Stocks indexes are at major crossroads
US Crude oil is in the process of correcting the huge surge to my main target to the $128 high a month ago. Latest quote is $96 – a decline of $32 (25%). Of course, the price could rally back from around here – or it could correct further as some traders expect a price-induced increase in supplies to the spot market.
But I want to point out how we traders can use contrarian methods to offer clues to the road ahead in important markets. Traders make profits by anticipating the next move – not by following the herd and the headlines. Often, the best moves come by fading (trading against) the blaring headlines.
We all know the Fed has promised to raise short term rates aggressively to ‘combat inflation’ as they see it. They were criticised/mocked last year for delaying any response to already-surging commodity prices. Remember their ‘transitory’ description of the surging price inflation last year? That word has now vanished from their recent comments!
Stung by this criticism of their lassitude – as commodity prices kept surging into this Q1 – they have decided to bite the bullet and promise to increase rates by 0.5% in May (and increase it further several times later in the year). Some are predicting a 3% policy rate by year end – up from zero now. It has been many years since they last moved the rate by that much in one go. Usually they move in 0.25% baby steps. They have now bought 100% into the ‘permanent rising inflation’ meme.
But what if that is wrong?
They are flagging in no uncertain terms they are determined to stomp out inflation not only by ramping up rates but reducing their balance sheet (total stock of bonds) by selling their inventory in large swathes. Of course, this has been reflected in the relentless bear trend in Treasury bonds in the Bond-mageddon we are seeing.
But with crude prices coming off their highs, is it possible the Fed – as is their usual custom – acting too late and are trying to solve last year’s problem (which they could have done last year but were afraid to)? If inflation is easing now, their planned massive tightening moves would hurt the economy just when it is recovery from the pandemics? A recession/depression would surely follow.
But traders are usually a savvy bunch – could they be thinking what I am? With short-term rate of inflation rise numbers easing (reflected in the upcoming data?), would they reduce or even delay any of their planned interest rate increases and asset sales?
If so, then stocks would get a renewed bid as most investors are still prepared for the worst case scenario (it’s all over the MSM!). And so would Treasuries.
This possible scenario is actually a Double Contrarian – a rare animal.
If true, what irony! It would demonstrate yet again that the Fed – whose decisions are arrived by running them through committee after committee in a lengthy tortuous process – will be behind the curve yet again. So is the smart play to front-run them by buying equities (and Treasuries)?
The Fed made its hard-line decisions in Q1 when oil was trading much higher – and rising rapidly. It must have freaked out the decision makers as they saw price inflation getting way out of control and commodities heading for the moon. But now with industrial commodities correcting, the risk for further weakening of asset prices has lessened.
But on the other hand….
It is true that there are two sides to every market just as we have two hands. It is undeniable that bond yields have been rocketing with the benchmark 10-yr Treasury yield now at a new high of 2.8%. Only last December, it traded at 1.3% allowing US mortgage rates to be less than half of current rates.
Normally, this would be a depressive to stocks (and house prices), but with US salaries and wages rising rapidly, the higher mortgage payments may not be a game-changer (yet). Housing demand remains high and there are few signs of stress (yet).
But the technical picture for the indexes has suddenly clouded with the interest-rate sensitive Nasdaq diverging from the old-tech Dow companies last week. Yesterday (Friday) for example, the Nasdaq closed down 1.4% and the Dow closed up 0.5% – a huge divergence. this is not the mark of a decisive market trend.
Here is the Nasdaq on the 4-hr chart
It shows the huge rally off the 14 March low to the 30 March high and the decline off it which so far is in three waves to the Fib 38% support. And that level at 14,300 is the point where wave ‘c’ equals 1.618 x wave ‘a’. This is a common Fib wave relationship between these two waves in a correction to the main trend.
This means the market is at a major crossroads. If this current support can hold and provide a base for another major advance, it will very likely do so next week. But if that support gives way next week, the market will likely adhere to my original third down thesis and the wave labels would change from an a-b-c to 1-2-and a new third wave lower.
We should soon discover which option will manifest.
After major corrections, the Ags are flying again
Many will know I have been a long-time bull on the US grains (Wheat, Corn, Soybeans). They have been in major bull markets for many months – but the upward progress has not been one-way by any means. Of course, that applies to most bull markets that almost always suffer large downward corrections before resuming their uptrends.
The skill of a trader lies in managing these large corrections while holding on to the gains made to date. Even when the trend is strongly up, we often see dips appear on our screen. Is this the start of a major correction that could wipe out much of our hard-won profits if we continue to hold, or is it just a minor dip we can ride out before the upward trend re-asserts?
That my friends is the essential eternal dilemma of an active trader.
And deciding wrongly can cost. Taking profits too early or too late is a common fate. As is missing a good re-entry only to see the market sail away without you!
Yes, there is much involved in trading that is frustrating and annoying. But there are clues that can help us choose correctly.
But the one Golden Rule I have at hand is this: Whatever you do, do not put your account at a catastrophic risk. Use sensible stops at all times and tend to trade small. The more exited you are about the trade you are about to make, the smaller your position should be!
Here is Wheat on the very long term monthly
What an incredible rally off last year’s lows! Since January, the surge has been almost vertical as the Ukraine war has put a major question mark over upcoming supplies from the Black Sea bread-basket region along with anti-Russia sanctions curbing their exports.
In fact, the surge to the 8 March peak matched that at the previous peak in February 2008 at the height of the Credit Crunch in a post-working of the conditions we see today with food insecurity amid growing social unrest especially in less developed regions.
And this sets up the possibility we have a classic Double Top operating. But the pull-back from 13.50 to the recent 9.70 low has been a massive 28%. Traders still holding long positions off the high would be suffering a massive loss. But when the 13.50 print was made last month, that was surely a signal to take at least some profit off the table. After all, no tree grows to the sky.
But now, is the correction over and is it ‘safe’ to re-enter?
On the daily, the decline is in a clear three – and that is always corrective. We also have a good mom div and so odds favour a resumption of the uptrend. The trend remains up and trading with the main trend should always be your default position (unless you have a very good reason not to do so).
The odds favour a move up to at least test the old high. Of course, much will depend on the weather this season (northern hemisphere) but any adverse conditions in the main growing regions will have an outsize bullish impact. Global stocks remain very low. We may even see moves above 13.50.
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NatGas remains near highs – and into major resistance
US NatGas prices have just rallied into major resistance at around the 63 region.
It has rallied off a very deep wave 4 correction as seen on the daily chart
That was a mighty pull-back – just before signs Russia was serious about invading Ukraine to prop up the market prior to launching another leg up. Of course, traders who were long up to the October highs had signs the rally was running out of steam and taking profits was a very prudent move.
And now with the market in a near-vertical rally phase and in a near-term overbought condition, I expect another pull-back in a small fourth wave from near current levels. Again, taking at least some profits here would be prudent.
But we are easing into the northern hemisphere summer where gas demand falls. Adding to pressure is the political demand towards Net Zero with very visible demonstrations against the fossil fuel ‘enemy’. And last week Boris laid out his plans to cut fossil and go full nuclear, wind and solar. Oh, and to upgrade the nation’s elderly electricity grid network. New stylish pylons to replace the ugly old ones? And windmills and solar farms covering the landscape?
Farmers are in trouble as their input costs (fuel and fertilizer) are sky high so they may be induced to turn their farms into solar and/or wind farms – provided the subsidies are large enough. After all, they cannot be allowed to stoop to riding around on bicycles rather than the usual Land/Range Rovers can they? Hmm.