The Tale of Two Walls

Stocks are powering higher and climbing their massive Wall of Worry – and my question is whether the Great Disruptor’s Mexican Wall will stretch as high if/when it ever gets built?  So far, the market is avidly ignoring the ‘political risk’ that looms large in the US and also in Europe.

Mr Trump is certainly getting sniped at from the usual MSM suspects as they try to unsettle him and attempt to find any mud they hope will stick. Meanwhile, stocks keep on their upward march – much to the disbelief of the many bears that show copious charts ‘proving’ the economy is about to turn down and investors had better batten down the hatches before the balloon goes up.

And over in EU-land (not to be confused with La La Land), the various right wing challengers in Italy, France and even Germany are gaining momentum while the perennial Greece debt can is being polished for another kick down the road.  Risks to the euro are mounting.

Of course, it takes two of opposite persuasions to make a market.   So who are these crazies who keep buying (other than the hapless short sellers who keep getting their margin calls)?  Haven’t they seen all the charts showing the market is massively overbought?  I showed some recently.

And isn’t it curious that this latest and best spurt has come after the Fed ceased its QE programmes?  Remember, during the QE era, stocks had several major down-draughts, but none so far post-QE.   Is that what a rational person would expect?  I don’t think so, especially now that interest rates are moving back up since last summer.  Remember the mantra that rising rates was going to deal a death blow to shares?  Ha!

With a strong market, there must be something else going on!  That is the only rational ‘explanation’ for this  performance.  I wonder what it is?

Could it be that the US economy is entering a genuine period of real growth that is not based on any distortions the Fed does?  Could it be that this current growth is organic and self-feeding?

There are many signs that it could be.  After all, I have been riding the copper and iron ore bull run for some months now – and both are in vigorous bull trends.  Remember, Dr Copper has the reputation of being a bellwether for the economy as a whole.

In addition, US lumber (timber) prices are likewise in strong bull trends – and that augers well for the construction industry in the months ahead.  Also, US rail and road freight data shows shipments at highs, despite the ‘War on Coal’ having hit shipments of that commodity.  Record high exports of grains (low US prices that are now recovering) is boosting shipments.

The US consumer seems to be in pretty good shape with spending up, good jobs reported easier to get and bankruptcy levels dropping to 2006 levels.  Although the high level of personal debt must be a worry.

So with this positive data, I can easily make a bullish case for shares, despite the high valuations!  How about that?  This isn’t magic – it is what anyone can do at any time in history.  As Charles Dickens wrote as the first sentence of his classic A Tale of Two Cities: “It was the best of times; it was the worst of times…”

So who is right – the bull or the bear?  By the very definition in a strongly rising market – it is obviously the bull.  The hope for better times is clearly winning over the despair of what may come to pass down the track.  The positive mood is driving prices higher.

But of course, trends change and sentiment changes – and this one will too.  And that is where the Elliott wave analysis proves its worth.

We are clearly in a third wave of several degrees which is always long and strong.  These waves take no prisoners – as short sellers are finding out to their cost.

Here is the 2-hr chart showing the explosive move this month:

As I write, the Dow is trading at the 20,600 level – a full 600 pips above the round number 20,000 much-ballyhooed level attained only a few days ago (remember that?).

By my reckoning we are roughly two-thirds to half way along the wave 3 of 3 of 5 phase – so there is quite a lot more to go for.

Since the purple wave 2 low on 1 February, the rally has had only a few small dips – not enough room to get on board of you are a dip-buyer!  This was surely a case of just jump on the moving car whatever the price and fasten your seat belts!

The next few days/weeks will be extremely action-packed!