A tenet of the Elliott Wave theory is that when general social mood rides high, stocks also ride high. And when consumer sentiment falls, stocks tend to falter. And the Dow is one of the most sensitive barometers of social mood. And the higher stocks are valued when sentiment declines, the harder they will correct.
The reason is that when social mood is elevated, people and institutions want to buy assets including shares. It also includes vintage cars, art (and the amazing phenomenon of NFTs) and much more. But when the mood starts to sour, people are more inclined to protect what gains they have made and start selling. They become more conservative.
We have been in an unprecedented bull run with elevated mood now for18 months off the Corona Crash low where the S&P has gained an astonishing120%. And before that, the S&P bull market had gained over 500% off the major Credit Crunch low of 2009. That’s what I call a roaring bull market.
But just as no tree grows to the sky, all bull runs come to and end at some point. And they tend to do so when everyone (almost) believes the S&P will reach ever higher levels. I saw one prediction today for 5,000 (latest high is 4550). And tops tend to appear just when there are no bears left (at least publicly).
Of course, the big question is – are we there yet? Because if so, the downside potential is massive as we all know.
The latest U of Michigan monthly consumer sentiment picture finally shows a marked deterioration in public expectations for the economy. Buying conditions for large purchases have slumped recently. So does this mean we should expect a slump in share prices as measured in the major indexes?
If history is any guide, it certainly does!
The Dow Theory is back from the dead!
Charles Dow developed his theory 120 years ago – and is thus most definitely not on any radar of today’s analysts (who can hardly contemplate a bear market). No, today’s analysts are wedded to their algos and intricate oscillators. But I predict it will be soon. The theory states that when in a bull market, the Dow Industrials and the Dow Transports move up more or less together making new highs – and vice versa.
But when the bull exhausts, the Industrials and the Transports break significant support levels (but often with a time delay). I believe the time is ripe to start including the Transports (IYT ticker) in your daily scan of the markets.
Here is the long term picture
This is a lovely scene! I have a complete five up on two time frames and the final fifth wave has travelled between excellent tramlines to the ATH on 10 May. Regular readers will know I placed this date as one of high significance (the Dow made an interim high on that date – see below).
Here is a close-up
From the May 10 ATH, the market has traced out a clear five waves down (also along good tramlines) to the wave 1 low of what will shape up to be a larger five down. This is a clear indication the trend has very likely changed to down.
Wave 2 bounce is a shallow affair – and that sets up the extreme likelihood that we have started a massive wave 3 down. This wave will be the longest and strongest of the budding five down.
So how does this compare with the Dow/S&P? Here is the latter index:
The S&P has gained about 120% off the March 2020 Corona Crash low – an astonishingly bullish run. But last week, it moved to close below my lower wedge line after topping on 3 September – a full four months after the Transport top.
So now with the Transports starting a bear trend and the S&P having broken key support, it appears both have confirmed new bear trends and the Dow Theory kicks in. That is why we should hear more references to it in the media as the markets move lower.
Another important development last week was the move lower by the US Treasury bonds. When bonds and stocks move lower together, as they did last week, something is changing.
Some industrial commodities are plunging
Iron ore is a commodity that plays a vital part in the construction industry – especially in China which has been hell-bent on building more and more ghost cities. But that is coming to an end with the Evergrande debacle. This is a major Chinese construction company that is heavily in debt as it tries to sell apartments into a now-declining market. It is verging on bankruptcy – so will the Chinese state rescue it? If not, it will send a major signal that the days of propping up risky enterprises is coming to an end.
Iron ore futures have lost over 50% since its ATH. And when was the ATH made? Why, it was on 10 May (remember that date!). That is a collapse that will ripple through many markets.
Has NatGas made an important top?
A few days ago while this explosive market was making new ATHs almost daily, I suggested to VIP Traders Club members that a top of some kind would be made when the MSM latched on to this story in a big way. We would see numerous articles on how the tight supply situation just before the winter season would result in major disruptions to electricity supply and result in blackouts across Europe.
And the Nord Stream 2 pipeline was being held up by Germany as it feared Russia would gain even more control of Europe’s gas supplies and was unlikely to ease supply supplies. It was gloom all the way! Blah, blah, blah.
These articles are designed it seems to sucker in amateur traders who get excited and whipped up into plunging into this unfamiliar market. Of course, the time to buy was when nobody was looking at this market and was historically cheap. VIP Traders Club members did just that – and took major profits last week on my advice just as the MSM fear articles appeared.
It even made it on to the BBC news – and that is the gold standard for contrarian signals!
What?? The BBC wants more CO2!
Incidentally, my Laugh of the Week came yesterday as the ever-reliable BBC featured a piece on the reduced supplies of the CO2 gas that is used in the production of meat (it stuns animals before slaughter). It interviewed an industry spokesperson that stated the situation was dire if no CO2 (from curtailed fertilizer production) can be obtained. Farm animals would be left on farms for longer with the associated high feed costs (see market quotes for Corn and Soybeans). Devastation for farmers (thanks Net Zero!)
The solution for the BBC? Pump out more of the evil ‘pollutant’ CO2 (and hold your nose). Here’s an idea: Why not hook up some diesel generators and extract the CO2?
Naturally, there was a total lack of irony in the piece and no mention whatever of the gas being a ‘greenhouse gas’ or a ‘pollutant’ which they never fail to emphasise in all other of their programmes.
I still believe the Net Zero pledges will be abandoned in due course as economies start to contract and the cost of conversions to ‘renewables’ will be resisted by more and more people.
Is nuclear about to go nuclear?
I had a COTW on uranium last week and it appears there is a growing mood to deflect away from solar and wind towards nuclear as fears of that sector subside. Last week saw a shut-down of wind turbines across the UK and even the normally windy North Sea was quiet. Naturally, this unusual weather phenomenon was not widely reported in the MSM as it did not fit into the ‘climate emergency’ narrative. But I am sure the authorities noted and must have put a question mark over their reliance on UK wind to save the planet.
We have been trading Yellow Cake plc for Pro Shares for some time and last week it pushed into new highs
This company buys and stores uranium oxide (“yellowcake”) in drums and sells it to processors who turn it into the fuel rods used by the companies running the reactors.
I believe that unless there is another major ‘accident’ in a reactor, the outlook is bright for the whole industry. A major uranium miner is Cameco and that is also worth a look.