The world order is changing – and so are market trends

Events and markets are moving very fast now. That is bringing in huge volatility where markets are turning on a dime.  Large daily spikes up/down (and vice versa) are now common – such as yesterday’s (Friday) 800-pip spike up and then down roller coaster session in the Dow and the sharp reversal in the euro.

This is heart attack territory for traders glued to their screens – but completely normal action when we see that the major multi-decade long uptrend in stocks is being turned around. Perma-bulls see every dip as a buy, while those that view problems ahead (not difficult) see every bounce as a sell. There is a tremendous tug-of-war going on between these two vast forces which have record financial fire power at their disposal.  Small changes in that balance is having a mammoth effect on prices.

This battle in the markets is being mirrored in the real world by the war in Ukraine which is at base an open battle between Western values and communistic Russia (and China) with the global economy being caught in the middle as sanctions bite both ends.

But the fundamental driving force behind all market moves – social mood/sentiment – is rapidly deteriorating as consumers are starting to feel the pinch from a ballooning cost of living squeeze with energy prices in the UK set for another surge on 1 April.  Sadly, most of us won’t get the joke on that day – and we will be seen as the Fools for voting in the eco warrior politicians who voted in Net Zero; a policy that is contributing to the severe energy crisis we face.

I have long been a critic of that policy as being unrealistic and unaffordable and recently declared Net Zero is now dead with the collapse of the European Carbon Credit market a few days ago.  And now, the MSM have caught on with today’s headline: Questions over Net Zero as Putin sparks change in Britain’s energy policy.  In a sub heading: UK prepares to boost domestic oil and gas production – months after COP26 pledge.

How’s that for a rapid return to an adult stance on energy?  So has anyone seen Greta lately?

Raising consumer energy prices is rarely a vote winner and politicians always take the path of least resistance (eventually) and will now begin dis-avowing their previous ‘green’ commitments. That swell will grow as prices rise- and now even the most radical eco converts such as our PM is raising the possibility of allowing fracking to ‘wean the UK off Russian gas’.

Consumer sentiment is breaking down as inflation outlook deepens as this chart of the respected U of Michigan survey chart shows

The rapidity of the decline is astonishing – it is back to levels last seen a decade ago in just two months.  But note that the peak was reached precisely when the US indexes peaked – a clear correlation.

Stock indexes are poised for major crash

As expected, the Dow bounced off the February 24 low at 32,200 and has been highly volatile since then..  So why was I expecting that bounce at that price point (where we took major profits on our shorts)?  It’s no secret, especially if you have been following me for a while – it was at the Fibonacci 23% retrace of the entire stupendous rally off the Corona Crash low of March 2020.

Here is my roadmap updated

Yesterday (Friday) the Dow spiked up to the 33,700 high presumably on some Ukraine news, but was hit by heavy selling and closed down  on the day.  That move completed another three up.  As you can see from the chart, every second wave has a clear three wave a-b-c form.  That is the stand-out characteristic of counter-trend rallies.   They are always in threes (or some variation).  That strongly confirms that the trend is down.

If you thought last week was volatile, then next week should prove even more so with the Wednesday Fed meeting when they will announce a jump in interest rates. The BoE to follow on Thursday (they are already raising) and Friday will see US options expiration.  That is some ingredient for some mighty wild swings.

The dollar is trying to turn….

Just as in stocks, currencies have seen some wild swings of late. Last week, the euro made a deep dive to what I believed was a selling climax low at 108, but the rally off it was nipped in the bud yesterday and now with next week’s forthcoming attractions, I am not so sure the low has been reached.  We could see one more spike low – and then a tremendous rally.

Why am I confident the dollar (and euro) is about to turn?  Bullish dollar sentiment has reached record levels with DSI bulls now at an ATH of 93%.  Traders are convinced the ‘flight to quality’ from the war in Ukraine will only boost demand for dollars as a safe haven.  But that is precisely the condition to be in place for a major reversal – when most agree on the trend continuing.

The late great trader Joe Granville once said: “When everyone believes it is obvious, it is obviously wrong”.

