September 3rd – a date to remember!
Dear Trading Diary: On Tuesday 3 September I called the top of the Dow at 41,600 (the Nasdaq had already topped in June) for my subscribers. But that was no random date plucked out of thin air! It is a curious fact that on the very same day in 1929, the Dow also made its ATH. What followed was the infamous Wall Street Crash of course. They say history never repeats, but it does often rhyme.
And back in the days of ticker machines and bucket shops (read the glorious Reminiscences of a Stock Operator for a flavour of those almost lawless times when compliance was just about non-existent), everyone was wildly bullish as the Roaring Twenties came to a sudden end as the Great Depression had arrived. “Equities are on a permanently high plateau” was a common refrain. Just as the AI bulls today have been proclaiming (until recently).
The big difference with that Depression is that this one will be a lot stronger due to the mountain of debt that pervades all corners of the financial arena from governments to small companies to individuals. A lot of this debt must be unwound and already we are seeing a sharp uptick in the bankruptcy rate of US small and medium sized companies.
Even huge US ‘Poundshop’ – style operations are going to the wall – a clear sign the US consumer is tapped out to the max (credit card defaults are rising). My French Fry IndicatorTM has been highly accurate (see previous blogs).
The next big shoe to drop is likely to be the commercial real estate (CRE) sector that is currently living on a knife-edge. Large properties are selling for a fraction of their appraised values and bond holders are being wiped out. Regional banks are back on the firing line. You will hear more of this from now on.
I have chosen to be an early bear and as the market declines, more will join me. But when everyone believes shares are for losers, that will be the time to buy them back. But that day is long off. This is the time to get into cash.
Since at least the Corona Crash, I have been waiting for the great post-WW2 expansion to peter out and I have had a long wait. Last week I was a strategic bear but a tactical bull. That was when the final flourish – the last hurrah of the bull – was setting as a classic buyers’ exhaustion. Then on Tuesday 3 September I switched to become a tactical bear as well and I am now planning my long term bear campaign.
So this is my plan: Because volatility has become heightened, I must use wider stops and this means smaller initial positions. This means I can break a long-standing rule to only enter shorts on bounces, not on breaks. This will be an advantage when markets are in freefall (to come). With index markets in this phase, locating a decent bounce is likely to be very tough if not impossible. And I may not be around if a juicy bounce is presented.
But with my targets at very low levels, even a small short position could translate into a very big gain in the months ahead.
Adding to the new bearish tone, the Nvidia litmus test has firmly resolved to my bear option
A few days back when the wave 2 or B rally had pushed the shares up off my trendline, I had two options: one higher in a final wave 5 high or a move lower in a wave 3 or C down. The market has now spoken. I am confident it is wave 3 or C down (probably a C) as it descends its Slope of Hope.
The $140 ATH was set back in June. The Nasdaq carried higher to top out in July and now the Dow has topped in September. This is the typical pattern with the indexes when stocks make major reversals – the tops spread out over time. The AI mania is now cooling and we are seeing more negative stories surrounding the use of AI. just as I predicted in the summer.
And the September-October period is traditionally a weak period for shares – sometimes very weak. This one should fit that bill nicely.
At major turning points it is useful to examine the long range charts and here is the weekly Nasdaq. Several notable features including the solid uptrend line off the wave 4 low (the December 2022 Corona Crash low). And the immense mom div at the June ATH which topped off the major bull run off the 2008 Financial Crash low. It also topped off the post-WW2 rally. My targets are posted.
Shorter term, my trendline is my first target around the 17,500 area – less than 1,000 points from Friday’s 18,350 close. That should be an area of support but if the selling picks up and pushes it smartly through this trendline, all bets are off.
The FOMC lies directly ahead on the 18th and if they panic and only cut by 25 bps (to try to support the weak markets), that could lift shares momentarily ( a new shorting opportunity). If the index is trading on the trendline at that point, that option becomes likely.
And ominously, crude oil has weakened considerably and is trading under my large triangle – a bearish development. And a weak oil price implies a weak economy, which is fully consistent with the message from the stock market. It is all coming together for a great asset price collapse. The outlook for the oil majors is not bullish.
I note that other assets are also coming under pressure from Rolex watches to classic cars.
Friday’s session was a sea of red on the stock charts with indexes closing on their daily lows. That suggests Monday’s opening will show large gaps down as traders/investors/gamblers assess the week’s action. This would confirm indexes are in a third wave down as I have suspected. And who knows what global events will occur over the weekend to scare the markets even more?
Last week’s rout was orderly with little sign of panic. That will come later.
And Bitcoin – another of my litmus tests for risk sentiment – has plunged back to the lower edge of the six-month trading range at $54k. It is now 22% off its March ATH. Major support here will give way as shares continue their descent.
I repeat my earlier warning: This is not the time to take on risk – it is the time to shed it and play safe. I cannot get excited about investing in bonds as I believe many will drop in value in the medium term. Treasuries (the ‘safest’) may hold up better, but I am not sure.
The AI Bubble has popped: With the leader Nvidia down now 30% off its June ATH (see above) the news is following it lower and gets a more bearish tone. Here is a revealing chart just released of the monthly visits to Chat GPT the leading retail site
For a year or so, users played with their new toy – and found it had a strong liberal bias (surprise! – and now admitted by Google). But the plunge off the cliff is now apparent as users lose interest probably because it has little revenue-generating power to date. And the collapse is almost complete with the latest July reading at rock bottom.
Of course, there are many other AI platforms that some have migrated to so the above chart should not be construed as an abandonment of chatbots. But it may be a litmus test of sentiment. And the proposed new subscription fees models will almost certainly change the colour of that litmus paper to bearish.
Update on my Gold campaign: Following my very successful bull campaigns this year I have now turned a lot more cautious with upward momentum flagging. Medium term the rally appears intact, but shorter term with bullish optimism near record highs, I can see a decent pull-back starting here. In a recent blog I warned that Newmont was entering overhead resistance and due for a pull-back. I believe that has now started. I have taken all profits on my gold miners.
But when the current corrections are over, I expect gold to resume its historic bull run.
Carry out the Carry Trade! The carry trade has become a hot item for the MSM in recent days. Dollar/yen had made a huge ATH around 162 back in July and was far above what many considered the ceiling for the BOJ’s comfort level (of 150). That made the carry trade even more profitable with a common vehicle being yen/Mexican peso with the huge interest rate differential.
But now that bubble has burst and a great unwind is starting. Here is the much more liquid dollar/yen
This cross is another factor in the great asset bull market unwind and it is totally appropriate that it topped out on the very same day as did the Nasdaq on 10 July! Another ‘coincidence’ to the day.
I have lovely tramlines and with the break and kiss, we are in a Scalded Cat Bounce lower to my first major target (pink) around 130.
Some further thoughts: The EV revolution continues to sputter out with VW planning to shut some German plants – a first for them. And here in the UK, our eco warrior officials are starting to scale back on their impossible 2030 goals to 100% eliminate fossil-generated electricity from the grid. They will press ahead though with their Impossible Dream (cue for a song?) and plunge the nation into even greater national debt with their white elephant projects.
And the spanking new Labour government is about to hit the real economy hard with major tax rises and benefit claw-backs. I can see the day when state pensions will be cut – while defending their precious public sector gold-plated pensions.
One item to watch out for would be a withdrawal of benefits for illegal immigrants. That would be a sea-change and a tacit admission that they are really strapped for cash with harsher punishment to come for taxpayers.
Of course, this is all in line with the message now from the markets as social mood sinks deeper into bear territory. For many, the party is well and truly over and the music is winding down.
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