The melt-up is in full flow
As I alluded to last time, this current manic buying period of shares very much reminds me of the 1990s dotcom mania. Then, it was about eyeballs as the currency. Even companies that just had one of those new-fangled websites saw their share shoot for the moon.
In fact, showing any positive earnings was a distinct disadvantage, How dare they not plough everything and the kitchen sink into gathering as many eyeballs to its dial-up website as possible? It was all about the burn rate – and what a fitting term. Most of the shareholders’ money spent was truly burned up.
So on to today. What are the equivalents. We know from history that every mania has its own peculiar characteristics from tulip bulbs to South Seas riches to eyeballs to – what? To me, there are several inputs. First, there is the belief in the magic of the Fed to dominate global financial markets. Second, there is the belief that low interest rates will keep bull trends intact. And the Fed is hinting it may cut rates soon.
But will lowering rates really help stocks? If history is any guide, it will do the exact opposite. Here is a very interesting chart
chart courtesy www.elliottwave.com
It shows that since 2000, when the Fed cut rates, stocks crashed! Not only that, but by raising rates the Fed actually helped stocks advance. How about that?
So once again, bullish investors have cause-and-effect the wrong way around. And with DSI at a very bullish 92% (which is near record), it is only a mater of time before stocks top out. But meanwhile, the bulls are very much in charge.
Interestingly, the US investing public has been wary of the post-January 2019 rally with the AAII weekly survey showing heightened neutral readings. And the bull/bear spreads have rarely been strong. And much of the MSM mirrors this caution with many pundits bearish. Of course, this has helped keep the bull rally alive.
Most casual observers would say the markets have become unhinged from economic reality. And that may be true, but is of no consolation to the bears as US markets continue to advance into ATHs.
Bears have been cautious because the economic news has been pretty blah, although consumer confidence is running at near record highs. Seems Mr Trump will be a shoo-in in November, and the impeachment panto will be seen as an overtly political manoeuvre by the Dems. Unless the market crashes this year, of course (see above chart).
But most of all, I recall the Fed Chairman Greenspan using the amazed phrase ‘irrational exuberance’ to describe the dotcom mania of the 1990s. Yes, the Nasdaq was in an exponential rocket ship and only topped out in March 2000. But he made that comment in December 1996 – a full three years before the top!
So although we know we have a bubble on our hands today, three years is an awful long time to be proved right. You can get seriously broke holding short positions in the meantime.
I have been wrong on the stock market’s direction for a year, but we have lost little capital as we have used my invaluable risk control rules (available to members). I feel no shame is getting the direction wrong (so far). All traders do that at times.
But the key to good trading is that I have made many great calls in other markets (our very recent gold/silver campaigns are notable) that have swamped stock index losses. Not only that, but over in PRO SHARES, we hold many excellent long positions on individual shares. It shows again the benefits of not putting all eggs in one basket and holding several positions concurrently.
Has AEP done it again with Crude Oil?
My members know that I use the outpourings of AEP (Ambrose Evans-Pritchard) of the Telegraph as a pretty reliable contrary indicator. When he publishes a story with a strong bias towards a particular market view, it is usually best to trade against that view – and with remarkably precise timing.
Last week, he promoted his view that the so-called ‘green’ energy transformation is unstoppable and that the ‘evil’ fossil fuels will fade from our memory in a few decades in favour of renewables. Of course, that is the fashionable view among the liberal ‘elite’ (or the ‘intellectuals’ as they were once known).
But did AEP mark a low in crude prices (after they had collapsed off the 8 January spike high)?
If my EW labels are correct, we are starting a wave C up – and will mark AEP as a pundit to follow seriously once again. Note that almost every pundit in print when they make the boldest predictions, do so well after that trend has started – it’s safer that way. So long as you can blind them with science, they will take you seriously, despite your awful track record. There are several US pundits who are still in business who act as excellent contrary indicators.
Pundits do not survive by being right – but we traders do!
Recall last week I stated my longer-term view is bearish but in the meantime, the above scenario should play out.
Our Beyond Meat trade was beyond belief!
Last week I showed how we entered our PRO SHARES trade in Beyond Meat just before it exploded out of a lengthy sleepy consolidation. Then, early in the week it surged up further to an important chart resistance area here
I was watching that area closely since it was at the Fibonacci 38% retrace and also the chart resistance (the two arrows on left marking two 2019 lows at $130). So with a superb gain from $80 to $130 in only a week, I advised members to take the profits for a very quick turn. Nice. But you had to be quick.
Sadly, some people believe that you need to do only a minimum of work to be a successful trader. Not so. I give members all the means necessary to craft a sensible plan of action – but that action has to come from the trader.
In this trade, you had to be alert for my emails – and be poised to act on them. As the saying goes: “You snooze, you lose” However, you only lose the opportunity to make a profitable trade. No capital is lost. But it hurts to miss out on such a great opportunity. They don’t come along every day.
And psychologically, this anxiety induces you into taking a rash action next time in an effort to ‘make up’ for the lost opportunity. That is a normal reaction. But it must be resisted!
Germany DAX hugs tramlline – for now
This is a major index I follow and it has been acting in a completely contrary way – even more so that the US indexes. While the economic data out of Germany has been dire (with car production in free-fall), stocks have been melting up at a rate of knots. Who said the stock market follows the economy? Fire that man!
Many moons ago, I started tracking these important tramlines I found on the weekly chart
The tramlines go back 4.5 years and I reckon they are highly reliable as lines of support/resistance. Note the break of lower tramline in October 2018 and the recovery which looks like a three with wave ‘c’ sporting a five up that may be complete or nearly so. Note the momentum divergence going into this week’s high (not quite an ATH).
Here is the daily chart showing how the market has hugged the lower tramline in a succession of kisses as it tries but fails to break the resistance:
There have been at least six tests of the tramline since early November, but will the next one succeed? If so, it would create a possible ‘overshoot’ – and that is what I will be looking for for my VIP Traders Club..
Of course, investors are expecting the ECB to keep interest rates highly negative but I believe this is another bull trap (as it is with the US indexes – see first chart above).