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The odds are stacking up we are at or very near the major reversal in stock indexes I have been long waiting for. Consider this:
- Bullish sentiment remains off the scale – tops are always made when there is very high confidence in the future. The line-up of 2020 pundit forecasts I have seen are uniformly bullish with just one example calling for a 10% increase in the S&P. What could go wrong?
- It is a curious fact that major reversals in the Dow and S&P occur in the vast majority of years that end in a ‘9’ going back many decades.
- In the Elliott wave picture, we are in multiple fifth waves (these are always ending waves) that can now terminate at any time
- We are near the Winter Solstice (December 22) where reversals are often found (see last December for a magnificent example).
- We are currently in a Solar Minimum. The last time – 11 years ago in 2008 – the Dow collapsed by 55%. Who knows what hidden force on our mood the sun has on us (see No 4)? And it is mood that governs all markets.
Here is that Dow Devastation the weak sun wrought 11 years ago:
On this scale, the 55% decline doesn’t look too bad, doesn’t it? The next collapse will be much greater.
The tech-laden Nasdaq has been leading the charge up the mountain in a massive exponential rally
that has clear echoes of the last one in the 1990s. Exponential waves never end with a whimper and when the turn arrives, the collapse will be a sight to behold. Faith in the future of tech has never been stronger. Will those sky-high hopes be realised?
So, would a rational long term investor looking at this chart have confidence in buying here? I think not.
With this background, I am placing exceptionally high odds for the reversal to occur soon. It could occur early next year since bull markets can go on much longer than expected (as I discovered!). But come it will. I expect 2020 to be our year.
Why next year for the top? Well, we have to negotiate a likely Santa Rally first and January seems to be the best bet.
Here is the Junk Bond (High Yield) Index, which I consider one of the major indicators of animal spirits – aka bullish enthusiasm. Recall, these are bonds issued by the riskiest of companies and perform just like equities
We are now going vertical this month and just admire the widening spread with the MAs and the MACDs as well as the growing trading volumes. Note the 13 consecutive up days. This is totally unsustainable and will almost certainly resolve in a huge spike top and sharp reversal. It matches the recent vertical action in the Nasdaq. Watch this space.
And with ‘safe’ Treasury yields advancing, the bond spread is narrowing – a sure sign of ‘irrational exuberance’.
So yes, I have missed out on this great bull Dow trade this year – about the only one I have got wrong. We did take some long positions in the Dow earlier this year but obviously not enough! But in 2018, we rode the bear trend that ended last December and took major profits. Not so this year.
You have seen many of my other calls (I nailed the sterling low in September, for example) in this year’s blogs.
One of my big winners this year has been my T-Bond calls. Unlike the vast majority of pundits and economists, I have been steadfastly bearish on bond prices – and bullish on yields, While ex-Fed governors down the ranks have been projecting negative US Treasury yields ( to be lead by the European Central Bank down the rabbit hole), my reading of the charts and sentiment told me otherwise. I take pride in my track record trading Treasuries.
A great hullabaloo was made recently of the rare Yield Curve Inversion where short rates were greater than the 10-yrs. Of course, this played havoc with bank earnings and I spotted a major buy opportunity for bank shares (see my COTWs and my Barclays calls). Many pundits jumped on this as the precursor for a recession since all recent recessions were flagged by such an inversion.
But as I mentioned back then; hold your horses! We must see a return to a normal positive sloping yield curve before passing that bearish judgment – and this is what we have now
chart courtesy www.elliottwave.com
With the on-going move lower in T-Bonds (higher yields), we now have that reliable recession signal. I expect US economic data to start coming in much weaker next year – perhaps in Q1 or Q2 at the latest. The stock market will not take this lightly, as it has this year. Bad news will definitely be bad in 2020 with the swing to negative mood.
The good news is that many bears are capitulating and will be changing their ways as we go into year-end since they do not want to show their losing short bets to investors. This will set up the mother of all sell signals.
