I believe last week will go down in history as the week that stock indexes rolled over into long term bear markets. That marks the end of the Great Asset Mania. The world is entering a much more conservative phase where rampant speculation will no longer be rewarded. And savings accounts will be treasured, rather than shunned as they are today.
Follow the corporate insiders (who are net selling shares) and prepare for the Great Asset Bust.
Just two of many pictures of the extreme optimism/speculation that has gripped markets over the past few years, here is an eye-opener:
charts courtesy www.elliottwave.com
Exhibit 1 shows the NYSE margin debt which is at a record high. Obviously, when investors borrow funds to margin their purchases on the leading global stock exchange, they are feeling bullish. An extreme level of debt means they are extremely bullish. Today, they are feeling extremely bullish. And that feeling has been augmented by the record low interest rates on that debt of course. This is extreme herding in action. Extreme herding one way leads to extreme herding in the other.
But the chart clearly demonstrates that when major market peaks occur, margin debt drops as investors take fright and the debt begins to be repaid. That is starting to happen now and will accelerate as stocks decline.
Exhibit 2 shows the vanishingly small deposits in US money market funds. These are liquid funds placed by investors on deposit that earns interest geared to the market T-Bill rate. These are funds that potentially are used to buy shares. As so many participants believe stocks can only go up, where are the funds to buy them? Previously, the Fed up to now obliged with their QE schemes.
But now they are pledged to withdraw the punchbowl – and that may occur sooner rather than later. The potential stock buying power is vanishing before our eyes.
And what a perfect time for stocks to roll over! As I observed before, markets often tend to reverse major trends around the time of the New Year when conditions change (or at least, the perception of conditions).
And that perception now is – Good news is Bad. We are in a new era. It will take most investors some time to acknowledge this.
Yes, whenever the economy blipped before this year, any bad economic news was considered good for shares as more Fed stimulus was guaranteed. But yesterday, the first jobs report of the year was a big miss. Did shares rally on this ‘bad’ news? No it did not, nor did Treasury yields spike as would have been expected last year. We are in a new era and I have a feeling that any news good or bad will now be considered bad for shares.
The catalyst for the topping of the Great Asset Mania (GAM) was the Fed -or rather the surging bond yields on the back of surging inflation. The Fed has just followed what was already happening in the Treasury market. On Dec 1, 10-year Treasuries (that most used to determine many US retail interest rates such as mortgages) stood at 1.35% in mid-December. Yesterday it almost hit the critical 1.75% level. Some might view this 0.0.4% yield increase as negligible. But at these low rates, that 30% increase is far from minuscule when many are borrowed to the hilt (and beyond).
That represents a 30% increase in mortgage interest payments (at least) – and that is why bank shares are rocketing as they eye vastly improved earnings (we are long surging Lloyds for Pro Shares). Incidentally, when the bank shares were hit hard in the Corona Crash with Lloyds down to 24p in September 2020, we started buying.
On Wednesday the Fed issued the minutes of its December meeting. The fact that it spelled out in no uncertain terms that it was about to tighten, what surprised me was that it took so long for traders to latch on to the bearish implications that were already out there before Christmas. In fact, the Dow only made its ATH on Wednesday, but then started to collapse when the penny finally dropped.
In technical terms, that bullish holiday period gave the Dow and S&P time to make one more high which was needed to satisfy the textbook EW pattern that was incomplete before Christmas.
All other major US indexes had already made their ATHs previously – the S&P on Tuesday and the Nasdaq back in November. A little-watched major index – the Russell 2000 of small caps – sports excellent EWs and chart patterns on the weekly:
From the March 2020 Corona Crash low, it has rallied in five clear waves to the ATH at 2462 on 8 November and on a large mom div. The rally has followed my uptrend line and the first sign of a major turn arrived when it fell below it in July, rallied back to the line and planted an accurate kiss on the underside of that line in November and is peeling away in a Scalded Cat Bounce lower (see my text pp 83 – 84), 143).
It is now starting a major five wave decline that should take it well below the Corona Crash low. That forecast applies to all other major indexes.
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What happened to the universal ‘Lower for Longer’ theme?
The big mantra last year was Lower for Longer (for interest rates) as investors trusted the Fed would never stop spraying markets with ‘stimulus’ funds. But with consumer price inflation riding high, the Fed is being forced to raise. It will do so with a heavy heart. They now see the danger is for equity investors to run scared while valuations are out of sight. They will resist as hard as they can.
You can be sure they will utter soothing words when markets fall. But the big difference this time is that they will be powerless to stop the rout. In fact they will acerbate it.
But the bond yield curve is steepening fast, so will they do it sooner or later? The March meeting is being touted as the most likely time they will raise. But if energy prices keep climbing (we are long energies for VIP Traders Club), they may be forced to raise higher and sooner. That will devastate equities in a major crash if they raise sufficiently. If they only raise a tad (as the BoE did recently), we may see a brief spike up in shares. That will present us with another great opportunity to short (or exit equities) esp the big name Tech Titans.
Of course, the Fed realises this and they will do everything to keep the horses from not being frightened. So January will be a game for conventional traders to guess the Fed’s next clues and for vol to ratchet up (we are long VIX for VIP Traders Club). Remember, VIX is a measure of the volatility of S&P options but generally, when shares fall, VIX rises. As an unconventional analyst, I will continue to use my Tramline methods and not try to out-guess the Fed.
Before I leave, here is another market that is at the forefront of the mania – Junk Bonds. Remember, these are issued by the riskiest of companies and are highly sensitive to interest rate changes.
The weekly chart shows the roll-over and is about to break the 50-wk MA but what is striking is the huge mom div at the recent high. This portends a collapse to at least the red 200-wk MA quite rapidly. Remember, junk bonds and equities usually trade more or less together.
Watch out below!
Soybeans are approaching my targets
The financials are not the only markets we are very successfully trading. We have been a long time bull in Soybeans (and Wheat and Corn and Cotton) from 2020 when trading below $9. Here is latest daily chart
The beans have been in a major correction since last May and only completed it in October. We largely sat this one out and only resumed bull positions just after the low was reached (I noted the huge mom div that heralded a likely shar advance, which has occurred). But now it is approaching the first Fib target in a major third wave- and close to the important gap from last June. remember, third waves are usually long and strong. They seem to go on far longer than you can imagine!
But with bullish sentiment riding high, I will be looking to take major profits on any further push up. A key factor is food inflation expectations are running at extreme levels and that is usually when surprises occur – to the downside.