The two-faced stock markets
What an incredible week in the stock markets. Manic melt-up FOMO buying of the AI -laced Nasdaq at the same time as this headline hit the front pages: “US corporations are filing for bankruptcy at the fastest pace since 2010″.
The image of the Roman god Janus, who looks both ways, to the future and to the past, springs to mind. AI is the clean-shaven future while the real economy companies are the whiskered past – and are struggling with high interest rates, high input costs and ever-higher taxes – and struggling consumers.
But the future belongs to the cutting edge computers that can solve all problems and do away with armies of employees that perform mainly routine tasks (such as journalists). At one time, phone companies employed masses of telephone operators who sat in long rows as they plugged wire connections into the wall sockets. Whatever happened to them?
And these old-line companies are running out of ways to ‘re-structure’ their liabilities as their borrowings are maturing at much higher interest rates and their cash flow is unable to cover them and their Fed pandemic support is drying up – hence bankruptcy looms for a growing number of zombie companies. That process will magnify as the year wears on. Here is the stark prospect for Junk Bonds:
Yields have shot up from around 4% in mid-2021 to the current 9%. For many, refinancing borrowings at these yields spells disaster.
But for Tech investors, they are gripped by visions of huge profits ahead. Will it happen?
The historical record is not positive. Remember, the dotcom boom? Anyone with a website saw their shares explode before the cold light of day dawned that easy profits were a tad more difficult to come by. It took a few years after the boom and bust for the few survivors, such as Google to figure out how to make money from the web.
Is AI the new Gold Rush?
The discovery of gold at Sutters Mill in California in 1849 is a fascinating story of how a few merchants got rich by selling the miners their picks and shovels while most miners failed to find much gold using them and failed to make their fortunes. I see AI in a similar light.
The picks and shovels of AI are the very specialised silicon chips needed for the armies of servers. And the leading company producing them is NVIDIA. Last week it issued mind-blowing earnings results and this is what that did to the chare price
From the October low at $110 (mis-quoted as $119 in chart) it has risen like a rocket to yesterday’s $400 high. But admire the most recent candle – a weekly advance of $100 (33% gain). That is a $200 Billion gain in market cap. And that weekly gain is 2 times the entire market cap of Intel, the venerable US chip maker!
And that gain following the earnings release Thursday night is the largest one-day gain on Friday in market cap for any US equity in history. That is a stunning landmark event.
That one-day gain is larger than the market cap of 472 of the 500 companies in the S&P 500. Incredible!
This is when FOMO meets a South Seas Bubble situation and with modern global instant communications today, the result is an almost-instantaneous re-rating of the shares. Back in the day, instant communication was delivered on sailing ships and then on horseback. Instant it wasn’t.
But take a look at the momentum and RSI gauges – both massively overstretched. But these indicators can be maintained for a long time and are not short term timing tools. But they do point to a manic bullish sentiment that is vulnerable to ‘unforeseen’ events.
So my question this weekend is this: Are we near the ending blow-off of the exponential rise in Big Tech, or the start of a new multi-year bull market as AI delivers the promised efficiency gains for all sectors that the bulls have embraced to their hearts and minds?
If the latter, the profits had better arrive pretty fast in order to overcome the earnings drag of rising interest rates.
Because the long term is made up of a succession of short term variations, it pays to focus now on the short term. Because achieving the long term visions of big profits for all will depend on the progress in the short term – and that is not assured.
There is little question that the Tech bears have been fully routed and most will have thrown in the towel. Now, everyone is bullish. In fact, I have caught the bug and went long for my new Phoenix Traders Club.
But we know from long experience that this is a most dangerous setup. Let’s remind ourselves of Joe Granville’s maxim that when everyone knows something is obvious, it is obviously wrong. I see on my platform that NVIDIA is the most traded share and has topped Tesla for that honour – a most unusual event for Tesla to come second. Today, with everyone and his dog piling into NVIDIA with nary a bearish comment in the MSM, are we reaching Peak AI Mania?
