929 – 1932, the Dow fell from 400 to around 40 – a ‘dip’ of 90%.  The Dip Buyers were slaughtered – as they will be this time. That 90% figure is a typical loss when a mania implodes.  And because this coming Depression will be of greater magnitude, shall we see a similar crash of 90%. If so, can I offer this as a target – 2,250 in the Dow?

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In the bigger picture, investors have been trained into the equity culture where one of the most assured roads to riches is through ownership of company shares.  In the UK, the public owned few shares after WW2 but since then, ownership has exploded along with the global economy.

Now everyone is a stock expert and fan! That has resulted in an explosion of offerings, such as ETFs which track just about any sector you can think of.  There are even ETFs you can buy that trade short the various indexes (In fact, they will become increasingly popular in the coming months).

It was the same in 1920s America. Even lowly shoeshine boys had a fascination with shares.  But then came the crash and at the lows, there were few who gave a good word for owning equities in 1932.  Such was the disgust and hatred at losing so much money. Not touching them with a barge-pole was a common refrain. Worthless stock certificates were used as cheap wallpaper.  It was decades into the 1950s before stock buying became popular again – but by then, shares were much higher, of course.

The 1920s was known as the Roaring Twenties.  Will the current Twenties have a similar moniker or will it be known as the Terrifying Twenties?

I believe the world is setting up for a remake of that 90-year old movie – only it will be on a grander scale of all singing and dancing.

I see the stock mania following the classic boom/bust scenario of all speculations that go sour:

We have had the boom and have started the bust with the first bounce as pundits proclaim we are heading back to ‘normal’ when company earnings will return to the good old days in a few quarters. But note the next stage is ‘fear’ which will be more intense than in March when the virus pandemic was scary enough.

The fear now is of a basic existential kind.  Will some well-known companies even survive?  And how will individuals survive economically when job losses are already surging?  It is highly unlikely many jobs will come back paying the same wages, especially at management levels.

I believe the almost global application of a Minimum Wage (and its brother the Basic Living Wage) in recent years will be under great threat in the post-pandemic world and many nations will be forced to reverse the idea as unworkable.  And in the developing deflationary scenario, economic activity will continue to contract thus weakening the overall demand for labour (except in some minor sectors).

One other tell tale sign is trading volumes which are contracting mightily on the April rally

chart courtesy www.elliottwave.com

Note the rapidly expanding volumes as the March crash got under steam.  But now, there is a strongly weakening desire to get back in the market on this ‘dip’.  Yes, you will read many pundits urging you to Buy, Baby, Buy.  But that track is wearing thin and with fear now spreading again, volumes will rise again as shares drop.

But the algo robots aren’t buying the message.  They are selling into the rally.  And the Dip Buyers are not taking up the slack in sufficient volume.  That is a very bearish sign.  And with the biggest fattest fingers on the Buy button now vanishing – the corporate buy-back CFOs – will the Fed step in and do a Japan and start buying SPY in earnest, as they have hinted?

I wouldn’t put it past them as they are hell-bent on keeping Trump in office! Also to keep stock values elevated has been their main mandate.  But the Emperor’s clothes are being forcibly removed by Mr Market.  Already, long-dated Treasury yields are rising and last year’s Yield Inversion (see previous blogs) is morphing into a strong positive spread – which will grow even wider this year.

 

Shell cuts dividend for first time in over 70 years

What a more poignant pointer that the world as we knew it is no more.  That Old Reliable in the dividend list has finally bitten the bullet.   With crude oil trading negative for a moment last month, oil companies entered that new world. 

And it is/was a core holding in UK pension funds since the year dot and is another nail in their coffin.  I am maximum bearish pension funds!

 

Whither the dollar?

In the VIP Traders Club, I reversed positions recently.  I had been long for a while but sensed a reversal and promptly reversed positions to short. But is it about to reverse again?  What a roller-coaster!  Here is the EUR/USD showing the roller-coaster action in recent weeks

I went long as the market broke above the blue trendline and set an immediate target at 1.10 which the market hit yesterday.  But I am nervous.

Why?  Because the latest COT shows hedge funds have very recently loaded up massively with bullish bets.  A few days ago, they were net short, so they have had a Road to Damascus moment together.  Remember, hedge funds are mostly trend-followers where the algos do the trading.

And as I have shown time after time, they almost always herd to the bull side and carry huge one-way bets right at market tops.

With that in mind, I am looking to reverse my position – again.

 

House prices are poised for massive declines

Last year, I forecast that UK and US house prices were at or near major highs.  I showed a graph of average UK house prices which showed a lovely five-wave impulsive pattern.  What was impressive was not the decline in 2007/2008 ahead of the Credit Crunch in stocks, but the decade-long recovery to new highs in the final fifth wave.

And that bullish performance has lulled almost everyone into believing the age-old mantra of “bricks and mortar, lad.  That’s where you want to put your retirement fund.  You can’t lose!

Here is a very instructive chart of US hose prices plotted against market activity which plunged in April (black arrow)

chart courtesy www.elliottwave.com

after hitting the Fib 50% retrace of the 2008 Credit Crunch collapse.

Note the surge in house prices to new highs this decade as activity came nowhere near matching the 2007 high.  Of course, this manic price advance was inspired by the tsunami of easy credit available at rock-bottom interest rates – and low unemployment figures.  If you had a pulse, you qualified for a loan – provided you could come up with the 40% deposit (from the bank of Mom and Pop). The UK experience closely matches the US.

If I am correct – and as unemployment now sky-rockets -the median US house price will fall to my target around $200k from the recent high of $340 – a drop of 40%.  And that is my first target – lower ones exist.

And that is one major reason bank shares are so weak – investors fear they are building up a pile of non-performing loans and mortgages.

Is it possible our idolised UK property market could experience that kind of devastation?  Even a 10% decline in median price would devastate many over-borrowed home owners, especially if mortgage rates rise, which I expect. Being under water in negative equity looms large, I fear.

When the estate agents are able to open their doors and viewings are permitted again, I expect to see MSM reports of buyers making ‘silly low ball’ offers’ which will naturally be rejected at first by the sellers as they cling to their old ideas of what their property is worth.

Eventually, some sellers will be forced to lower their agreed prices – and there goes the whole neighbourhood as similar properties will be compared with the new lower valuations.  And that is how a price decline starts.

 

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