Waiting for Godot

In an English Literature class at school, we ‘did’ Waiting for Godot by Samuel Beckett.  It is an infamous absurdist and surreal play which consists mainly of two characters who sit around shooting the breeze waiting for the arrival of Godot, who never arrives.

Many must have a similar feeling waiting for the Fed to actually do something.  Yesterday’s non-event was entirely predictable, but will the Fed be able to continue keeping all the balls in the air and stocks in their bull run for much longer?  Will they signal another round of ‘stimulus’ soon?  And when I say stimulus, I mean stimulus to the asset markets, and definitely not on Main Street.

Will Fed Funds trend even lower and towards negative?  I covered that point recently. This week, a UK bank has warned its business customers to expect a charge on deposits if policy rates go negative, which has now been well flagged.  Already, some EZ banks are doing just that.

But I fail to see how a charge of even 0.05% pa on deposits will induce a company to make a large investment in capital equipment that would be uneconomic at plus 0.05%!  To ‘save’ a measly 0.01% pa, would they take on the added risk?  In today’s ultra-competitive environment, that is highly unlikely.

So what is the ulterior motive behind low and negative policy rates?  Could it be the time-honoured way of signalling deflation ahead?  The most sensitive barometer of inflation expectations is the US Treasury market (and that is why I spend so much effort analysing it).

And the 30-yr T-Bond is showing signs that long rates are finally heading up (see my previous post) after many years of falling rates.  Is this a signal inflation will start picking up?  The scene is being set for just that with governments gearing up for huge expenditures on public works projects and wages/salaries are generally rising with skill shortages in some areas.

Yesterday’s bounce in the bonds is my wave 2 and next will come a long and strong wave 3 down and when it does, it will confirm inflation expectations are rising.  Could that possibly arrive in conjunction with a rapidly recovering crude oil market?

When US crude topped at the $52 area in early June, I forecast that the market would begin a slide down to my first target at $45 and then on to my main target in the $42-$43 zone.  Yesterday, it hit $42.

If crude can stage a recovery and test my long-standing target at the $60 area, it would surprise an awful lot of oil bears (who are assuming the market will continue lower). As a sign of this bearishness, a typical headline today reads: “Is Oil Staring At $35?”

Caterpillar heads into resistance

Many large cap shares both US and UK lend themselves very well to my tramline trading analytical methods – and Caterpillar is one of these.  Because the company provides large equipment around the world, it is considered a bellwether for global economic health.

With the generally  downbeat mood since the 2014 highs, the shares have been hit hard into the February lows just under the $60 level.  But together with the general market, the shares have recovered with yesterday’s thrust to the mid-$80s. But look where the rally has arrived at:

The mid-$80s is where the Fibonacci 50% resistance level and my upper blue tramline meet – and this is heavy resistance.  In addition, the shape of the recovery is clearly an A-B-C with a small momentum divergence at yesterday’s high.  And this A-B-C form is always a corrective pattern, and so signals that the odds are now heavily in favour of a decline.  At least, taking profits on long trades appears a wise move.

Caterpillar isn’t the only share that is hitting a brick wall of resistance after a goodly rally phase.

Standard Chartered heads into resistance

I have been bullish on this share since the April lows and saw the potential for a corrective rally following the severe bear trend off the 2014 highs.

Now compare the two charts – aren’t they eerily similar?  Both made lows in February and have made A-B-C corrections.  They are in unrelated businesses, so why should the two charts be almost identical?  Of course, the simple answer is that the same swings of bullish-to-bearish sentiment of general economic conditions apply to both companies.

As with CAT, the conditions are ripe for taking at least some profits off the table.