US stocks recover and point higher – much higher
Spoiler Alert: This is a politics-free blog today. But I do reveal an ending!
On Saturday, the day after the Brexit result was announced to the world and stock markets everywhere were plunging, I showed this chart as my forecast over the subsequent few days. I expected a dip and then an almighty rally:
I based this forecast on the likelihood of chatter about the Fed (and perhaps the BoE) lowering policy interest rates. Of course, this went against received wisdom that rates would rise and was a significant contrary view. But not today – traders are openly expecting rates to be forced lower perhaps at the next Fed monthly meeting in mid-July.
How is my immediate expectation working out? Here is the Dow chart updated:
I call that a success for the Elliott wave model with yesterday’s 400 pip gain! Note that wave 2 was turned at the Fibonacci 38% support zone on Monday. Now, provided Monday’s low can hold, I can forecast a sharp rally phase in a third wave to take the Dow above the May 2015 high of 18,360.
Yesterday’s very strong push must have surprised the shorts who believe the obvious story of Brexit creating ‘uncertainty’ in the markets. Such a load of tosh is discussed in the media (I only read it for entertainment purposes). Everything is uncertain. The weather tomorrow is uncertain. The winner of the 2:30 at Haydock is uncertain. The Brexit vote was certainly uncertain.
The universal ingredient of uncertainly is vital to make markets. The buyers hope prices will rise and the sellers hope they will fall. One will be disappointed. But uncertainty can work both ways – it does not always result in lower prices, as the MSM in their knee-jerk way believe. The uncertainty in the Fed’s intentions regarding policy rates sparked the huge rally in gold earlier this year.
Did we hear howls of anguish in the MSM over this gold rally? I think not.
But the upward move in stocks will not be straight up! The market is eating into overhead resistance where sharp dips can be expected near-term. But I believe the scene is now set for a counter-intuitive rally – something that markets do best. Bearish sentiment post-Brexit is high and short covering will drive the market higher.
But the rally will not help all sectors. I expect banking and finance to lag badly as the prospect for low or even zero interest rates in the UK and US persists, thus squeezing margins. Also, lucrative corporate deals within Europe will dry up. Banks also hold huge portfolios of bonds both sovereign and corporate. I expect long-term yields to start rising now and that will also hit profits – and put balance sheets under even more pressure.
When I started covering Barclays last year at the 280 level, my forecast was for the shares to decline to under the 2009 low at 50p. Not too many took me seriously then, but as Farage said yesterday, ” They’re not laughing now!” Shares are trading today at 136.
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