The Magnificent 7 – is it the gift will keep on giving next year?

As we head into the New Year, most of us look back on 2023 and assess our performance in the markets we choose to trade. And also look forward. Do we keep to our winning strategies that served us well and ditch those that didn’t? Or do we take fresh looks at everything we believe – good or bad?

Some kind readers have emailed me to point out my huge error in being bearish stocks this year and encourage me to switch my stance and join the bull’s party. While I have been pretty accurate trading the stock indexes up and down until late October, recent action has been super-bullish and I have missed that action expecting a wave 3 down reversal that has not arrived (yet).

And it is the M7 that has captured most of the inflow of funds (they account for 30% of the S&P 500 cap – a record high concentration). Yes, investing in any one of them was a very winning strategy this year. Here is an interesting analysis of the performance of various strategies

The traditional Buy-and Hold approach has clearly worked (for some shares), but if you had invested in the ‘green’ sector, your Buy-and-hold would have been a Buy-and-Bust. My poster child of the EV Revolution – Chargepoint Holdings – has lost 84% since February.

But this study is a clear indictment of chart methods – particularly the Stochastics (which I use). but note that the Elliott wave theory is missing. Of course, we know that how useful a method is depends on the skill (and luck) of the trader using it. For instance, I have never been able to understand Gann methods and yet many swear by it.

But what such a study illustrates – that reinforces the traditional Buy-and-Hold approach – is just how entrenched bullish or even manic sentiment has become since the October 27 – the date of the recent deep lows when sentiment was on the floor as investors were convinced the Fed would keep interest rates higher for longer to ‘fight inflation’. Inflation since has pulled back – and has inspired the bulls to push shares higher.

So when the market reverses, as it will at some point, Buy-and-hold investors will be sorely tested. That is what markets do – when everyone believes something is obviously correct, it is obviously wrong.

The main focus for the bullish crowd has been the M7 of course. That stampede into this small group has left many individual shares in the dust.

But recently, we have seen these laggards catch a bid as investors see a catch-up phase. That shows up in the rally in the small cap Russell 2000. But this too illustrates the extreme bullish sentiment prevalent. Many of these companies are zombies where their earnings do not cover their debt repayments. They are on life support. The recent pull-back in bond yields has ignited these bullish urges.

With the economy in a Goldilocks period, as say the bulls, with moderating inflation, company earnings buoyant (esp the M7), interest rates declining, all is right with the world, is it not?

But before I admit the error of my ways and jump on board the bulls’ train, this is a chart I keep pinned to my wall:

Here is a very credible two-year cycle of major highs in the Dow. It has been in effect for three cycles and the big question is: will it make the fourth one very soon?

Cycles can look very seductive but they have a nasty habit of failing at some stage. But this one is very seductive! And a major high this month or early in the New Year would fit in beautifully with my Elliott wave analysis and extreme bullish sentiment picture. This is danger territory for the bulls.

Note that the previous two cycle highs heralded major collapses – will the approaching fourth one repeat that action?

I will consider any further Dow gains into the New Year as an opportunity to gird my loins in preparation for a historic reversal in a major third wave down – the wave I have very frustratingly been anticipating for some time. I hope and expect to be vindicated in my wave 3 thesis in the near future.

The dollar advances – against overwhelming consensus

The MSM pundits are convinced the dollar is poised to collapse. They cite the huge and growing national debt. But markets do not behave in a rational manner (as we have shown many times). In fact, there is one Golden Rule with markets – they top out when bullish sentiment is extreme and everyone is on board (and vice versa). And the dollar is in a vice versa position today.

But for traders who follow the Golden Rule, the recent advance is confirmation of its validity – and against overwhelming consensus.

The autumn rally accompanied the rise in interest rates and the pull-back off the October wave 1 high accompanied the rate drops. But when it hit the Fib 62% support, it had reached max bearish sentiment and staged a reversal as i highlighted to my VIP Traders Club members. If my wave labels are correct (to be proven by market action of course), the dollar is starting a major multi -month Elliott wave wave 3. But if it moves lower to break below the wave 2 low, there are options, few of which envision a dollar collapse (bearish sentiment is too strong for that unlikely option).

So if the dollar continues its advance, how will that impact shares? A dollar advance implies stable to higher interest rates – or at least the rate spread with the euro. Odds are starting to favour a euro collapse as the EU economy is in trouble and as I mentioned before, a new EU QE operation is not out of the question to try to boost their economy.

So the dollar has a tailwind and with hedge funds now 3:1 long the euro (COT data), a re-balancing euro liquidation is on the cards.

Of course, if the Fed maintains its generally hawkish tone into its upcoming monthly meeting next Wednesday, that would add further upward force on the dollar and a downward force on shares.

Thus, next week would well be the pivotal time when the Dow hits its two-year cycle reversal. My Elliott wave analysis strongly suggests the wave counts in all time frames have satisfied all requirements for such an event soon.

December is usually a volatile month so expect sharp moves.