The final melt-up in stocks?
Many are calling this a ‘melt-up’ phase in US stocks – and they are right! The latest ‘terrific’ news that the MSM have jumped on is the intimation on Thursday the Tariff War is all but over. The Dow jumped another 300 pts. And is getting very close to one of my targets at the 28,000 zone.
But of course the rally is not about Tariff Wars, Brexit, interest rates, Trump, China etc. It is about the ephemeral concept of sentiment – and that has been bullish for months. The DSI bulls count in the Nasdaq is close to 90% and has been elevated for some time. That is what is propelling the market ever higher, much to the the amazement of the bears.
Yes, there are plenty of reasons to be bearish if you look into the latest economic data points. For instance, last week it emerged that US consumers are getting much more worried about their future prospects. Worried investors do not usually go gung-ho on buying shares. In fact, they are more inclined to cash out. This ties in with the current mood of extreme anxiety about the climate.
I must quote you this from the cover of the landmark book on manias: Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay:
This classic catalogue of some of the more outre enthusiasms – speculative, social, religious and just plain daft – serves as a salutary reminder that the follies of mankind are not unique to the modern world.
The current climate mania I am sure will go down as one such folly. To me, it is a great modern example of irrational herding – a phenomenon I discuss often in financial markets. But as a trader, I ask: Is the climate scare affecting the markets and if so, can I make money from it?
As manias go, it has everything. Its adherents do not understand the science of climate (who does? – it’s complicated!) but claim they do, they overlook obvious facts that counter their views, they blindly follow a ‘leader’ who is a schoolgirl, and they glue themselves to planes, roads and railings. Manias by definition are irrational and lead the masses to do irrational things. And it is apocalyptic – the name Extinction Rebellion amply demonstrates that!
Every weather event – and even the welfare of polar bears (populations are at record highs, by the way) – is used to justify their panic. And one of its nasty aspects is that university professors who cast doubt (they are called ‘deniers’) are literally hounded from office as heretics of the new religion.
And one of they key aspects of a mania is that very few followers understand they are in a mania at the time! In fact, they are the real deniers.
As George Orwell said: “In a time of deceit, telling the truth is a revolutionary act”. And he was one of the world’s most accurate 20th Century visionaries (see Animal Farm and 1984 (although he was a little early on that one).
How many of the concepts in Orwell’s 1984 do we recognise today? War is Peace (Defence Department wages war). The Ministry of Truth (fake news, anyone?). Newspeak. Thoughtcrime. Room 101. Thought Police. You really cannot discuss today’s social movements without quoting Orwell.
I bring this up because I see a similar herding mania in asset prices. When that bubble pops, the scales will be gradually pulled from investors’ eyes. The Bond Bubble has already popped and equities are next.
And one of the most mysterious (to me) manias of the last century surely must be the mass eager lemming-like voluntary enlistment of young men to join up to fight in 1916 – 1918 when their likely death stared them in the face. Were they fighting for their country? For glory? For Lord Kitchener?
Hmm. As is well said, people go mad in herds and revert to sanity one by one (if they live long enough).
And how much higher can stock prices go in the face of suddenly rising bond yields? The !0-yr Treasury (most closely allied to US mortgage rates) has jumped by a mighty 26% in recent days to the 2% range. That is a shock to the housing system and should put a dampener on the real estate market. And if so, it will mirror the events of 2007/2008 when rates jumped and left many new home-buyers under water that lead to the Credit Crunch.
Not only that, but rising yields will put a crimp on stock buy-backs, a major driver of many markets this year. That could be pivotal.
Yes, I have failed to nail the turn in stocks (so far), but more than made up for it in my T-Bond call. In fact, since my latest foray in our shorting campaign, VIP Traders Club members have a tidy 10 handle (big points) gain to date. That is equivalent to a 1,000 pt move in the Dow.
Gold and Silver have turned
I have been pretty accurate in my gold calls this year.Lately, I called the recent high at $1555 in early September. While the herd were manically bullish (based on the baseless theory that low interest rates always means a bull gold market), I encouraged VIP Traders Club members to take profits.
Here is a typical article that puts interest rates as the key driver of gold prices (and he is bullish!). Other analysts are puzzled that gold is no longer advancing given the very low interest rate environment that still prevails. Here is one who ties himself in knots trying to justify this discrepancy:
Gold falling as inflation rises makes sense considering that gold tends to fall with rising interest rates and that interest rates tend to rise with inflation. But the Fed just lowered interest rates again, so why is gold not rising? On Wednesday, October 30, the Fed cut interest rates by 25 basis points to 1.50%-1.75%, but it had also said in their last meeting that there will likely be only one more 25 basis point cut in 2019. Thus, it looks like the Fed may pause, and Powell did hint at a pause in the October meeting. The market likely was disappointed, causing gold to fall. But then Powell said that it will take a significant rise in inflation to justify a rate hike, which sounds bullish for gold in the long run. Given that the Fed does not expect the PCE to hit 2.0% till 2022, there may not be any rate hikes for the next two years.
My friend, what the Fed will do down the road will be determined by the market, and not by the Fed. The market leads, the Fed follows, as I have recently proved here.
I noted that hedge funds (who are largely trend followers) had amassed a huge long position – a sure sign the end was nigh. And the decline off that high has hardly dented their bullish enthusiasm as they pray this is just a blip and the low interest rates will save them. They won’t.
My original long trade around $1300 in June was kicked off by the clear signal given by the break above the pink trendline. The market then advanced along my tramlines to the September high that was set on a large momentum divergence – a sure sign the rally was exhausted.
That was a tidy gain of $250 – if you had ridden the trend all the way. Many VIP Traders Club members took profits and reinstated positions along the way.
It has been a choppy decline but the trend is now clear. After the break of lower tramline, the market rose for a kiss and then a Scalded Cat Bounce lower. It then oscillated between the pink bars but on Thursday, it tipped its hand and broke lower.to confirm the major C wave top is in.
With the hedgies still overweight long by 6/1, I expect my target around the $1400 area to be reached soon.
And Silver has followed the same path. Here is the long term weekly
As gold was advancing to its $1555 high. silver was testing the six-year old trendline at $19.60 and spiked up/down rapidly. That was a signal to take profits on longs. Silver has a long history of putting in large spikes at major turns.
Since then, we rode a nice 50 cent bounce and took profits at its top. And with the trend now clearly down, I am looking at a target around the $16 area.
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