I have rarely seen a more divided stock market than this. The money managers are uber-bullish as they expect the Fed to keep the balls in the air, while the retail crowd is expecting the end of the world round the corner.
This apocalyptic mood of Joe Public is starkly reflected in the near-universal belief in the West (not elsewhere!) that we humans are destroying the planet with our profligate ways and governments had better get its act together or we will all die. Either we will roast to death or the rising sea levels will get us.
Not only that but we are seeing an outpouring of protests on the street in many countries against the political status quo and politicians in general. They have rarely been held in such contempt in their handling of their economies.
For instance, Lebanon’s economy is in dire shape and the government has just proposed a tax on WhatsApp to boost revenues. This has brought mainly young users of this messaging service out on the streets this week in big numbers with near riot conditions and road blockages.
And here in the UK and around the world (except China and India!!), we have Extinction Rebellion disrupting commuters (who are now fighting back). And in Barcelona, we see major riots in the streets against the jail sentences for the Catalan politicians who dared to hold an independence referendum.
Yes, these are all signs public anger against the authorities is growing – and that is bearish for stock markets. So with stock markets near ATHs, will this mounting anger bring them down soon?
When I was a lad, I remember seeing men walking the streets with sandwich boards proclaiming: The End Is Nigh!! That was at the start of the Atomic Age when nuclear war was a real possibility. Very few took them seriously then, but now they are on TV all the time (with banners now) – and are being taken very seriously indeed.
I ran a simple experiment in my local pub yesterday. I mentioned that I am pleased my car is pumping out CO2 because it is a vital plant food and without it, we would really all die from lack of food. We need more CO2 for more plant-based food! I was met with a stony silence and the subject was rapidly changed!
That little anecdote sums up the highly emotional and irrational state many of us are in today.
And on the economic front, consumer sentiment for the future is low and pessimistic. There have been record US inflows into bond funds and out of equity funds recently as retail investors seek a safe haven.
Also, there has been a record inflow into Gold ETFs (see last week’s blogpost) also in a flight to ‘safety’. I believe both trends are bearish for Gold and Bonds, not bullish as many pundits proclaim.
The widening gulf between the public and the money managers that is mirrored elsewhere in society is the prelude to a severe bust, which is the stance I have been holding for some time. And when it comes, it will be devastating. But for now, stocks are holding onto huge gains by a thread. But for how much longer?
Already, we are seeing cracks in the dollar’s strength. Here is the long term view
The ATH was made in January 2017 and the first strong decline off that is my wave 1 of what will turn out to be a five wave pattern (or at least an A-B-C). And off the wave 1 low set in January 2018, the dollar has been advancing, but only in a fitful way with heavily overlapping waves that are typical of corrections to the main trend (down).
Identifying the wave 2 top has been an exercise in frustration – but I finally nailed it earlier this month and now I am confident the very large wave 3 down has started that will last for weeks/months. A break below the lower blue trendline is imminent.
Moving up into the wave 2 high was accompanied by near record bullishness with DSI readings above 90% bulls. It was following the universal theme that hedge funds are at max bullish/bearish at major turns.
Sterling rallies hard – as forecast
But it was sterling as the main performer for the VIP Traders Club! From the 1.22 low the previous week, it has surged to near 1.30 – a gain of 8 cents in only a few days.
Many ascribe this explosive move to Brexit. In fact, cable has been in a firm downtrend since 2007! In that time, sentiment had built up to become uber-bearish as money managers chased the downtrend. Being short sterling became a way of life! Here is the 12-year picture
In fact, we had a potential Double Bottom set in August at the 1.20 area. So already by the time of last week’s ‘bullish’ Brexit developments, the market was already advancing off that low to confirm the reversal signal of the Double Bottom. And at that low, COT data showed hedge funds were at an extreme bearish posture – a sure backdrop for the swift reversal that followed. As I noted at the time, once the tun has started, a short squeeze was assured that would propel cable up smartly.
But last week’s advance appears pretty puny when set against the historic record! There is plenty more ahead and the 1.40 zone should provide major resistance.
Bond yields are rising – again as forecast
When I stated that bond yields would probably advance, I was in a distinct minority. The whole world it seemed was chanting the ‘lower for longer’ mantra. That was because they cling to the false premise that it is the Fed that controls all interest rates.
Last week, the Fed started scooping up short term T-Bills for the first time in a new heavily disguised QE exercise. Before, QE had been aimed at longer dated bonds. The result? 3m T-Bills now trade at record lows at 1.66%, while the heat is off the 30yr T-Bonds. The gulf widens and the ‘yield inversion’ has vanished. recession assured.
This means the major buyer of Treasuries is letting the T-Bonds float and there has been heavy selling as overseas holders want dollars to convert to their own currencies. And with the new QE liquidity, dollars are being released into the system, thus providing a double whammy for its value.
And from the wave ‘c’ of 2 high a week or so ago, the market has been selling off hard. But now they have dipped to T3 (equidistant tramline) on a mom div after a five down. A wave 2 bounce appears to be on the cards.
But the main trend is down (yields up) and when the budding wave 2 terminates, it will be a very hard down in wave 3 of 3. That will be well worth riding!