The generals march up the hill – but where are the soldiers?

This is a remarkable stock market is it not? It must be the most fragmented market in many decades – if not at all time. The next Big Thing is AI which has been getting extensive media coverage (rarely a good sign) – and is now the principal focus of investors’ attention. Large investors have been switching out of boring old economy shares that are populating the Dow and especially the Russell 2000 and plunging into the Big Eight.

The wizardry of AI has been spellbinding to investors as visions of mass layoffs to be replaced by ‘cheap’ AI tools and hence boost bottom lines have danced before their eyes. Even our old maid UK stalwart BT has announced such a move is in the works as a major cost-cutting project.

But did the shares zoom northwards on that ‘obviously’ bullish news?

Ouch! Don’t you just love the perversity of markets? In fact, this is a terrific example of the non-mechanical nature of financial markets. They are definitely not cause-and -effect objects as so many believe.

Press a lever here, and you will get that reaction there? Not so. There are just too many levers dancing around all the time to be able to use any one as the sole director. For BT investors, the overwhelming desire to take profits from the recent rally trumped a projection into the future that may or may not materialise.

And that is the position today with investors in the Big Tech generals that are marching up the hill virtually all alone. They are filled with a bullish mania for possible future profits that may or may not materialise.

Here is one of the generals – Alphabet

Google is one of the leading AI exponents -here is a recent headline: New Google tools will let advertisers generate media assets on YouTube.

There is much information in this chart! Last week it surged to meet the Fib 62% retrace on a hugely overbought Momentum and RSI as AI mania was in full flow. But has it blown off with the hit on the usually reliable Fib 62% target?

And this AI mania has helped propel the Nasdaq into a new high

Because the Nasdaq contains a majority of companies that are not directly linked to the AI ‘revolution’ and where many of them remain in bear trends, this index has ‘only’ managed to retrace 50% of the overall decline off the ATH of November 2021.

Now compare this performance with the Russell 2000 that contains small caps of the ‘real’ economy

It remains in a bear trend off the February high. The soldiers of the economy are definitely not marching up the hill with the generals.

And note that this index has not even retraced a Fib 23% of the decline off its ATH of 2460 in November 2021! That’s exactly what I mean by a highly fractured market – and a very unhealthy one.

So why have real company shares resisted the pull of Big Tech? After all, it is claimed that AI will take over many routine tasks that even small companies can use to advantage. Is that because they do not like what they see ahead for the economy with so many to be unemployed?

After all, there are many signs of trouble just under the surface from record high consumer credit card debt (with last week’s negative Sentiment picture) to baking woes that have not gone away to inflation remaining high – and ominously, a resurgence in the oil price (up 15% from the early May low).

Last week I covered the rising Treasury bond yields and have risen further last week as inflation expectations are back up again. That will put upward pressure on short rates.

Recent Fed member comments have been hawkish but stock investors have turned a blind eye to them and are likely setting up a classic Wile-E-Coyote moment. When the penny drops, wave 3 down will be in full swing – watch this space.

And interestingly, almost manic bullish sentiment surrounds Treasury bond prices as investors have been lulled into the belief that inflation will come down sharply. As I said before, the fly in that ointment is energy prices.

Personal finance gurus have been pushing bond investments for the better yields. And flows into bond funds have been strong. But I believe they will get better. And the sudden embrace of bonds is one more sign that investors are getting more nervous about stocks and the economy. A flight into safety is on – except for the speculation in Big Tech.

In recent weeks, bonds and equities have been in their usual pattern of moving contra as stocks investors have been switching into bonds.. Recall last year when they fell in unison as short term market rates (followed by the Fed with a lag) recovered smartly from the zero bound. And stocks faced higher payments on their borrowings and hits to profits.

When bonds and equities trade contra it usually indicates a bullish positive market scenario. Last year when they moved in unison, it was during a heavily negative market mood. So when they do align in unison soon, it will accompany a reversal of the current manic bullish mood. And remember, second waves induce a bullish mood that is often even more bullish that at the ATHs (back in November 2021).

My bottom line: With some AI mania shares at significant Fib levels (as is the Nasdaq) on hugely overbought technical levels and most of the other shares still trading in downtrends, I will consider a realignment of bonds and shares trading down in unison as the kick off to a very long and strong wave 3 down.

Notes on trading the indexes since the October lows

For us long term bears, the stock indexes have been the most difficult to trade since the October lows, a full 7 – 8 months ago (a lifetime for a spread betting trader). And looking back, that should be no surprise since they are in Elliott wave second waves off the wave 1 lows of October and second waves are notoriously the most difficult to read. That’s why I love Elliott Wave third waves and actively seek them out.

Just when you think you have identified a top, it often just dipped to get us excited but then reversed sharply upwards again. Luckily, the use of our Break Even Rule did limit losses, as did my advice to only trade small in this period.

This rally has certainly tested the patience (and account balance) of most of us. Luckily, VIP Traders Club members have had major trade successes in the meantime to soften the blow. But it is the stock indexes that loom the largest in most traders’ attention.

The one major index making a new ATH last week was the Japan 225

It had been in a very lengthy trading range until last week’s breakout. It has been a market for swing traders. And being in a trading range is a sure indicator of a decline in investor interest. Who trades Japanese shares today anyway?

Any investor holding Japanese shares have had to sit through months and a few years of shares going nowhere and may have lost interest in favour of the most dynamic US issues.

But the yen has been weak for some time and that has inspired a rush into the shares.

So with this new ATH, are the sunny uplands looming? Their car manufacturers feature large in the index and their outlook rests very largely on the EV ‘revolution’. If that is in trouble, as is likely, upward progress will be very hard won.

I remain confident that we are in an Elliott Wave wave 2 relief rally in the US markets and I will continue to look to find the reversal into the Elliott Wave wave 3 down. This will take more patience on the part of like-minded traders. When the slide starts, it will be ferocious and getting on board will be difficult as daily swings will be violent.

I hope to be able to locate a relatively low risk opportunity. Watch t his space.

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Our standout market is the dollar

It has been a long time coming but the upward reversal in the dollar has taken it to my first target

Last month when it was deciding whether to make a new low below the February low at 100.50 or to stage a reversal before that level could be hit, I was able to construct a set of tramlines as shown. And about ten days ago, it gave me a major clue that the rally was about to get started and I could set my first target at the upper tramline around the 103 level.

And right on cue it hit that target on Thursday where I advised members to take some profit. My roadmap calls for a dip and then a likely resumption of the rally to my next target aorund 105.

Of course, all of these levels are mirrored in the euro which most traders prefer to trade rather than the index. But the dollar index contains a lot more inputs than the euro. In particular, it also harbours the yen and the dollar/yen cross has been one of the most active on the board

The yen has been in a solid bear trend (up in the cross) for some time (see Japan shares above) and we have been riding that trend. But last week, RSI became way overbought and I advised taking profits.

Are commodities back?

Crude oil made its correction low on 1 May and is now recovering sharply and is 15% higher. The Ags are still in deep bear markets but near a bottom, The precious metals remain in overall bull trends but in deep corrections.

In I show my top pick for a comeback – NatGas. It has softened by a huge 80% off its ATH. Seasonal lows occur in the Spring as reserves are replenished at low prices for the winter ahead. This is a great confirmation of the maxim that the cure for low prices is low prices.