One that did not work – and lessons
I get an occasional emails complaining that I ‘boast’ about my wins and rarely mention the losers. OK, here is a recent loser:
On Tuesday, I advised BASIC £5k ACCOUNT members to go long GBP/USD as it had just closed the Boris Gap in what looked like a three down. This is my usual practice and this is the result
We bet £2 per pip on a 40 pip stop. Sadly, the market did not turn there and chose the lower odds option of moving lower. We lost only 1.6% of capital and moved on.
What can be learned from that little exercise? I believe several things:
- A trade is a trade is a trade. Sometimes despite the odds being on your side, it fails. Move on to the next setup and keep using your methods. Do not switch out of the methods that have served so well in the past.
- The small max risk of 1.6% was planned in advance by setting the stop. That is disciplined trading with the stop entered at same time as the trade entry. In fact, it was a perfect trade when measured by the level of discipline used.
- When measured against our gains on the long side (see last week’s blog) of 12 cents (a £2 bet = £2,400 profit), the £80 loss was minor.
- A small loss is no reason to be disheartened. The winners will come along and more than recoup the losses from the losing trades.
Stay positive, but realistic. The small loss was planned and should have no bearing on your mood.
Sadly, I get a few emails from traders who say they have lost big. They are totally disheartened, understandably. The big losses are usually down to an in-disciplined trading approach. My mission in life is to show any trader how to trade in a sensible and low risk way. Betting the farm on one trade is nothing I endorse. Try to take an arm’s length attitude to all trades. And certainly do not marry any of them!
I find many unsuccessful traders usually have a hugely emotional attachment to a particular market view (say, the Dow must collapse). Remember, the market doesn’t care one jot about anyone’s view. And all of that is why I have recently launched the BASIC 5k ACCOUNT to try to make everyone a winner.
And one that is working – BP
The oil majors are always on my list of shares to keep watching even though a trade may not be indicated for some time, In fact, for PRO SHARES members, I have avoided it for a while, but finally spotted a high prob/low risk opportunity last week.
This share is basically a plodder. It rarely swings by more than 50% declines/100% advances. But it does sometimes offer wonderful buy/sell signals using my Tramline method.
And with the Saint Greta Effect, more investment funds are ditching anything that smells of fossil fuels, even the solid dividend payers, such as the majors. So a new investment in BP is becoming very contrary and is best put under your hat.
Here is the very long term monthly
I have a lovely blue tramline pair and a three down on a momentum divergence to the recent low which was also a Fibonacci 50% retrace. Time to examine a possible long trade. Here is the 4-hr
and I have another lovely tramline pair and the dip to the 465 area lay on that and the main pink tramline for double support (see my text pp 59 – 60, 135 as a Chinese Hat) and on a momentum divergence. Time to definitely pounce!
And pounce we did for a very low risk/high prob buy. These don’t come along very often but when they do, we fill our boots gratefully.
Did planes fall from the sky 20 years ago?
And finally, it is the 20th anniversary of the Millennium Y2K bug scare (remember that?) that never was. Food supplies would be cut off, power grids shut down and planes would fall out of the sky as their on-board computers would be unable to adjust to the year 2000 at midnight December 31 1999.
Well, we know what happened to that widespread apocalyptic prediction, don’t we? It went the way of all the multitude of end-of-the-earth scenarios we humans have painted since the dawn of time.
And what a suitable moment at the end of the year to reflect on the latest apocalyptic vision of the earth’s destruction (in 12 years? Or is it 18 months? I really can’t keep up) because of so-called human-induced climate change.
We seem to be prone to total social anxiety as stocks reach the top of a long bull trend. Note that the Millennium bug occurred as stocks were entering the Dotcom bust. Tech shares had been in a manic bubble in the 1990s (see above chart) and then reached a peak but then started a devastating collapse from the March 2000 top after the vision of dread had faded.
Will history repeat now? Are the bulls partying as in 1999? Hmm.
Wishing a Happy and safe Christmas to all with a small gift:
There are smart/knowledgeable traders and there are wise traders. The smart ones learn from their own mistakes, while the wise learn from those of others (it’s far cheaper!).