Stocks are climbing its Everest
The Dow made a major low on October 13 at 28,600. Since then it has rallied to 34,000 – a gain of 5,400 pts (almost 20%) in just five weeks. That is a very sharp rally. And that is exactly the kind of rally we always see in major bear markets.
In the Elliott Wave model of market behaviour, waves of investor sentiment drive the swings between the highs and the lows. And this display of sentiment is in turn driven by unconscious mood swings. It is not dependent on the ‘news’ and the ‘fundamentals’ (although short term moves can be influenced thus).
At the October lows, investor sentiment was highly negative as a review of the MSM headlines then would attest. But today, the exact opposite pertains. In just six weeks, investors have switched from a deeply negative outlook to a very rosy one. And that was done without any outside intervention. It happened spontaneously.
When investor sentiment – and with it social mood – changes, the news follows. Rallies are always followed by good news – and vice versa. They are never preceded by good news. Incidentally, with the improvement in social mood at the time of the US mid-terms on 8 November, the incumbent Democrats fared much better than expected. This follows the rule that when stock markets are buoyant, political incumbents do well – and vice versa.
If the elections had been held in mid-October, I am confident the results would have been vastly different as angry electors would be wanting to ‘throw the bums out’. As it was, their anger subsided enough to tip the balance.
A few days ago on 11 November I posted a chart to VIP Traders Club members with my revised wave pattern in the Dow that shows the strong rally off the October low is a ‘c wave of an a-b-c upward correction.
The wave 2 rally had reached the Fib 62% retrace of the entire decline off the January ATH. It remains testing this region. Remember, the Fib 62% retrace level is a very common point of turning. But it could move even higher (the next Fib level is at 35,700 but should turn before that).
For one thing, I have excellent tramlines working and the market has poked above the upper line. That usually signals more upside. For another, although sentiment is more bullish, it has not reached the manic stage yet although many investors believe the Fed will pivot and are buying on that basis. But as I showed last week, Fed pivots almost always result in steep stock declines. Investors are thus walking into a major trap.
But the Dow is by far the leader on the climb to Everest. The small cap Russell 2000 is still stuck at base camp
The rally off the October low has only spanned a Fib 62% of the wave off the Aug high (Dow is up 98%).
So once again we are at a crossroads. Stocks can certainly move higher with the Dow’s ‘c’ wave possibly moving above the ‘a’ wave high of August. I am open to that possibility. But with relative complacency now in force, the turn should arrive soon. Here is a measure of how little investors fear a sudden downdraught
Downside protection is back at the low levels last seen in 2017 – 2019 when stocks were riding high – and just before the Corona Crash of 2020 that resulted in a fall of about 40% in the Dow. The Corona pandemic came out of nowhere – and I believe the next crash will also be totally unexpected by the vast majority.
I wonder what it will be? Most of the skeletons in the finance world closet are known, such as the steep interest rate hikes and the massive debt levels held by almost everyone and also by many corporations.
Could it be not just the threat of nuclear war but an actual nuclear strike itself (Putin perhaps)? Or could it be a Chinese invasion of Taiwan? Or just a simple news alert that a well-known major corporation is about to go bust?
The bankruptcy drama surrounding FTX crypto firm is already known but there may be more to come emanating from cryptoland. But these are now expected with little potential for major surprises from crypto.
Meanwhile in the real world, sentiment is not so rosy
But this sudden desire to own risky shares is in stark contrast to messages coming from on-the-ground reports from the real economy. In the US real estate markets are freezing up. A recent headline tells it all: “Existing Home Sales Are Crashing At Their Fastest Pace Since Lehman” – a slump that is associated with the recent sharp hikes in mortgage rates. The collapse is a staggering 30% year-on-year – the fastest pace since the 2008 Credit Crunch.
And when home sales freeze up this much, prices always follow. But so far, demand remains strong and prices have remain elevated. But with rates between 6% and 7%, many first-time buyers are simply not qualifying for a home loan. And those that have recently purchased face the prospect of negative equity next year.
And with the cost of living rising everywhere, disposable incomes in the Western world are falling hard. And now the so-called ‘Conservative’ government in the UK has decided to ramp up taxes to the highest level since WW2 to add to the pain consumers are feeling from the government-forced energy crisis resulting from their Net Zero fantasy. Curiously, this major blow has been met with little opposition (so far).
