The Bitbubble is deflating – are stocks next?
China is the pin that has popped the Bitbubble. It is trading just over $500 which is a Fibonacci 62% decline off the $1250 top made 29 November. As I wrote in my last WR, it is pure speculation that has driven both Bitcoins and US stocks to their highs. In the case of Bitcoins with nothing of value backing them, it acts as a normal currency whose value is entirely dependent on the confidence (sentiment) of those using it.
It is not money in the sense that the dollar is. The dollar is backed by the tax-gathering (and US credit) powers of the IRS, which does not seem to be weakening just yet. If that time ever comes, then the dollar will drop, but don’t hold your breath.
Meanwhile, the Bitcoin has no such backing and its value is entirely dependent on confidence, or lack. I mentioned that it has risen one hundred-fold in one year. I just cannot think of another currency that has seen such a bull market, except perhaps the Reichsmark in Weimar Germany (in reverse, of course).
This deflationary bursting of the Botbubble is just one more sign that social sentiment is on the wane. And things can get real ugly real fast.
Many are calling for further gains in 2014 for stocks. This is a very crowded trade and don’t forget that markets exist to disappoint the majority.
The Fed is taking baby steps
That was a wild ride yesterday! The Fed are taking baby steps to wean the markets off the QE teat and stocks made a giant leap upwards in excitement that the taper was not as heavy as was expected. But that leap is pushing stocks closer to their highs which I expect very soon. While US stocks flew, UK and European stocks lagged badly. This confirms my long-standing thesis that the next deflationary wave is emanating from Europe.
But the news of the day was the reaction of the dollar – it leaped in a key reversal which was notable in the EUR/USD. As I forecast, the 1.38 level is proving a mighty strong barrier and the odds are rapidly increasing that the next major move in the euro is down.
What concerns the Fed is the rapidly dropping consumer demand. Here is the Personal Consumption Index, which is plunging:
With aggregate demand falling because Main Street has suffered from QE (while Wall Street has flourished), the Fed are hoping they can get the consumer to spend again. But they have the cart before the horse. It is social mood that drives spending, not vice versa. If the consumer feels gloomy (and in yesterday’s MW Trader email, I showed the Bloomberg Comfort Index), even free helicopter money will not induce consumers to spend – they will just pay off debts and save the rest. That is what happens when consumers are in a negative mood.
The Fed has been hoping that the trickle-down effect of higher asset prices will raise the mood. Good luck with that. I believe the Fed rejected the helicopter idea to get dollars directly into consumers’ hands because they knew that most of the money would not be spent – and they had their banker buddies to satisfy.
My feeling is that Christmas retail sales will be a big disappointment both in the UK and USA. That will be the catalyst for a reversal in stocks. We will see further small gains in stocks, but around the New Year, the major turn will come.
Here is the Dow:
Yesterday’s new high makes the dip a definite A-B-C (my alternative labels) and the strong rally is a w3. I expect a small dip before making a new and final w5 high in the next few days. But we are entering a traditionally low-volume trading period over the holidays, which makes the potential high for some strong moves down as stope are hit.
But the divergence between the Dow and the German DAX and UK FTSE is stark. Here is the DAX:
The rally looks like an A-B-C which needs another push to the Fib 78% level to complete. With the potential neg mom div at the C wave, that will be a great place to look for a short trade.
And here is the FTSE, which is lagging everything very badly:
It hasn’t even made a 50% retrace – and may not. This rally also looks like an A-B-C on a big neg mom div. This is shaping up for a classic reversal very soon.
But my chagrin at seeing US stocks rally is tempered by my long Alcoa position, which is knocking on the $10 door again. It’s an ill wind….
EUR/USD
With the huge dollar rally, the euro has again turned back from the 1.38 level:
Here is the daily showing the large wedge – and the potential double top at 1.38. My main target is the lower line in the 1.36 area and a break of that should propel the market quickly to the 50% level at 1.33.
I remain very bearish the euro. Also, the GBP/USD will follow the euro down as the dollar embarks on its third wave up.
My Trade for 2012 – 2014 long USD/JY had a boost yesterday and is on its way to my first target at the 105 – 106 area.
I remain very bullish the dollar. Next year will be the year to swing into dollars from all assets in a Great Roatation (which you will read about later as the media catch on).