The bears are growling at the Wall of Worry
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I have noted a sharp increase in bearish dire warnings of the global economy (and hence stock markets) in the MSM recently. I am watching the needle on my Headline Indicator very closely indeed.
Today, here is the Telegraph’s contribution:
In this article, Warner rehearses all of the well-known worries that have persisted for some time – including the idea that when central banks even hint at cutting back at QE, stocks will crash. But overnight, Japan has announced major extra ‘stimulus’ taking bond yields even deeper into negative territory. And Japan shares rallied hard.
Also, BOJ is on course to be the biggest shareholder in 55 of the biggest Japanese companies. And the other major central banks are not too far behind with massive share and corporate bond purchase programmes.
This truly terra incognita in central bank territory
Of course, all of this feeds into the notion that the stocks and bonds are in bubbles and are about to pop. This is a very common sentiment among retail investors – and the MSM.
And here is AEP’s scary article from yesterday: “China facing full-blown banking crisis, world’s top watchdog warns”. I must say AEP does frighten the horses more than most commentators.
Here, AEP rehearses the huge debt pile in China where total debt is 255% of GDP – the highest in the world for a major economy. Outstanding loans total $28 Trillion – bigger than the US and Japan combined.
With this background, surely stocks have to turn down to reflect the fundamental dangers. But as JM Keynes once said, markets can defy logic for far longer than most expect.
Remember the famous “irrational exuberance” speech of Greenspan in 1996 as the Nasdaq was shooting for the moon? Then, the bull run defied all logic as share valuations were based on ‘eyeballs’ and ‘equity funding burn rate’. The more the company spent and the greater the losses, the higher the valuation.
The Nasdaq did not top until three years after that Greenspan speech, making a short trade very painful if you had heeded the Fed.
In fact, some companies were set up just to lose money to attract high valuations for the managers to sell out (a pump and dump operation). Very reminiscent of The Producers Mel Brooks movie. You knew this was totally unsustainable, but you didn’t know when the top would arrive. That is the problem with bubbles. It all looks so clear in hindsight though.
Being very smart doesn’t help either in predicting when a bubble will burst. Even that great man himself Isaac Newton rode the South Sea Bubble up – and then down again. He lost a ton. This was the man that discovered major physical laws that operate the universe.
A very similar setup prevails in tech today – especially in social media stocks such as Facebook, although at least they are making profits meagre though they are.
One of the hottest sectors in US shares is said to be in biotech. But look at this chart of the Nasdaq Bioshares ETF
The decline off the 2014 top is in a clear A-B-C, which is counter-trend. That implies the major trend remains up.
And in recent weeks, the market has thrust past the green trendline in a bullish show of strength. And the pull-back did not make it to a kiss on the line. To me this is a very bullish chart.
It appears the Wall of Worry is getting taller and taller.
As a measure of retail investor sentiment, I like the aaii.com survey of US investors. Here is the latest result:
The percentage of bulls is well under the historical norm despite the Dow recently making new all-time highs. This is highly unusual. Also, bearish sentiment is above average, as is the don’t knows.
That’s what I mean when I say money managers are very bullish while mom and pops (those who read the MSM!) are extremely dubious of further upside.
This is a highly fragmented market – and has been for some time.
Later today, the Fed will speak and the market pundits will continue to treat Yellen’s utterances just as if it was coming from behind the curtain as the Wizard of Oz did those many years ago. He managed to fool everyone until Dorothy called his bluff and he was revealed as a fraud. I have a feeling that if anyone is going to do that job on the Fed, it will be Trump.
Gold holds support with accurate hit on trendline
I have an excellent long-term trendline on the daily
The trendline starts at the lows in Dec/Jan and the wave B low in June provides an excellent touch point, making the number of accurate touch points at least three. In my book, that is enough to offer that line as a line of support. I was then able to extend this line into the future as a line of support.
When the market dipped to the line last week, it was testing that good support. Of course, a break below the line would present a problem for the bullish case. But the support is holding (so far) and my next target is the upper pink trendline in the $1349 area.
From a risk perspective, going long near the trendline was protected by a close stop for a very low risk trade. Now the market has risen to the $1330 level as I write, I can invoke my Break Even Rule now and move my PS to my entry price, thereby ensuring whatever happens, I will not suffer a loss on that trade. For a trader, this is nirvana. I wish all of my trades were like this!
