Political turmoil has eased – and stocks rally hard

Liz who? Was she just a Will -o – the – Wisp that was cancelled by the establishment blob as if she wasn’t there? So now the way is clear for the Return of Boris (for the Second Coming?) And to an almost certain economic crash. He is very much tarnished goods and the Tory party most likely will not unite behind him as is their most fervent wish. The revolving door continues swinging.

Mine is not a political blog but it is clear the recent machinations in government is the outcome of the bearish UK markets that reflect the very negative mood out there. All the Truss mini-budget did was to accelerate existing downtrends. But in the relative calm today, markets are bouncing, as I have been warning for several days.

For the MSM, the consensus is that it was Trussonomics wot done it. Not so. Sterling and gilt yields had been plunging long before Ms Truss arrived on the scene. But she is a very convenient scapegoat to blame rising mortgage costs and energy cost spikes and all assorted ills (even the weather?) that are befalling us. It was ever thus.

Irony Number One of the Week – it was she and Kwarteng alone in the Tories that espoused rarely-seen genuine Tory principles of smaller government, lower taxes, more self-reliance and immigration controls. And party members voted her in. Now they will be side-lined as Boris (or Sunak) will be crowned. That will not go down well with the party faithful and will see the whole process as a Westminster coup that will keep the deep party divisions wide open, thus ensuring the bear market will nor ent soon.

So what will the new PM have to deal with? What if sterling and gilts continue their bear market declines as seems likely even if we are currently in a relief rally? What if the MSM soon run headlines about dollar parity again? Will they blame Boris (or whoever is in)? They will have no shortage of ammunition due to his ‘colourful’ track record and erratic behaviour.

And with fossil fuel prices in decline, is it possible the panic over price inflation is totally mis-placed and out of synch with current price trends?

As I never tire of saying, governments (and the Fed) are always fighting the last war – and this should be a doozy of an example. The major reason for that is that these large organisations possess multitudes of committees, outside advisors and hangers-on where a major proposal has to grind slowly through them before a consensus is reached (if at all), This process can be speeded up a little in times of crisis.

Of course, all decisions are based on old data and by the time a decision is reached and the solution appears obvious, that is when it is obviously wrong (in the words of an old-time trader Joe Granville).

And that is why we traders love this dysfunction that provides such rich opportunities.

Huge snap-back rally in shares

Since just before the major wave 1 low in the Dow on 13 October at 28,600, I have been forecasting a major relief rally. Last night it closed at 31,150 for a gain of 2,550 pts. I guess that qualifies as a major relief rally – but is there more?

Relief rallies in strong bear markets are always in threes or some combination – and this one is conforming (so far).

Yesterday, it moved lower in the morning and then started an 800 pip rocket with basically no new news to propel it. The MSM were totally baffled and the only excuse they could muster was that Treasury rates held steady (but at major lows with 30-yr yield reaching an eye-watering 4.38%). Pathetic. And a complete failure of the ‘news makes the market’ theory that 99.999% believe (erroneously).

On the other hand, wave theorists that observe the fractal nature of markets had not just a rational explanation of what happened, but by virtue of the insights offered by wave analysis, could actually forecast it beforehand with high accuracy.

This was the Nasdaq chart I posted to VIP Traders Club members Friday morning where I had two very clear options – and it did not include a hard decline immediately:

The Nasdaq is displaying slightly better wave forms than the Dow and I had two options for my Trade Alert at 7 am Friday morning: Either it would start a major rally then or take one more dip and then start the rally. Either way, a ‘c’ wave rally was very likely. And that ‘c’ wave would be a five wave affair.

My favoured option was the first because it seemed the Fib 62% support was pretty strong and I had a good mom div on the 2-hr.

That set my high confidence forecast for a five wave rally starting that day, not a decline.

This was the result:

Indeed, it followed my roadmap perfectly. The impulsive (larger trend up) surge was even stronger in the Dow with the market moving above the recent highs.

OK, so where to now? We are in wave 2 off the wave 1 low and it has only lasted six trading days which is very short compared with wave 1’s span of 50 trading days off the August high. To sensitive eyes that can spot a mis-match a mile away, this rally is way too short to consider wave 2 at an end.

At a minimum, wave 2 should span at least 1/3 of the time as wave 1, putting a likely wave 2 top around November 6 give or take.

It so happens the US mid-term elections are on Tuesday 8 November. It would be sheer poetry for the wave 2 top to arrive around that time, especially if early results point to a surprise – and a possible spike high with a large up/down day in a key reversal.

If this scenario pans out, I expect a shift away from the Fed’s hawkish stance to more dovish interview statements by members hinting at the ‘pause’. This would give the bulls all the ammo needed to go all in – right into a classic bull trap where I will be waiting.

The Senate is currently split 50/50 with the Vice President (Democrat) having the deciding vote. What if there is a swing to Republicans? All House seats and 34 Senate seats are up for re-election so the results should have a major impact on policy – and the markets.

For instance, Biden has opened the spigots to release oil from the Strategic Reserve to keep the gas/petrol price down in an attempt to ‘influence’ (aka bribe) the public to vote Democrat. A clear Republican majority next month could force him to curtail this activity – and provide a boost to the oil markets.

Remember, OPEC+ has an $80 floor and will defend it vigorously. The November mid-terms are also important in that after the elections are over, Biden has no real need to keep up releasing major outflows of the SR which would drain the remaining supply to dangerously low levels. Thus, I expect oil markets to sustain major advances into year’s end as the promised 2 million barrels a day cuts to production kick in to restrict supply.

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Did the dollar top out on 28 September?

I have had no clear evidence that the 28 September high near 115 was The Top and have been ambivalent about trading the currencies recently. There is little doubt that the exponential rise may be long in the tooth and traders have been massively long, but that is no logical reason to call the top. That is emotional reasoning!

As always, the clues lie in the charts – here is the daily showing my dilemma:

I have an absolutely terrific upper trendline stretching back to January with at least six highly accurate touch points. That is a very reliable line of resistance. Please feel free to admire it!

On Friday, the market spiked up in the morning only to be hit hard into the close and fell hard to the lower trendline – here is a close up

The internal wave patterns are very confusing and not textbook. All I can say is that normally, I would expect the support to hold to allow the market to move higher as the uptrend is intact so far.

But lurking in the background is the performance of Treasury Bonds/Notes. The dollar (and the euro) is moving very much in line with interest rate differentials (mainly with dollar/euro rates). Yesterday. they plumbed new depths – and stayed there with no discernible upward bias as the dollar moved sharply lower in the afternoon.

A lower dollar implies either lower US rates (higher Treasuries) and/or higher euro rates (which may come next week with the ECB on Thursday the 27th).

T-Bonds have now made losses for 12 weeks consecutively – an incredible AT record going back to the start of trading in the 80s (the Fed has been active sellers). By that measure, they are well oversold. Also, DSI bulls reading has reached a lowly 9% which is near an AT record.

Thus, odds favour at least a relief rally very soon and if so, that would push the dollar lower and if it breaks below my lower trendline, it should set off a wave of selling – perhaps a very strong one.

So the stage is set. If Treasuries begin a rally phase, the dollar will decline and stocks will advance (into my forecast November 6 – 9 top?). Let’s see how this pans out.