Last week with the Dow trading at 24,300, I forecast that the bull trap was about to close. Now with it trading over 1,000 pips lower, that trap door is creaking gradually towards the inevitable.
With the new-found bulls rushing in to buy those ‘cheap’ shares – with fond memories of 2019 when valuations ramped up sky-high – they surely must be experiencing buyer’s remorse now. According to Bloomberg, the average US shares is down 18% so far thus year even after the explosive May rally.
Once again, this rally has been fueled by the big tech big names with Apple testing the $326 ATH of January/February. As a matter of fact, since Apple has been the leading Big Tech share (along with Amazon) in the FAANG Gang, its movements are of prime importance in the direction of the general indexes (Apple is a component of the Dow, the S&P 500 and Nasdaq)
Here is the 4-hr chart
The waves appear textbook for the start of a major decline very soon. With the large momentum divergence into my purple wave 2 high, it signals that the buying power is weakening. And note that if correct, that would set up a magnificent Double Top with the $326 ATH set in January against the wave 2 top in May at $320 (just $6 off the ATH).
If I am correct, that would be an historic Double Top to go down in market folklore. And importantly, it would only be noted by most pundits when the shares are much lower! So here is my roadmap on the daily
Only a large surge above the ATH would make me go back to the drawing board.
So where are we in the Dow? The late rally last week took it up to the meeting of the neckline of the Head and Shoulders pattern and the Fibonacci 50% retrace where strong resistance lies
This is typical action following a neckline break. With the market kissing the neckline, I expect a Scalded Cat Bounce lower next week as my top option. Only a very strong sustained surge up on Monday would cancel out this forecast.
But there is another alternate option (there always is!) – and it is this:
With the threes, one more push up to complete purple wave 2 is possible. But with the internals (NYSE trade volumes, put/call ratios) weakening, this is a less likely option – but one to keep in mind if we get a surge early next week with no return lower in a spike. That’s why the current kiss level is so crucial as a moment of truth.
Should we trade like Buffett?
Warren Buffett is probably the most avidly followed famous investor in the world – that is no secret. Whole books have been written about how he has built Berkshire Hathaway into a hugely successful investing machine. Many private investors hang on h is every word to glean clues as to how he does it.
And he is famous for ‘Buying America. He has said that no-one goes broke betting on America in the long run. The long list of company holdings is dominated by US names. In fact, the company is more like its own stock index than a normal share.
But just as it is usually best to judge a person on what they do rather than what they say, has Buffett been ‘Buying America’ lately? If so, his cash reserves must be pretty low, right?
Oops! Is that chart upside down? No – he has actually been selling shares for at least 10 years!
Does that square with his perpetual Buy America slogan? Hmm.
And now we hear that he has dumped major stakes in some of his cherished holdings (those he would ‘never sell’) – including Goldman Sachs. And that comes right on the heels of his much-noted dumping of US airline stocks.
Of course, since plays the long game, this accumulation of cash may be in readiness to snap up bargains post-virus slump. But ten years (at least) to build cash reserves suggests something a lot more sinister. It certainly did not start with the appearance of covid.
He is a value investor and this says a lot about the valuation of US shares over a ten year period. It is way too high is the obvious conclusion.
And Buffett has been Selling America. But has he proudly stood on the podium and said as much? Of course not – he would lose a great many acolytes who have been brainwashed into Buying All Dips.
And his action aligns nicely with my forecast for further weakness over the next two years or so.
And here is what investors think of Berkshire – they are trading at $170 – $60 off the ATH (26%)
The rally off the Corona Crash low in March had reached the Fibonacci 50% on the nose and since then, the market has dropped much deeper than the Dow or S&P. It is in the early states of a huge wave 3 lower.
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The upcoming US Presidential election is fascinating…
…but not in the usual way. We have the incumbent President Trump who has said that injecting Clorox bleach would make a good blood disinfectant to kill the virus. The MSM has had a field day over that one.
And now the challenger Biden has just stated “85,000 jobs have been lost in the US and millions of Americans have died” in a recent gaffe-laden speech.
So which clown will it be? If anyone is in any doubt that the level of politics in the US (and elsewhere) has reached subterranean levels, then please leave the planet you are living on and come back home.
Further thoughts on the pandemic
Many traders/investors are of the belief that when an effective vaccine is developed and the inoculation of millions gets under way, markets will get back to normal (up). Surely, it is only a matter of time before this happens. That belief is one reason why shares are in rally mode off the March 23 lows.
I am of the belief that we are in a bear market off the February highs with the Corona Crash being the first of many sharp declines to follow. No developments on the pandemic front will alter that. I base that view on the wave patterns and sentiment.
Remember, the bull market was driven to extreme heights of complacency with all readings of bullish sentiment off the scale. Extreme risk was seen as normal. One measure was the spread between junk bonds and Treasuries which reached paper-thin levels. Junk bonds are high yield bonds issued by the riskiest of companies, such as debt-laden shale oil outfits. US Treasuries are considered risk-free.
Not only that, but most of last year’s corporate bonds were issued ‘cov-lite’ which gave the buyers little protection in case of default. Buyers of these bonds evidently saw little risk as they chased yield down the quality curve.
With risk out of the picture, the way was clear for a ‘surprise’ crash which I forecast. And the appearance of the pandemic early this year was perfect timing for such a surprise. In fact, the news followed the market lower.
Now the rally is about two months old, investors have strengthened their bullish stance as no new crash has appeared. And the current re-opening of society in many nations is vivid proof that positive sentiment is climbing. This is a great time to full yer boots is the cry.
And once again, with markets teed up and bullish sentiment back to almost manic levels, we are on the verge of another sharp leg down as the bull trap closes. That will be another shock to investors. And no vaccine news can change that. It is written.
But the over-riding factor is that social sentiment – which drives the stock market – is a lot more fearful. That is amply demonstrated by the almost complete lockdown compliance in most nations (except Sweden, which imposed no strict rules).
My question is this: How come billions of people around the globe decide to self-isolate in the face of a then-unknown threat that now appears to be doing no more harm in death toll than a normal ‘flu outbreak (or even less)?
It is because the public were primed to act out of the latent fear and growing negative mood they already felt internally.
If that were not so, then I very much doubt we would have seen such a complete response to an unknown threat if public mood were not so primed. The response would have been piecemeal and many groups would have rebelled. That did not happen because their latent fear took over – and fear is the enemy of bull markets.
Will Gold reach $3,000?
Many pundits are calling for the $3,000 level to be reached soon with manic fervour at boiling point. Hedge funds are 10/1 bullish on the COT! In fact, several major banks have that as a target. But will it?
Until the breakout last week, the market has gone nowhere for a month and is now making its final thrust up out of this wedge. When it terminates, the reversal will be extremely sharp and the trapped bulls will head for the exits.
Watch this space.