Weekly Wrap

So, it’s fill yer boots time again! Grab that risk with both hands – you can’t lose. The debt ceiling crisis is over and it’s perfectly OK to get back in the water. You know the Dow is heading for 20,000, then 25,000. I have even seen one quote for 100,000!

Yes, we are in bubble territory again. House prices are on the march, even our latest IPO the Royal Mail is up over 50% from issue price in less than a week. Google is trading over $1,000 – a target proposed a few years ago (along with laggard Apple, which is trading at the $500 area). Each new bubble must have a new story to entice the punters.

Everyone is convinced interest rates will stay low for the foreseeable future, the Fed will keep up its QE bond-buying (latest thinking is for tapering to start next March), and the dollar is doomed (again).

This is what groupthink does – and sets the stage for a massive disappointment. Stock markets make their major tops when bullish enthusiasm is high – very high. They never make tops with bearish sentiment ascendant. They must climb that Wall of Worry.

But low interest rates is not a guarantee of rising company profits! Far from it. What expands an economy is an increase in final demand. Consumers (70% of the economy) have been squeezed by stagnant wages and salaries. Much of the (weak) growth so far has been increasing government spending.

At some stage, if this will stop, especially if Treasury yields ramp up again (as I expect) as investors take fright of the ballooning deficits. With the prospect pf reduced government spending and with the consumer still being squeezed, company profits are set to stop growing – and when this realisation hits the stock markets, watch out below.

But underneath the stock rally lies a weakening structure – momentum is not confirming the rally and NYSE New Highs/New Lows shows a large divergence.

Not only that, but the Dow is badly lagging the S&P and especially Nasdaq, both of which are making new highs.

Of course, I am missing out on a trading opportunity by avoiding the Dow and other indexes. However, I have been busy in the Treasury market, which has followed my forecast perfectly (see later).

Sadly, with US government people back at work – and I refuse to make any snide comment here – we are still without the latest COT data. But it is clear that investor sentiment has made a big swing to the bullish side.

Latest AAII.com data show the highest bullish reading for many months. So we are getting closer to the top.

And last week, the news that many hedge funds are being killed with their short positions simply confirms the extreme bullish sentiment. Reading such tales of woe only serves to reinforce the bullish bias of the committed bulls! It is called confirmation bias, I believe.

The key to the next phase is interest rates. They have been trending lower last week with expectations the Fed is not tapering soon. But is that a realistic view?

The Fed have indicated they are anxious to find a way to extricate themselves from QE – and with decent employment data, they might have that excuse.

This would kill the reflation rallies, of course. And that is when we need to position short. The bust will be spectacular.

DOW

The rally carried yesterday to the Fibonacci 2/3 retrace – and on weakening momentum.

If the markets are going to turn, this would be a great place to start.

GOLDMAN SACHS

This is a share I follow. The financial sector is badly lagging the general stock market advance. Remember, it was the lead sector in the 2007/2008 credit crunch – and it may do so again this time.

I have a nice tramline pair working and a break of lower line should signal the end of the line. Watch this area as it should provide a general sell signal.

T-BONDS

The upside to the Dow rally – which I missed – has been the tremendous three-day rally in T-Bonds, which I did not miss:

Having taken a long position at the w4 low, my gain was a tidy 300 pips in three days.

This w5 rally should be the prelude to another leg down (up in yields) and I shall be looking at a shorting opportunity.

GBP/USD

Has rallied with the euro with the dollar-battering of last week, but it approaching a turning point as it hits major long-term resistance:

This will present a major long-term opportunity to position short.

GOLD

What an exciting week! A new low on Tuesday on a positive momentum divergence induced me to take hefty profits on my shorts just before the big Wednesday rally and now will be looking to re-establish shorts soon:

The big jump was a massive short squeeze as the market was too bearish. Have the shorts taken enough pain? If not, then the alternative is for the market to advance to the Fib 50% level at around $1,340, which I would like to see as the 50% retrace is the most common turning point.

ALCOA

Remember Alcoa? A while ago, I forecast it would move up out of the doldrums (it did trade at $50!) and was a super candidate for a long-term investment. That was when it was trading around the $8 area: