I sense things are slowly changing in the markets from the extreme bullish mania prevailing at least since the March Corona Crash lows. How? To a more cautious attitude going hand in hand with the current rise in bond yields.
If I am correct, yields are already starting a major thrust that will surprise most observers, as I have been warning for a while. The world has been expecting yields to stay ‘lower for longer’ and this has been etched into traders’ psychology.
But as we have seen time after time, when everyone expects something to happen, the market rarely accommodates the majority, except for a while.
So the question is: can the share markets keep elevated when bond yields are on the rise? With valuations already in the stratosphere, especially for the tech big name high-flyers, will this be the final straw that breaks the camel’s back?
Already in the UK we are seeing mortgage rates on the rise and conditions for buyers getting tighter. Gone are the 5% deposit, 1.5% fixes. And with the ‘surprise’ boost to house prices since lockdown in some areas, first-timers are even more unlikely to get on the ladder. Mum and Dad will have to dig deeper, but with widespread lay-offs seemingly up ahead, the outlook is not favourable for the property market.
So today I am looking at some of the tech high-flyers – and the outlook is bearish.
Performance has been simply amazing, given the numerous headwinds from disappointing company announcements in recent months. And there is no shortage of competition in the EV sector.
But the shares have been a graveyard for the shorts – many hedge funds have lost big time in their short positions. But now, the charts are giving me a pretty clear signal the path of least resistance is down
The ATH was made on 2 September at $540 and from there, it declined in a textbook five down to the first wave 1 low at $310 (a hefty loss of 42% The momentum divergence there allowed a substantial rally and it is in a clear three waves carrying to the Fib 62% region – a typical target for a reversal.
Given the momentum divergence at the Wednesday high (wave c of 2), odds are strong that high will hold and a break of the minor blue trendline should confirm a swift move lower to kick off red wave 3 down.
Only a sharp rally above Wednesday’s high would force me to question this outlook.
Another share that has been defying gravity for some time
The ATH was made at $307 on 26 August and as with Tesla, it kicked off a textbook five down to confirm major trend has changed to down. Another momentum divergence off the $244 low on 21 September set it up for a decent rally and as with Tesla. is in a clear three waves taking it to the Fib 62% retrace.
The swift move lower off last Monday’s low should be the tell-tale sign the high is in and big wave 3 has started.
This is another ‘never sell’ share, according to the bulls. It is so dominant that it will never lose value, so they claim. We shall see about that
The ATH was made on 3 September at $1760 and on a possible overshoot of my major trendline. Unlike the previous two charts, this does not show a classic five down but the recovery to last week’s $1580 high is a three and has carried to the classic Fib 62% retrace making this level a high-prob high prior to the start of wave 3 down.
We are in US earnings season and any variation from the coning ‘priced to perfection’ results could well tip many over the edge.
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Sentiment remains historically high
How could it be otherwise when stocks remain so elevated in the face of a worsening global pandemic? Real businesses, such as hospitality, high street retail, travel are in depressions – and set to get worse this winter.
Yes, many online businesses are flourishing, but have we reached peak Netflix? have we spent out at Amazon? Are we tiring of our Zoom hook-ups?
So far, little mention is being made of the savage tax increases that will be imposed (after Christmas?). And now, Moody’s has lowered the UK’s credit rating making the mountain of new debt more expensive, putting even more pressure on the need for higher taxes.
So can shares remain elevated for much longer in such an unhelpful environment?