With only two more trading days until the end of the year, there is little time for the Dow/S&P to observe the well-established rule that major stock market turns occur in years ending with a ‘9’.
But as I write on Friday, I see US stock indexes have reversed from the day’s ATHs and the Dow has made a very possible Grand Top. If this holds, the ‘9’ Rule will have squeaked in with just a few days to spare. And the Dow today hit an important trendline:
The vast majority of MSM pundits are proclaiming the 2010s decade as the Great Recovery from the devastation of the Credit Crunch with 2019 in particular a stunning year (for the bulls). This had lead them to the common fatal error of getting out their school ruler and extending the trend forever upwards into the future.
This is called ‘recency bias’ by psychologists – and is the reason why most investors buy high (and sell low). As anyone with eyes can see, economic and stock market trends clearly do not go on forever. They change – and usually when the majority least expect it – as exists today.
With the MSM and money managers (who are fully invested) totally on board the bullish projections, the markets are perfectly primed for an imminent major reversal. Watch out below!
This year has been marked by the overwhelming faith by investors that the Fed will continue to do ‘whatever it takes’ to keep the stock market balls in the air. Company earnings have been flat to weak but the Dow is up 25%. Who says earnings drive the stock market? If they do, they are not paying much attention.
It is always and everywhere a dominant positive mood that drives markets higher. The investors who are buying are more determined than those who are selling. And this year the herd of buyers has totally ignored economic data and instead it has been motivated by the belief that the low rates will propel them higher. Bad economic news has been very good for shares.
Here is an interesting chart showing how share valuations have rocketed to the second highest level in history after the Credit Crunch of 2008. The current reading is just short of the maniacal dotcom years of the 1990s (where the tulip-like eyeballs were more valuable than gold):
Of course, much of this yea’s gains in US shares has been the result of heavy share buy-backs in the background of ultra-low interest rates. Not only has it paid handsomely for companies to deploy reserves away from low-to-negative fixed income to buying their own shares, but the directors’ bonuses have been boosted. A veritable win-win for them. That’s why capex readings have been so low. Why risk capital in uncertain new ventures when there is a sure-thing in buying their own shares?
But in an environment of rising rates, will they be so keen to continue buying their own shares, especially when share prices are flat to falling?
APPLE has had one of the most energetic of share buy-back programmes and its share performance has been stellar. It made a lot of sense as gains from share price appreciation has swamped the interest payments on their loans to buy the shares (and much greater than the interest gained by bank deposits of their mountain of cash). In fact, its chart has closely matched the exponential rally in the Nasdaq chart I showed last time
They are joined at the hip. There is one thing you can rely on with this kind of rally – it will end not in a whimper, but a crash. Hard to believe with Apple, isn’t it? But taking profits around here will be seen as a very smart move months from now.
Actually, the above chart shows the result of my first COTW call of 2019 for Interactive Investor and gave the year a fine kick start. It is a great illustration of how a very fine degree of timing can be achieved with my Tramline Trading methods.
Gold/Silver are flying, as forecast
This year has been somewhat tricky trading the PMs, especially Silver. But in general, Gold has continued the rally off the August 2018 low at $1,150 with two major corrections that were a little problematic for me.
Here is the very long term
The large momentum divergence into the wave 4 low in December 2015 at the $1,050 level was a superb place to explore the long side. Thereafter, the market moved in several large waves within a zone and only broke out of that zone in June of this year with a fine surge to take out many buy stops set by the army of shorts (sentiment then was pretty negative).
It was then that I set a possible target at the $1700 – $1800 area. My confidence in the advance became more secure.
Of course, I had little idea of today’s financial background in the summer. The US dollar had been advancing strongly off the 2018 low and only recently has shown signs of tailing off. Most adhere to the incorrect notion that gold always prospers when the dollar is weak. That rule was well and truly smashed this year.
So why did I believe gold would advance against a stronger dollar? One answer: Sentiment was negative and my Tramline Trading method gave me strong buy signals. But it takes a lot of discipline (and nerve) to trade against the herd! Here is this year’s action on the daily
The two corrections really stand out and I confess I was fooled by both. My best guess was for the declines to continue into new lows, but I had to abandon that notion when the market powered above the two blue trendlines following good momentum divergences. Those thrusts were clearly bull signals.
So my best guess now is that we are in a fifth wave up to new highs with target at my cited $1700 – $1800 zone.
And if my forecast for a collapse in the dollar and stocks plays out, gold could reach much higher levels next year.
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Wishing a most Prosperous New Year to all!