Stocks Rally in a Crescendo of FOMO

Stocks Rally in a Crescendo of FOMO

Stocks continued their bear market rally last week as more investors are taking the plunge to ‘get back in’ for fear of missing out (FOMO). Bullish sentiment has changed up a few gears with widespread belief the worst of inflation is over and the Fed will now pivot away from raising rates aggressively.

With US gas prices at the pump falling from $5 to under $4 a gallon (eat hearts out, UK readers), consumer sentiment has moved up a touch from the deep lows of last month. And crucially, retail US stock fund flows have suddenly jumped ($11 Billion last week the highest since the rally began in June) with even corporate insiders now buying their own company shares at a rate of knots.

Thus, bullish enthusiasm has leaped towards manic proportions. And nothing shouts risk-on louder than the meme stocks such as Bed, Bath and Beyond. These are no-hope loss-making companies that the Reddit crowd latch on to in order to squeeze the mainly hedge fund shorts.

The shares made a low last month around $4 before soaring to over $12 on Friday in one of its regular short squeezes. Of course, the fundamentals are playing little part in the share price except after a short squeeze has run its course and new shorts come in to force the market to new lows. I am quite sure the smarter hedge funds employ that strategy after being burned the first time by Wallstreetbets.

Thus, we have a resurgent risk-on position that is driving the indexes higher. And a growing number believe the worst of the horrors of H1 are over and here is a Bloomberg headline I spotted today: “Don’t Buy The Stock Rally? The Smart Money Does” with the strap line: “The latest trading patterns suggest that the nasty sell-off of the first half of the year is over”.

I totally disagree.

A common feature of second wave rallies in a strong bear market is that at the wave 2 top, bullish manic enthusiasm for shares at least matches that at the ATHs (last winter) – and sometimes even exceeds it. Sunny uplands lie ahead! And the reversals often show up as a sharp daily spike that can slightly exceed a relevant Fib level. Let’s see how this could work in the S&P

Last week it pushed above the possible Fib 50% target which cancelled that level for a reversal. The next level at the 62% (around 4365) is the next likely target (currently 4280).

Also , I have decent possible tramlines working with an immediate target around the 4330 area. But if an overshoot occurs as is likely if a spike appears, a better target area is the 4400 mark or even slightly above. The equivalent region in the Dow is 34,300.

As for when the top is likely to occur, here is what I wrote in my blog two weeks ago:

Some almost random market observations

The US stock indexes made their lows on 16 June – about six weeks ago. The decline to that low off their January highs took 23 weeks. Thus, the current rally is lasting only a quarter of the time of the decline. I estimate that if we are in a wave 2 rally, it should last at least 1/3 of the time – a matter of 8 weeks. Thus, on this broad brush scale, the rally should last at least another 2 weeks. It could last another 5 – 6 weeks if a 50% relationship pertains.

Most second waves top out with a final spike flourish of panic FOMO buying which should easily be recognisable at the time. I want to be there for that (if it occurs) as it should kick off the delayed third of a third crash.

This top should be accompanied by much bullish commentary that claims the bear market has been stopped in its tracks and that blue skies lie ahead as the Fed is poised to lower interest rates (see above). And the US economy is coming out of its shallow recession with economic data now positive.

But that will coincide with T-Bonds topping (yields bottoming) and starting a major bear phase. All of that is for a few weeks later.

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So here we are – about 2-3 weeks from the start of September – a notoriously poor month for shares performance. Is it possible the wave 2 rally can last that long before flaming out in a blaze of FOMO?

To put this bear market rally in historical perspective, this is a fascinating chart showing how much retracement of the first major wave down off the ATHs occurred in four previous major bear markets:

chart courtesy www.elliottwave.com

In all cases, retracements were very steep taking then to less than 10% off the highs before they embarked on huge collapses. If the current wave 2 reverses at a large 32% off the ATH, then that would be the shallowest wave 2 rally ever with huge negative implications.

Next week I expect more volatility to creep in to the indexes. US consumers are much better protected against rising energy costs (the US is a net exporter) while lamentably, the UK could be once again net exporters (and have much lower domestic prices) but our glorious leaders decided against exploiting our own resources in their zeal for eco ideology/idiocy.

And as a result, we are seeing growing protests by the public against the very high energy costs and general exploding cost of living increases mostly engineered by politicians. The Don’t Pay UK movement is growing and could pose a threat to the energy companies unless the UK government introduces a massive support scheme that will be ‘temporary’ at first in the hope that NatGas prices will fall into next year.

But what if it doesn’t? What if fossil fuel prices remain stubbornly high for several years at least? The suicidal War on Fossil by all Western governments shows little sign of easing even in the face of much consumer suffering (and projected suffering this winter). Oil companies have little incentive to overcome the onerous regulations now imposed on new fields (except in less developed and more enlightened regions of the world).

And so-called renewables show little signs of being available on a wide scale that could replace fossil for many years hence. During the current ‘heat wave’ in the UK, there has been little wind and turbines have been still and as a consequence generated little electricity. Fossil had to step in.

In such a high price scenario, these ‘temporary’ supports will turn into permanent, as is the case for most government schemes. In fact, the Income Tax was first sold as a ‘temporary’ measure to cover the cost of wars with France in 1799 by William Pitt. I wonder what happened to that idea? Today, all government taxes and duties take about 50% of GDP.

And in the USA, the Income Tax was introduced in 1861 to help pay for rebuilding after the Civil War. It was set at 3% on incomes over $800. I believe the rate today is a tad higher than 3%.

An interesting thought – I wonder where we would be if most taxes had never been introduced and we could keep almost all of our income and corporations could keep all of its revenue.

Of course with politicians in charge, that could never happen. They were born to spend other people’s money.

But I digress – here is updated Crude Oil chart

With the high gas (petrol) prices, consumption has fallen and oil demand has likewise declined. That has forced the market down to the $87 area ( a substantial 30% off the March ATH at $130) but right at my lower trendline support. That also happens to be lying on the Fib 62% retrace of the previous wave off the December low.

That has created a mammoth three down a-b-c pattern on a strong mom div which is corrective to the one larger trend (up). Thus, I expect prices to edge higher and even go on to test the old ATH at $130 in a few weeks time.

Under this scenario, today’s protests about high energy prices may look like a garden party in comparison to what lays in store.

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