It is unimaginable that there are no rival chip makers that are not working on supplying the booming AI industry. The dominance of NVIDIA could be quite short-lived with huge implications for its share price.
Also, it is interesting to see how the AI minnows such as BigBear.ai, C3.ai, Buzzfeed, or Groundforce.AI fared last week. In fact, except for a small advance from C3.ai, all barely budged off the floor on Friday. So AI Mania has clearly not trickled down the AI chain. Hmm.
For me, it is too early to call the top and we could well see more advance into next week after the UK and US holidays on Monday. But my best guess is for a setback to arrive in the next few days and taking at least some profit would be a prudent move.
But when a more advanced setback does arrive, the slide should be huge with buying power about exhausted as shown by the momentum indicators.
Old economy shares are still struggling
Back in the real world of the real economy, US non-tech small cap shares have hardly moved off their October lows. Here is the Russell 2000
The ATH was made in November 2021 at 2460 and declined to the wave 1 October 2022 low at 1628 for a decline of 33%. That was the Elliott wave 1 of what will become a huge five waves down when the deflationary depression gets under way in Elliott wave 3.
But in the meantime, the relief rally has carried to the Elliott wave 2 high and is currently trading close to the October low! It has not even reached the Fib 23% retrace. That is a very weak rally.
Now compare this with the red hot Nasdaq 100
With last week’s surge, it has reached the important Fib 62% retrace of the Elliott wave 1 down off the ATH – and on an overbought momentum.
Clearly, the momentum remains firmly up and shares should extend gains into next week for an overshoot of the Fib 62% level. But after that? A buying exhaustion appears likely.
And if so, all indexes would resume their decline with the Russell 2000 being the first index to move below its October low. That would be a clear signal the general stock market was kicking off Elliott wave 3 down.
A great trade in recent weeks has been long Nasdaq/short Russell 2000 but that appears way overstretched now and should start to revert soon.
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And here is another market showing extreme moves
One of the most active fx trades in recent weeks has been the dollar/yen cross. While US rates have been moving h higher, the BoJ has kept yen rates low. In fact, Japanese government bonds are still trading with negative yield – and is hugely negative compared with domestic inflation.
But there have been flurries of forecasts the BoJ would start to tighten and this has helped the yen move higher (USD/JPY lower). But these hopes have been dashed by officials and the yen has resumed its bear trend (USD/JPY higher). The carry trade remains very popular with such a large interest rate spread.
The Elliott wave 1 down has nine sub-waves – a rare phenomenon but is a valid Elliott pattern for an impulse. And the rally off that January low is in a clear three up with the current ‘c’ wave likely not yet complete with a possible target at the Fib 62% region. And when it does terminate, the decline will be a very strong one.
My best guess is that this cross will turn sharply lower when the Nasdaq and all indexes roll over. It is one of my litmus tests for a change in trend and market sentiment.
One more thought on the stock markets
Sell in May and go away. That is the venerable adage often trotted out in this merry month of May. While that appears great advice for the small caps, you would be missing out on the action in Big Tech.
The adage also advises coming back in October as historically, this summer period is the least bullish for shares.
Thus, if that applies this year, any rolling over of the Nasdaq into October should be strong. And what could possibly arise to produce this outcome? For one thing, the banking woes that surfaced recently have died down for now but with rates not falling and Treasury yields still rising sharply, surprises are still highly likely.
The Fed is offering a special facility for banks in difficulties to borrow on favourable terms and we are seeing a rapidly growing use of this facility. If banks are now ‘safe’, why is this?
Remember, debt levels everywhere are at extreme highs and now interest rates are climbing. This is the ticking time bomb that will produce the deflationary depression – eventually.
Highlighting the Everest of debt, the US debt ceiling drama continues with a new deadline date now set. Of course, they will push the federal debt higher where the oxygen is wafer thin. And achieving genuine spending cuts will be cosmetic at best. No politician can survive today by promoting real cuts to government. It will continue to grow until an economic implosion arrives.
I see that the US Federal income tax take is starting to fall and could be a sign for the economy. Hmm.