Weekly Wrap
Announcement
My book Tramline Trading is being published by Harriman House and they tell me publication date is to be in July. You can purchase in advance at a discount from their website
www.harriman-house.com/comingsoon
There is a paper book and an e-book combination. It is packed with practical ideas for trading using my tramline method.
Your voucher Code is HHTT2014
This market is obviously bomb-proof. Despite less than glorious US data last week – and despite how the MSM try to spin it – the Duracell bunny keeps going and going. The S&P made a new high on the close yesterday above 1900.
But I remain certain that the top is near. While the pros (money managers) keep piling in on any small dip, the public are staying away in droves. Latest AAII data shows that bulls and bears matched at about the 30% level, but neutral sentiment is a huge 44% – way above normal. How’s that for lack of trust in the rally?
It really is a tale of two markets. Does the public know something the pros don’t? We know that that a money manager who wants to keep his or her job must be invested at all times. We have seen an great example of how they play that game with a rotation recently out of small caps (Nasdaq and Russell 2000) and into the big boys (Dow and S&P).
The pros play the momentum game – they keep buying so long as the QE-derived money keeps flowing. But that little scam is coming to an end with the Fed tapering. Is it possible the rally will only turn when the QE spigot is finally turned off in October?
If so, then the Sell in May advice won’t work. In fact, because this theme has been well aired in the MSM, it is that much less likely to work.
Yet public sentiment remains depressed. Latest Bloomberg Consumer Comfort figure came in at 34 – a miss of 10% below expectations. This is a seven-month low. The share of people who said the economy is getting worse climbed to the highest level this year.
Yet stocks keep marching uphill. Because stocks represent the thermometer of social mood, either the mood must swiftly turn up, or the market will fall to match sentiment. It’s as simple as that.
And how can public mood suddenly revive? Will world peace suddenly break out (Syria, Ukraine)? Will gas prices suddenly fall (crude is trading well over $100 again). Will all of those people who have left the jobs market in desperation suddenly receive lucrative job offers? Will everyone rush out and buy a new home? The MSM were all over yesterday’s ‘great’ home sales data as an ‘explanation’ for the market’s gains. Rubbish. Home sales and price data have missed all year, yet the market has held up. US existing home sales data remain weak and inventory is building – and mortgage rates are creeping up.
No, what is levitating the market is simply momentum buying by the managers – hedge funds, banks, insurance cos and all of the usual suspects. They have no other choice. And when the market tanks, if they lose less than their competitors, they can claim they have out-performed them! And likely keep their job. It’s win-win for them.
But what is rumbling under the surface is the strength of the dollar. It seems the carry trade is helping the dollar with the prospect of lower rates in the eurozone. Also, what seemed certain (that rates in the UK will rise sooner rather than later) may well be dashed.
The run-up to the ECB announcement next month will bring out the opinions of the gurus and revive memories of when all eyes were on the monthly pronouncements of the US Fed in the 1980s when interest rates were much higher and crucial to the stock market.
And scanning the many articles I read on the stock market “bubble”, there is just too much expectation for a dip of at least 10% that it is just not likely to happen (yet). The Sell in May theme only adds to this conviction. But when most expect something, it rarely happens – at least not until eyes are averted and focused on something else.
S&P 500
Here is the daily chart showing the large wedge forming.
Momentum is weakening on the rally and unless the market can thrust much higher out of the upper line, it is only a matter of time before the inevitable happens.
The Dow diverges and has not made a new high. Nor has the Nasdaq.
I took a small loss on my short Dow trade last week of 20 pips.
EURO
My dollar forecast remains on track – much higher in 2014. Here is the daily EUR/USD:
It has broken below the apex of the lovely “V” formation at the high and with the tramline break as well, the top at 1.40 is in.
I write about the “V” formation in my forthcoming Tramline Trading book and I find it a most useful trade entry method.
My next target is my lower tramline in the 1.34 – 1.35 area. I remain short.
GBP/USD
Was it only a few weeks ago when bullish sentiment was off the scale? UK growth forecasts were sky-high, unemployment was falling fast, house prices were shooting up and manufacturing was reviving.
So what happened as cable reached 1.70?
What happened was simply too many bulls capsizing the boat. Now I have a clear waves 1 and 2 off the 1.70 top and we are now in wave 3 down. Look out below! I remain short.
T-BONDS
Treasury yields trended up last week and I was presented with the hourly chart on Thursday:
Last week, I suggested that the market was in the process of making a H&S. And here it is.
I was short from the 137.50 level going into this chart. Because of the Fibonacci 62% hit and the pos mom div, I took a 100 pip profit on my short.
Sentiment remains in the 90% bullish area, so the path of least resistance is going to be down. I am looking to short again on strength.
GOLD
Is still confined to the large triangle (or wedge):
It made an assault on the upper line against last week but was pushed back down. That makes six hits on this upper line since mid-April. That makes it one heck of a strong resistance level.
To complete my EW count, I expect the market to move lower and break out of the wedge.
I have no position, but will be looking to take one on the break.
Have a great holiday weekend!