Maybe it verifies the observation that the public always gets the government they deserve. To me there is no way back to a smaller state which encourages enterprise – until the whole political system collapses in an economic depression. Only then will politicians be compelled to act – but not these in power today.
Now we hear that Europeans are cutting back on foreign holidays by booking cheaper hotels and shorter breaks. It seems the tide of carefree spending is coming to an end. Welcome to the new Age of Conservation. It will play havoc with economies.
If so, how are companies going to make their profits increase next year as wished for by the bulls? And from April, UK Corporation Tax will be a staggering 31% higher than before. That means more work for clever accountants who will be enjoying their usual bull market.
Already, Big Tech is feeling the pinch with the FAANG Gang in severe bear trends as they lead the way lower (Meta is already down a staggering 78%). Many are slashing their workforces with the Christmas canary in the coal mine – Amazon – cutting jobs in the lead up to what is always the heaviest sales period of the year.
One other point – credit card purchases have reached ATHs despite eye-watering interest rates of 24% or higher. It seems many are charging normal day-to-day purchases in the hope that one day they may be able to clear their debt. This is a disaster in the making.
A note on trading strategy All traders must expect to make wrong decisions sometimes. That is the nature of forecasting the future. The Number One Rule in trading is this: When in a losing trade, make the loss as small as possible. That means setting manageable stops. And when the trade is in winning form right away, move stop close to or at your entry price so that a sudden reversal takes you out at zero loss or a very small one. That gives you the space to re-assess your view.
Remember, you can be right on a forecast but still lose money! Please don’t hang in there on a losing trade in the hope that it becomes a winner. Hope is not a trading strategy.
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Is Crude Oil really in a bear trend?
I have been working on the assumption that the oil markets are in deep corrections to the on-going bull trend. Recall, we made fabulous profits on the way up. We have seen energy prices a matter of great concern to the public and industry alike. In fact, they are rarely out of the news bulletins and MSM headlines.
The BBC in particular, seem to be obsessed with reporting the hardships experienced by ‘ordinary’ folk. They report on the efforts made to not turn on the radiators and to wear another jumper in the choice between food and fuel. They are specialists in dealing with misery.
So has the message got through to cut back on energy use? Many households are used to keeping the thermostat well over 20 degrees 24/7 and wear shorts and T-shirts even in the winter months. Has the conservation message reached these? It might when they examine their gas and electricity bills to come.
With this in mind, I am raising the alternate scenario that oil prices are actually not in major corrections but in bear markets. This is shown in this chart showing that option:
The March high at $124 is the ATH and the waves down are not exactly textbook but they fit. A move below the wave 1 low at $76 would help confirm.
In the market, there are two main camps – those that point to the ‘tight’ current supply that should be exacerbated by the recent OPEC decision to cut production and those that point to the rapid drop in consumption induced by the so-called cost-of-living crisis.
In view of the looming decline in economic activity, I will give it to the bears. And if oil prices do fall, that would fit in with a forecast for a more severe recession which would lead to the depression conditions I have long been forecasting.
Is Dr Copper pointing the way lower?
The copper market is said to have a PhD in Economics as it has consistently flagged changes in the global economy. In recent years, China has been the Number One consumer as it re-built its nation from a society of peasant farmers to a modern industrial state full of ‘middle class’ urban citizens in record time.
This building boom resulted in a surge in prices to the ATH in May of last year at the $5,000 a ton range. And then the final high in March of this year.
But the ongoing collapse in the real estate market there has resulted in slowing demand. Combined with the surge in the energy needed to smelt the metal has resulted in a reduction in a steep fall in prices to the current $3,600 region.
This is the weekly chart and like Gold, shows a lovely Double Top pattern
I have wave 1 terminating at the July low at $3,100 level. The recovery since then is a classic a-b-c second wave to last Monday’s high. Odds are very high the decline has started a major wave 3 down.
If so, then Dr Copper is signalling a weaker global economy this winter – and aligns with my forecast from other sources. With stocks surging against this backdrop, how much longer can they defy gravity?