Remember last December/January when the Dow made its ATH?  Then, bullish sentiment was off the scale with record high DSI bull readings as the global economy was gearing up from the pandemic lockdowns that were restricting trade, all seemed bright.  Investors piled in to shares in droves.  Fund inflows reached record levels.

But smart investors (especially corporate insiders) saw the dangers ahead and left the party when it was really swinging.  Smart currency traders are doing the same today.

I have a clear five up in wave ‘c’ and the overshoot at the high.  We are at or very near the top.

Incidentally, with the Nasdaq down 20% from its November ATH, investors have been buying that dip with abandon. US share fund inflows have reached even greater levels recently. So as stocks have sunk, the bulls with their record buy orders have not succeeded in pushing shares higher – on the contrary. That is not a bullish sign – and will contribute massively to the record waves of selling that lie ahead as they scramble to reduce their losses in their wrong-wat bets.

Remember, news follows the market and not in the conventional sequence trotted out by the vast majority.  Most believe it’s the news that drives prices. That is understandable since we have been bombarded with that causation model since birth and the whole MSM rests on that assumption.

In most of life, effect follows cause.  If I hit myself on the head with a mobile phone (a frequent occurrence), my head hurts.  It doesn’t hurt before I hit it!  First cause, then effect.

But financial markets are totally different.  For one thing, what is a ’cause’?  Are we all agreed that a certain news item is ether ‘bullish’ or ‘bearish’?  Of course not.  There is never total unanimity on that and that’s why markets exits – to let bulls and bears express their opposing views with a financial commitment.

Remember that at the Dow ATH on January 5 there  was little ‘bad’ news out there.  I did not spot any. The Ukraine invasion had not occurred and commodity prices were high but not startlingly so. US crude was still trading around $75.  It is now about double that – a level it has reached in just two months. That is how fast the world is changing – and that change was preceded by the switch from bull to bear at the index ATHs.

Of course, with the dollar making new highs, oil priced in other currencies have been reaching far higher levels especially in emerging markets.  That is a sure recipe for coming social unrest that is being magnified by the similar price increases for food commodities. It will get ugly soon.

Eco warriors now have a battle on their hands.

The green movement has had it all their own way for some time with all leading politicians captured as they have tried to outbid each other to prove how ‘progressive’ they are as they try to capture the young vote. But now, the tables are being turned. 

This was amply demonstrated by the sudden collapse of the Carbon Emissions market I show here again

With that staggering 50% crash, many holders have seen their government-mandated permits crash in value (such as steel, glass and cement makers).  They will not now be particularly well disposed towards toeing the party line on Net Zero, especially so as other nations (such as China) now have a distinct price advantage since they are less committed to strangling their domestic economy.

Many industrial firms in Europe are already feeling the pinch as their input costs have ballooned and they are unable to raise prices in the cost of living squeeze.  I see many bankruptcies ahead with layoffs.  These are never vote winning developments for incumbents.

But the markets are now doing what markets always do – they eventually restrain the most pie-in-the-sky dreams of politicians when they carry too far into fantasyland.

Incidentally, fantasy has been a growing popular theme for some time.  I would say starting with Narnia, Lord of the Rings, The Hobbit and then the blockbuster Harry Potter books and movies.  In my view, fantasy appears always at the end of a long period of economic growth/bull stock market. This has given birth to the social extremes we see today. It will mark the termination of both trends.

And nowhere is fantasy more evident than in the eco movement.  Any unbiased engineering student can tell you that all of the CO2 reduction targets mandated by law are completely unfeasible and unaffordable.

And now with the energy markets screaming ‘crisis’, some brave politicians are speaking out against Net Zero and some are changing horses in midstream.  I fully expect that as inflation worries deepen, politicians will be forced to ‘do something’ – and with Russian oil and gas now off limits – I expect the Net Zero law will be ‘amended’ in due course.

By the end of the year, I expect the political landscape will be vastly changed with more sober and adult representatives voted in.  This is what happens in bear markets – more turmoil, more uncertainly (aka weaker markets), more bad economic news with a sharp rise in bankruptcies (that is to come).

And investors/traders who see that future will be amply rewarded.