If you recall at the start of the Corona Crash back in Feb/March, I stated that there will be a major reversal in attitude from lavish consumer spending to one of greater conservation. I stated that the massive record debt levels held by consumers would be paid down as they sensed harder times to come.
And now we have confirmation that this mood is indeed in full flow with the release of the latest consumer spending trends. Here is the updated chart of US credit card debt
Talk about falling off a cliff! The speed of the collapse in outstanding credit card debt is unprecedented – faster that that twelve years ago in the Credit Crunch of 2008. It appears that no sooner have furloughed employees received Uncle Sam’s cheques (with the extra bonus) that they promptly paid off a lot more than the minimum on their statements. That is exactly in line with my forecast.
As I stated then, social mood has changed big time. Of course, with lockdowns, much of this conservation is enforced as opportunities to spend, spend, spend have been virtually limited to Amazon purchases.
So has this change to a more sober consumer spending mood translated into the stock market? Hardly! The Nasdaq is making new ATHs almost daily and one of its darlings – Tesla – now has a cap greater than the sum total of the caps of majors such as Ford, GM, Fiat/Chrysler, Toyota and Honda, yet sells a tiny fraction of the vehicles produced by the majors (see below).
Yes. it’s unreal alright – and continues to be so (for now). That is what happens in manias. They have a momentum of their own where sober reality has no place and it’s all about the story – and momentum. Tesla is the EV future! Not those nasty fossil-fueled dinosaurs produced by the others! They’re history, man. The teenage Robinhood traders consider them grandpa’s stocks, I’m sure.
But here is the story of one man who lost big on Robinhood. What!! Stocks can go down? That wasn’t supposed to happen. What about the Fed? Where were they?
But the same trading mania is occurring in China – in spades. Bloomberg reports that one quant trading firm made over 100% this year by selling every stock it bought the previous day!
Zhang Ruiqi, the 34-year-old chairman of Shenzhen Qianhai United Fortune Fund Management Co., screens about a dozen mainland-listed stocks every day for their turnover, momentum and volatility. He then does it all over again the following day. That strategy, which he calls the “all-in-all-out” method, helped his flagship $5 million fund gain 108% this year through June, according to data provider Simuwang.com..
How’s that for a trading strategy? So move over US teenagers on Robinhood, your Scrabble bag method is so passe.
So while consumers are paying off debts, many are also going gung-ho into the most speculative shares on the planet with huge leverage to boot. That’s a neurotic split personality syndrome if ever I saw one.
A kind reader reminded me in an email that Mercury is in retrograde motion (it appears to be going backwards in its orbit) – and that is often when communications go haywire and mixed signals abound. And that certainly fits the current scenario in the markets.
Here is a chart of the split personalities of the various US indexes
chart courtesy www.elliottwave.com
The tech-heavy Nasdaq is making new ATHs almost daily, while the old-line Dow Industrials topped in February and is in decline, The small cap low tech Russell 2000 topped two years ago and is also in decline. These yawning gaps say one thing: this is not a healthy market whn most sectors are more or less in synch.
This is a clear sign of a fractured market where leadership is getting narrower and narrower as the big tech FAANG names only lead the charge up the hill.
I receive a few emails from some who taunt me for not being super-bullish – along with the near-record 91% Nasdaq bulls (latest DSI reading). But how can any rational person buy shares at these historic manic valuations – unless they are day-trading (see the Mr Ruiqi story above)? The rally has ‘bubble’ written all over it.
It is a given that those who are most bullish after an eleven-year bull run will still be buying the ‘dips’ when the markets crash, as they will. Most of them are destined to lose everything. Hope is the emotion that propels them – and here are quotes from Chinese ‘investors’ where hope springs eternal:
When I read ‘it’s different this time’, and ‘I can’t lose‘ I just know the end is nigh.
Tesla – to the moon!
This share is the poster child for the manic wave 2 hope for the future in the major indexes and is the most intensely traded – and it is rocketing up (inside one of Musk’s Space-X rockets, perhaps?) to the moon – or so the bulls hope.
Here is the astonishing chart
The EWs are pretty clear and the latest third wave up has a large element of short covering. Remember, Tesla was one of hedge funds’ most shorted shares at one time – but not now!
In fact, the short covering of the last few days has sent the short interest back to the same level it was in 2011 when the shares were trading at a minuscule $25 (now $1540!). As I say – astonishing. But totally in line with a manic speculative binge that will end very much in tears (after perhaps one more down/up to complete).
The crash will be spectacular.
Note to VIP Traders Club members: Yesterday saw a large upside reversal in the Dow. And that is why my Break Even Rule is so valuable. When our timing is wrong, we can escape with little or no loss when we employ this Rule. The key for all traders is to conserve capital, keep losses small (or zero) and live to fight another day.
No-one on the planet can time every one of their trades correctly – that is a given. There is no shame in getting your timing wrong. Everyone does it. But taking large losses is inexcusable.
US Grains are flying!
One of our major successes recently is our long campaign in Wheat, Corn and Soybeans. These are the oldest futures markets in the world – as it satisfied a practical need for a pricing exchange in order to bring farmers and users together and make those prices public.
Back then, speculation was a minor part of the business and limited to insiders. Fast forward to today where most markets are dominated by speculation! But they are still able to price the underlying commodity, whether it be Wheat or Interest Rate Swaps.
And the key point for we speculators is that the price charts can be analysed using the traditional charting and Elliott Wave techniques in my Tramline method.
The Soybean market is especially liquid and displays huge volatility at times. I love trading it! The USA is one of the largest producers. This is the chart I showed VIP Traders Club members in January when it was in a severe decline. China is one of the biggest importers of soy and with the trade tensions between China and the US, trade had dropped off.
But it had reached a 12-year support shelf
and with sentiment pretty negative, odds were likely to be excellent that shelf would hold and if my EW labels were anywhere near correct, it would at some stage start a bull phase. I reckoned a long campaign was a low risk opportunity.
Since January, prices have worked their way up and this is the latest daily
The tramline break last month was a classic buy signal – but only for those who were watching this market! And the huge momentum divergence at the low was likewise a classic setup to look for a reversal.
My take on today’s markets
The Dow made its recent high on 9 June at 27,630. It is trading 1,500 points below and it seems everyone is bullish -more bullish than they were at the high. This is a typical trait of second waves where confidence in the future is even more enhanced than it was at the Top. New ATHs seem assured especially when the Fed has promised to flood the markets with ‘stimulus’.
The speed of the purported “V” shaped recovery (esp in Nasdaq) has seduced many into this view. And that is playing right into my bearish hands! The more fervently the bullish outlook is held, the more likely it will be dashed on the rocks of reality.
When the crash occurs, many will still be buying the dip, but this time it will be too late – and their sales will add fuel to the bearish fire (is occurred in the Corona Crash of Feb/March).