We are getting closer to the cliff edge
Apologies to lemmings (who do not jump off cliffs), but I see this Disney-cooked fantasy as a suitable image for FOMO investors who are likely to suffer this fate.
Later today the non farms report will be out and will likely start kicking the army of complacent investors out of their slumber – or at least, this is a highly appropriate time to do it. The surging Nasdaq – lead by the rampant AI/EV giants – has reached a crossroads:
It has reached my upper tramline at the Fib 76% retrace of the entire move down off the November 2021 ATH on an extreme overbought RSI. Not shown is the momentum divergence on the daily into the recent highs.
If my usual Technical Analysis rules remain valid, the odds heavily favour at least a decent pull-back from around current levels.
And what a time to do it! Levels of extreme manic FOMO behaviour abound in several sectors as I have been outlining in my blogs (I showed extreme bullish sentiment in bonds last time).
Two weeks ago I published my blog with the title “Standing on the Cliff” where I featured the Russell 2000 index that appeared to be on the verge of a precipitous decline. That has now started.
Asset prices everywhere are under great threat.
Here is the explosive growth in UK house prices to earnings ratio and it is tracing out a lovely impulsive 5-wave impulse since the 1970s. This five wave Elliott pattern means that the end of the road is nigh when wave 5 terminates.
The current 9.2 times av’g earnings is the highest on record (in London it is close to an astonishing 20 multiple). Until the Millennium, the ratio was pretty stable around 4/1 and houses were relatively affordable for most.
Recent data reveals the first decline in year-to-year average price in decades – the first sign, surely, of more declines to come given mortgage rates have ballooned – and look to go even higher.
Already I see reports that some owners are slashing their asking prices to achieve a sale. Has the dam finally broken? At some point, houses become unaffordable compared with earnings so has this point been reached? Today’s house hunters face a dilemma – few rentals on the market at sky high rents and out-of-sight purchase prices. Something has to give – and soon.
As for the UK housebuilders, it is a sorry tale.
This is a major UK player and has been in a major bear trend for over three years – all the while everyone is screaming for more new homes! What a topsy-turvy market! When demand is off the scale, investors see no profit in the company and have no faith they can provide them at affordable prices despite their focus on first time buyers. They have banked land to the hilt and yet investors see no future in the company. Huh?
Added to this bearish scenario is the likely forced selling of buy-to-lets by landlords unable to make the economics work as the government ups its war on them. That should break the logjam of supply that is currently clogging up the market especially at the lower end.
In any case, the five wave pattern is telling us that a reversal lower is the next big move. And it will be the numerator that gets hit, not the denominator. I sense that house prices have rocketed so far that the current slowdown in activity is a prelude to a lengthy decline.
And it is the same picture in the US – here is a chart of annual average price growth
Annual price growth topped in mid-2021 and has been in decline since and now is in negative territory. There is a lot more downside to come as mortgage rates skyrocket.
That is what happens in markets. I am sure you have noticed that when an active market such as the euro moves quickly in one direction, that is followed by a hiatus when the price seems to stand still for a period as if deciding whether to turn back or move on.
Of course, the real estate market moves a lot slower than the euro, but the same process is in play. This quiet period is when buyers and sellers are evenly matched. In a highly liquid market such as the euro, there could be good trading activity in these quiet periods as buyers and sellers slug it out.
So are we finally at the end of the line for asset valuation growth prior to crashes? I see investment quality watches such as Rolex auction prices are falling. Commercial Real Estate (CRE) has been is a savage decline for months. Each sector tops out at different times but as more are added to the list, the end is very nigh for those still elevated markets such as Big Tech.
Off the radar for many who seek excitement above all else is the Russell 2000 index of US small cap companies that are what I call the ‘real’ economy who use tech but is providing goods and services that support the big guys.
This break on Thursday morning should presage a more substantial decline -and in fact is doing just that as I write.
Last week I highlighted the potential for massive declines in bonds – including US Treasuries. I showed this chart that pointed to the impending fifth wave up in yields in the 10-year.
And now as I write, yields are surging at the same time as stocks are collapsing. This is the very same pattern – and contra the usual relationship – that pertained last year when bonds and stocks lost a great deal of value as visions of recession loomed as the Fed hiked rates precipitously off the zero bound.
Now with many locked into debt taken when rates were near zero, when they expire and need to be rolled over, huge hits to earnings (companies) and spending (individuals) will be felt.
Now, those very same visions of recession loom even larger. Latest macro data is pointing to a rapidly slowing economy as interest rates surge.
Odds are now extreme that my long-awaited third wave down in share indexes has kicked off. Remember, this is one of the last asset sector that has stayed aloft – as manic bullish sentiment has been boosted by visions of an AI ‘revolution’.
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Will Just Stop Oil succeed in banning fossil fuels?
The colourful entertainment provided by Just Stop Oil protesters at Wimbledon – their latest appearance on the big stage after Lords cricket – is highlighting the current state of ‘progress’ of the ‘renewables’ transition from fossil.
Once in a while I come across a chart that is worth more than a thousand words to show a basic truth – and this is one such
This shows the global energy use by source. The overwhelming contribution is from fossil (red line that is still rising). The contribution from traditional biomass (camel dung, wood, etc) is the green line. Remember, biomass burning is a pre-fossil fuel – coal, gas and oil are simply biomass that is millions of years old and formed under great pressure. It contains as much carbon as fossil.
And that from ‘renewables’ – wind and solar – is the blue line at the bottom. Need I say more?