Russian bear 1 – Wall Street bull 0
Bears are highly evolved social animals with intelligence comparable to that of the great apes. Bears often share friendship, resources and security. So is that why the Russian bear and the Wall Street bear have joined forces to do battle with the all-conquering Wall Street bull ( for security)?
For political and economic security, Russia knows that its economy is being slowly attacked by the West’s headlong rush away from its prized natural resource oil and gas sector. It knows that when the current commodity boom flares out, civil unrest looms. The rouble is already tanking making imports a lot more expensive. I am sure that fact has not been lost on Mr Putin. And will EVs really take hold in the largest country on earth?
And on Wall Street, that most savvy group of investors – the corporate insiders – has already started voting with their feet and have been unloading their shares at a rate of knots. Remember this chart I posted in December?
It shows the data up to January last year, but with the crash in several FAANG Gang shares late last year, I am sure Sell/Buy ratio has surged even higher than 8/1.
Remember, the insiders are the only major investor group that has been net selling – both the retail and the pros have been scooping shares up until recently in a clear demonstration of the rule that speculators become wildly bullish at major tops.
So how are the Russian leaders (and their oligarch cronies) feeling about all of this? I would say – not happy. And as leaders always do when they feel under attack – they strike out, egged on by their military (their only reason for existence is to be involved in war).
So with Ukraine seemingly about to be attacked, is the world teetering on the edge of a major shift? If the stock market is a reliable indicator of social mood (as I believe it is), then the market outlook is grim indeed. And the charts back this up – here is my wave count in the S&P (similar in the Dow)
The astonishing 120% rally off the Corona Crash low has followed the lovely upper tramline until it reached a complete five up on 4 January at its ATH at 4800. Then on 24 January it broke decisively below my lower tramline in wave 2 down and then staged one final last hurrah in wave 2 and is now solidly starting a very long and strong wave 3 lower. My first major target is the 3500 area (about 26,500 in the Dow).
Bond yields are now surging – or are they?
For weeks, we have been subjected to the MSM narrative of high inflation and higher bond yields are here to stay. It makes sense, right? Crude oil and NatGas prices have been surging and hitting the headlines for weeks now and the general expectation is that prices will keep rising as new sanctions on Russia loom. Crude at $100 is a commonly cited target.
But as the old-time trader Joe Granville put it: When everyone believes something is obvious, it is obviously wrong. A recent example is the stock market action last month when it made major highs just when most believed that the vaccine success would mean lockdowns would ease and free economies from their shackles and a new boom would emerge.
If it were only that simple! Few figured on the new triple threat – higher energy prices, cost of living squeeze and much higher taxes to come (NIC). That has not put smiles on too many faces I am sure.
A natural consequence is a more conservative attitude as consumers start to draw in their claws. If so, then no matter how much salaries/wages rise many will not spend it like a drunken sailor but save it instead.
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Have bond yields topped?
This is a heretical question is it not? It seems the whole world is expecting interest rates and bond yields to keep rising on the back of increasing consumer inflation – and promises by the Fed. Latest CPI data shows prices are rising at a rate higher than expected. So why would I suggest bond yields will fall back? Am I mad?
That may be, but the ghost of Joe Granville stalks my trading room! In defence, I point to last week’s surge in US crude oil but to a major Fib target I have been eyeing for some time at the $94 area. That occurred at the same time as jitters over the Ukraine invasion surged.
And if we do get some sort of invasion/incursion over the weekend (as some expect) the response of the crude market will be crucial. If oil prices surge much higher above $94, then odds swing to the much-quoted $100 target being reached.
But if they do not surge on Monday/Tuesday, then that will be a clear signal to me that a major high is in – and the Treasury market should respond by sharply moving higher (yields lower).
Right now, the bullish Daily Sentiment Index (DSI) on the 30-yr T-Bond (the most sensitive to inflation concerns) is at a multi-year low as most have bought the perma-inflation story to the hilt. Most specs are fully bearish. That means any positive surprises (such as a pause in the oil price) should induce much hedge fund short covering and a regular hard short squeeze should develop.
Because the European economy is most exposed to the Ukraine situation and Germany in particular, German Bunds have been hit hard – a fact not helped by having some of the most expensive energy prices on the planet (as the Green Blob inmates have taken over the asylum). But here is the budding short squeeze in the Bunds
If my projection is correct, all sovereign bonds will surge (yields lower) near term. Helping that process is the switching out of still-expensive stocks into the safety of ‘cheap’ bonds. As the stock rout continues, that process should intensify.
Gold has been rocketing higher
On the back of the increasing tensions over Ukraine, Gold (the only real money left standing) has been advancing strongly to last week’s $1900 print.- an increase of $120 this month alone. And the chart is telling me there is more to come
The standout feature is the huge year-long triangle/wedge with mom divs at the lows. This pattern usually occupies wave 4 of an impulsive five wave pattern where wave 5 moves above the wave 3 high. In this case, that level is the old ATH at £2,070.
However, I must raise this word of caution. With Russia threatening Ukraine today, history is being repeated. I am old enough to remember the Russian invasion of Afghanistan in late 1979 after months of threats to do so (sound familiar?). Gold had been screaming higher (there were few ‘safe havens’ in those days).
But on 1 January 1980 when the invasion was well underway, the Gold price topped and began a savage bear market that lasted months and years. Taking profits then was a very shrewd move – but few did it – they rode the market down believing new highs were inevitable. That was a great illustration of the principle that when things look their darkest, bull markets often make major highs. I have carried this example with me since then.
