Stocks up, mood down – a glaring mis-match
The Nasdaq has advanced an astonishing 60% this year in spite of a huge spike in interest rates. I see that last week, US financial advisors made their largest stock inflows since at least 2016 – the vast majority into the Marvellous Magnificent Seven. These guys are certainly not early in the trade!
Bullish enthusiasm is now riding high as investors believe interest rates have peaked, inflation has been licked. Iran has not attacked Israel and we can now buy shares with total safety. The lowly VIX is telling us complete complacency rules (again).
But social mood remains negative with cost-of-living worries dominant. Retailers such as Walmart (seen to be the litmus test for the state of the US consumer) shares plunged last week with a negative outlook for Christmas spending.
So what to make of this seemingly perverse action with stocks up and mood down? The Wall of Worry is certainly high – but the indexes are climbing it (so far).
Most of the upside in share indexes is due to the M7 which are more or less insulated from the ‘real’ economy. These have a magnified effect on the indexes with their mammoth valuations. For a peek at the real world economy, here is the US small cap Russell 2000
We have a convincing five down/three up to the Fib 50% and while it may push up to the Fib 62%, the rally’s end is surely near. That is the way I will be playing it.
Anatomy of an ideal Tramline method trade last week
People can be divided into investors and traders. An investor seeks income from their investments and are less concerned with market price fluctuations. Traders never seek income but are 100% concerned with price fluctuations and how to profit from being able to identify the coming trends. Spread betting is the ideal medium in the UK for traders (no tax on profits).
I am mainly a trader and have developed my Tramline Trading method to seek out promising low risk/high probability setups where I expect the market to move in my direction right after taking a position, or close to it. I emphasise low risk because just jumping in and taking a high risk position can (and often does) lead to a disaster even though you are proved right in the end. Trade timing is 100% essential. Your guess can be right but you can still lose money especially when spread betting!
So what makes a good trader (rather than an investor)? Here are some qualities that I believe necessary:
- A good trader is never wedded to a particular ‘bullish’ or ‘bearish’ view. If he/she is long and the market is going up, then you are correctly positioned (and vice versa). We are always prepared to change view (and position) if our analysis strongly suggests it. We are prepared to take a highly contrarian view when indicated.
- Good traders always have a reliable technical method of analysis and we are prepared to assess a setup in front of us and be able to immediately pull the trigger either long or short when our analysis tells us that we have a low risk/high prob setup. Good traders are rarely those that have to think about it for a few days. We are not fence-sitters.
- A good trader always uses stops to limit potential losses if wrong. Sometimes, the less likely option will play out and we must be prepared for that. That is why I have my Break Even Rule, my 3% Rule and Split Bet Strategy. That keeps us in the game. And finally, no method on earth can offer us winners 100% of the time. We have to use the time-honoured rule of cutting losses and letting profits run. There is no way to tell in advance with 100% confidence that your trade will be either a dud or a whale.
Of course, this is well and good depending on what time frame you are in. Most of us by necessity focus on the short term (after all, the Dow can and often does move within a daily range of several hundred points and even a £2 spread bet results in a change in your account size by £1,000 or more in within a day).
As spread betters using a high degree of margin, we must therefore hone in and try to find a very precise level to enter a trade. That is why I often need more than one attempt before I latch on to a good position. And of course, few of us can stare at our screens all the time during market hours. We often miss important turning points in the day.
But the really big money is made by riding a solid trend – and getting on board as early in the new trend as possible. Of course, at the start of a new trend, the old opposite trend has been in force usually for some time and the reversal always looks like a counter-trend move at first, They never look like the start of a new one!
The temptation is always to fade the bounce – sometimes that works and sometimes not.
So here is a great example in real time of what I mean.
I had been tracking the USD/JPY cross for several weeks and we had been flat for my VIP Traders Club members. But I felt that as the market had rallied strongly above the 151 level to new highs, it was only a matter of time before the Japanese authorities would step in to defend the weak yen as they had done so many times before (usually by raising or threatening to raise rates).
And there were signs that with the US Treasury yields moving off their highs, the yield differential (which is the basic driver of the dollar/yen cross) was narrowing. That is a change from the situation before the rally to 151. So now I began looking for signs of a reversal.
This is the very long term picture on the monthly for perspective:
Here at the 150 ‘ceiling’, it has made it to the same level as the 1998 high and the October 2022 high. On both occasions, the market reversed and started a massive – and highly profitable – bear phase. So will history repeat today?
Then on Thursday morning I identified my first Elliott five waves down and three up to the Fib 62% retrace. That is a critical clue that the trend had changed. As you know, that is my favourite wave pattern setup and a gift to all Elliott wave readers. This was the ideal setup I was looking for. This was truly a low risk/high prob opportunity:
So on Thursday morning we entered our short position with high confidence using a stop placed just above the current level. And this is the current position at the weekend:
So right off the bat, we were in profit and can now move our stops to Break Even – thus guaranteeing a ‘free’ trade. Nice. Now the task is to navigate the waves down – an equally tricky job. But at least we now have the confidence that no matter what happens (almost), we cannot lose money – and have the opportunity to make a big gain. Psychologically, that is hugely important for our confidence levels.
Global debt remains sky high – and climbing
Here is a very interesting chart showing the massive growth in debt public and private since 1950 as a % of GDP.
It now stand at around 250%. It is said that when a Western nation’s debt exceeds 130% (as is the UK’s), the higher interest payments exceed the growth rate and wealth-destroying higher taxes become necessary.
Much of the recent cheap debt has been directed to unprofitable enterprises and in recent blogs I have shown that the multi-trillion ironically-named Inflation Reduction Act that has boosted US public debt will be wasted as the favoured ‘renewable’ wind and solar sectors are imploding. This has all the hallmarks of a disaster waiting to happen when rates stay high and go higher and crash the global economy.
Next year, a huge tranche of debt must be rolled over – at much higher rates. This will force many more companies (and individuals) into bankruptcy especially if the growth in the real economy fails to pick up.
One final note – I see that trouble is now brewing in the high-flying AI industry with the sudden departure of the OpenAI boss. AI is still still looking for effective regulation as it currently harvests copyrighted material without agreement. Law suits are sure to follow.
And in Europe, we are seeing more wanting to enter illegally, not just in the UK but all around the EU borders. These are from mostly Muslim countries (ex Russia) – and that is sure to increase tensions with the locals – and rebel against the status quo and the installed politicians. In addition, there is a dramatic increase in anti-Semitism – and we all know where that has lead in the past – more totalitarian governments.
Political parties are tearing themselves apart with polarisations widening. Trust in politicians plumb new depths. And trust in the police to counter crime ( esp shoplifting) is darkening. Woke-ism is dominating national institutions and the civil service here and abroad.
And now in the UK, a top politician has suggested breaking international law and just send asylum seekers to Rwanda for processing with no chance of legal challenges. That is what I call a revolution in how we are governed. And I am sure it has wide support with the public.
Also, the Net Zero fiasco is hardening most home owners and non-fleet drivers into hardened resistance to EVs and heat pumps. They are just not trusting their lords and masters to act for our benefit, but for those of the elite (who have big investments in the wind and solar farms). Yesterday’s news that payments from the output of US solar farms are to rise dramatically, thus scotching the claim that ‘renewables’ can provide cheap power.
Germany is a prime example in what happens when nuclear is shut down and ‘renewables’ are pushed by eco-fanatics in government – the highest electricity prices in the world. And now that nation is in a recession. Spot the connection.