So where has the Wall of Worry gone?

Bull markets in stocks advance against a barrage of headwinds, seemingly irrationally. A Wall of Worry can be very tall. Interest rates high? No problem. Debt levels gargantuan? No worries. Earnings flat-lining? Great! US corporate bankruptcies on a sharp rise? Fabulous! Oh, and international tensions rising with world trade in decline? Perfect! Bad news has been great for stocks – seemingly irrationally.

That was the position only two short months ago, but as they almost say in politics, two months is a long time in finance (in trading, two minutes can be a long time!).

And today as we head towards the end of the year, all of the above worries have suddenly vanished into thin air. Recessions have been avoided and the wonderful Fed is engineering a very soft featherbed landing. Break out the bubbly!

Investors are now totally convinced the Fed will lower rates next year and pundits are fighting over themselves to forecast an ever-greater number of 25 bps cuts in 2024. The path is now clear for a major bull run, they cry. Nothing can stop it now. It’s obvious!

But only two months ago, it was all gloom and doom with the Dow making a low for the year at 32,400. It closed yesterday at 37.700 for a stunning almost vertical 15% gain. Annualised, that is a 90% lift – and of course, most pundits get out their school ruler and apply it to the chart to forecast the future. Recent trends are assumed to be linear into the future. Until they aren’t.

Now even many prominent high-profile bears have thrown in the towel and are forecasting higher stocks in 2024.

So now we have the perfect setup in extreme sentiment for a major disappointment. Everyone has moved to one side of the ship and it is in danger of capsizing. One small wave could do it.

Here is one measure of how bullish the market has become

US money managers adjust their portfolios according to their sentiment. When stocks are in bear trends, they sell and vice versa. The chart at the bottom shows how the most bearish of the cohort have in just two moths switched from highly bearish to slightly bullish. Note that this bullish stance has occurred very rarely since July 2022 – and only near major peaks on the S&P just prior to downside reversals.

Now in the MSM we are in the season of predictions for 2024 – and I have yet to see a really bearish one predicting much lower markets.

My friends, this is a historic setup for a major disappointment. Do not miss out!

As a reminder, we are in the time window for a major reversal if my 2-year Dow high cycle is still operative

And while the market has convinced itself interest rates are about to fall hard, Treasury yields have plummeted since late October when US stocks bottomed. Here is the T-Bond yield chart

The October 27 yield high (exactly in synch with the S&P low) is at the end of a major five-wave multi-month impulse. And the decline to the 4% level last week is at or near the end of wave 1 down of what should be a five-wave impulse (an A wave perhaps?),

And the buying of Treasuries since late October has been so intense that the RSI has plumbed depths not seen in a long while.

But the Stochastics are telling us to expect a reversal up at some near point. That will be my wave 2 up and could carry to the 50-day MA (blue line) around the 4.4% area. That would remove about 5-6 big points from the bonds. That move should be very sharp since the whole world has been buying Treasuries with most pundits coming out strong for this amazing opportunity!

Yes, last week I saw a whole plethora of “Fill yer boots” advice on grabbing this ‘once-in-a-lifetime’ opportunity in gilts and Treasuries.

In my opinion, waiting for the wave 1 down (up in yields) to remove the bullish late-comers would present a much better entry since a large wave 3 down in yields beckons.

But with bullish sentiment so one-way, I cannot rule out the possibility the upcoming bond decline could be far stronger. As we are seeing in the stock indexes, wave 2 corrections can reach very deep and get very close to the start of that wave. Thus I cannot rule out a move down to the 110 area (currently 123).

So here is one possible scenario for early 2024: Some event will come out of left field to shake stocks (2-year cycle high). Because stocks and bonds have been joined at the hip for many months, bonds will also sell off sharply initially.

Depending on the wave patterns, both initial sell-offs could quite easily be of near-panic proportions. But then there may well be a switch back later into the perceived safety of Treasuries and that would mark the start of my wave 3 up in price (down in yield).

Many investors would view this as bullish for stocks but they would be catching a falling knife into a wave 3 down phase. Investors who had been conditioned to buy stocks when rates (or their promise) fall will be unaware that falling rates now means lesser demand/more supply for loans and hence a weakening economy.

If the Fed is tempted to re-introduce QE to support the economy, bond prices will be under greater pressure. But that is a very distant option (so far).

In this case, lower rates means the precise opposite of what investors had always assumed – lower stocks. Then, bad news will be really bad.

The key to watch for is the divorcing of the stock/bond marriage. It could get very ugly and acrimonious.

Wishing you all a Merry Christmas!