The Big Tech melt-up – near its end or just starting?
Last week the Nasdaq screamed higher as FOMO investors threw caution to the wind and embraced the bullish frenzy unlocked by the promise of AI to explode growth’ shares’ earnings. But meanwhile ‘value’ shares represented by the Russell 2000 remined relatively moribund. What a difference!
I see two main factors at work, The bulls are buying on hope – hope the AI revolution that has followed on the heels of the failing EV revolution that created the boom/bust cycle in EV shares can replicate its boom phase this year.
The bears – and there are very few of this rare breed – are looking at the trends in the economy and interest rates and see the mother of brick walls just ahead.
Complacency runs rampant with the VIX Fear Index at lows not seen since the late 2021 stock index ATHs. Bullishness is likewise off the scale with DSI (Daily Sentiment Index) in the Nasdaq back at 93 where it was last seen at the December 2021 ATH.
And here is another brick in that wall – the looming debt crisis in France:
A downgrade by Fitch and a near miss by S&P have become a major issue in the French political debate, forcing Emmanuel Macron to pull forward retrenchment.
The debt ratio has risen to 112pc of GDP. The risk spread between German and French 10-year bonds has doubled to 52 basis points from pre-pandemic levels.
Debt refinancing and interest payments over the next year amount to 24pc of GDP for Italy and 16pc for France (ECB data).
And bonds issued at negative rates during the QE madness will have to be re-financed at much higher rates this year and next.
I had a double-take when I read that – debt costs will run to a staggering 24% of Italian GDP. That puts a squeeze on investment and guarantees higher taxes. And this looming crisis in bonds is being replicated in many other countries.
Of course, the bulls believe there will be great jobs created by the AI revolution – and great efficiencies leading to a booming bottom line. But even in today’s relatively good jobs economy, will anyone want them?
I was shocked when a dog-walking friend told me of the difficulty filling vacancies in the mid-size company where she works. All of the recent job applicants either did not turn up for the interview or did and failed to show up for work. All vacancies remain open. Apparently, the ‘applicants’ are better off on benefits (and lots of free time) but must attend a certain number of job interviews to keep qualifying for their generous un-taxed benefits.
As I have long suspected, in-work and out-of-work benefits in advanced nations such as the USA, the UK and Europe have grown so great that work has become very unattractive at the lower scales. So from the ‘safety net’ intention after WW2 that helped many to get back on their feet, living off benefits has become a lifestyle choice for a growing number.
Incidentally, I have long suspected that our political masters are covertly supporting the waves of legal and illegal (small boat) immigration, many of whom are desperate to come here, in order to boost the tax take and GDP, and provide the work for them that the indigenous people are refusing.
With an ever-growing benefits system in a low-growth economy and national debt forever rising with ballooning interest payments in a rising interest rate regime, ever-greater tax burdens will be imposed. That is certain. They are already the highest in the UK since WW2.
The looming brick wall is where higher interest rates, higher taxes and high inflation will slam shut any prospect of higher growth – and eventually lead to a bear market. A growing number of mobile higher income individuals are already leaving the UK citing the onerous tax burden – and sky-high housing costs.
So how is the tech-heavy Nasdaq 100 faring in this Melt-Up phase?
Since mid-March, it has engaged in an ever-steepening rally (some call this exponential) and has reached close to the Fib 76% retrace and is only 1,500 pts from the ATH of November 2021. So far this is a bear market rally but any close above the ATH will nix that description.
By the momentum and RSI charts, it is now vastly overbought and combined with the bullish sentiment indicators such as DSI at a record 93% bulls and a highly complacent VIX, the odds for a significant pull-back is high.
But just as 100/1 longshot horses do win some races, I can not rule out an extension of the rally near term. In fact, that is my preferred roadmap.
Why? Because last week the Fed issued a strong signal they will increase rates in July and beyond to kill inflation and stocks still rallied on the news, then the market has other things on its mind.
For today’s traders, FOMO stars in their eyes trump interest rates!
Those around at the time remember the ‘irrational exuberance’ comment of the then Fed governor in 1996 to the dotcom boom where the Nasdaq rose from 1,000 at the time of the comment to achieve a top at 5,000 in March 2000 – four years later. That was when it was even more irrationally exuberant!
History is replete with examples of how markets can achieve unbelievable heights (and barely believable lows in bear markets).
The trend is undoubtedly your friend and until I see definite signs of a major turn, I will stay with the bull trend but expect at least a pull-back in due course.
The ags are flying!
I have been covering many ag markets recently and have pointed to the very great bullish potential. Last week I pointed to the early El Nino weather phenomenon building in the Pacific that may be the most destructive Boy Child in recent memory.
But near-term concerns over the drought in the Mid West growing regions have sent soybean and and corn futures sharply higher in recent days.
But up to 1 June, the beans were in a sharp decline as prospects for another record global crop loomed. But the unexpected lack of moisture for planting in the US Mid West saw the market perform a sharp hand brake turn back up. Prospects for a record US harvest have dimmed.
And what a poetic time to do it with RSI dropping into oversold territory after a three down off the February 2022 high at 17.60.
This now sets up my first major target at a kiss of the lower trendline around the 14.50 area.
Of course, if the El Nino does arrive on the scene for the Southern Hemisphere crops next season, much higher prices are likely.
Not to be outdone, the Tropicals are advancing but for different reasons. I have covered Sugar and Cocoa in recent blogs and here is Coffee
Is in a general uptrend and if the lower tramline can hold, it will be up and away.
New York trades the Arabica varieties (makes espresso) while London trades the Robusta types (makes instant coffee) and here, prices have just reached a seven-year high. Vietnam is now a major producer and is bang in the path of any El Nino weather effects. Thus, this great weather uncertainty should keep supporting prices of both.
Has NatGas finally formed a base?
NatGas has been in a steep decline since last August as supplies have been more than adequate. We have been mostly standing aside in this period except for a few aborted attempts to find a low. But last week, I see signs that the lows are finally in
With many US shale drillers shutting down because of the low prices, we have ideal conditions for a new bull market if the warm weather in Asia and elsewhere results in m ore gas being used to produce electricity to power air conditioners.
As ever, the cure for low prices is low prices.
But with RSI now at an overbought level, I expect at least a pull-back from around current levels to offer nimble traders a great opportunity to pick up some cheap gas on dips. Will we see a repeat of the great bull run 2021? That gave some terrific profits for VIP Traders Club members. I will certainly be watching for further signs of a repeat in NatGas and in Crude.
The bottom line: Conditions are ripe for very active markets this summer. I do not advise traders to take many holidays in what I believe will be a highly profitable phase.
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