Stocks closed the week at another new high. Of this I am certain: we are getting closer to the top! And it can come at any time with bullish sentiment pushing into the stratosphere, valuations at crazy levels, but trading volumes remaining weak. In my Trader email yesterday I showed the wide gulf between the haves and have-nots with large caps up and small caps down big time this year.
The public has been sceptical towards shares since they were taken to the cleaners in 2007 – 2009 and have not returned in droves, as opposed to the pros. But the latest AAII survey shows the mom and pops finally plucking up courage and buying shares again. This is a significant development. The bullish reading at 40% has last week edged past the neutral reading for the first time for many weeks. Bearish percentage falls to 22%.
We know that when the public are finally convinced stocks are a buy, a major top is not far away. That Wall of Worry is getting a whole lot smaller.
Most people believe that it will take a huge external shock to trigger a turn in the market, such as a sudden flare-up in the Middle East or between Japan and China, or any number of places. Or a ‘shock’ rise in interest rates. Not so. Markets run on internal sentiment changes.
For instance, if enough investors decide that in their opinion, the odds of further gains are out-weighed by a potential loss of value, they will book profits. If enough do so at the same time, selling will snowball – all the while, the pundits will be rooting through their drawers of market rationalisations and coming up with the ‘reasons’ the markets fell. I read such stuff for entertainment purposes only.
There is no doubt we are near major turns in several major markets. Sentiment extremes abound in stocks, Treasuries, gold/silver. The rubber bands are now tight and primed for release.
Here is the weekly chart showing a good tramline pair starting in 2008:
And this is the unthinkable – if the market rallies up to my upper tramline (a possibility I do not rule out), the target will be in the 18,000 area. That is another 1000+ points away!
The latest COT data shows that the S&P. hedgies swung to the bearish side and are now net short, while the small specs added to their longs and are net long. This is consistent with the new-found bullishness of the AAII survey. Do the hedgies know something the public doesn’t?
While everything is screaming OVERBOUGHT, there is no law stopping the markets climbing even higher. But when the top arrives, it will be the start of a huge waterfall decline. The higher they climb, the harder they will fall.
See yesterday’s post.
The ECB news triggered a huge key reversal and the low that day is my new EW wave 1 down. We are now in w2 up and I have marked possible Fibonacci targets for this wave. The 62% level is the most common target in this situation. The huge pos mom div should be the rocket fuel for such a rally. Also the COT data shows hedgies swinging to the bearish side just before Thursday’s reversal and now a short squeeze is very much on the cards.
I took profits on my shorts but not yet willing to go long, but I may this week.
Right on cue, has bounced off my tramline support and is forming a base:
I am not so sure I will see one more dip before the huge rally I am expecting and so I decided to take a long position as I do not want to miss this rally. My first target is the upper tramline in the $1290 area.
I am now long but with a tight stop.
Has been trading in a tight range and is forming a very nice triangle on the daily:
The lines are a bit indeterminate – you can draw them slightly differently, but the triangle form is clear. A breakout of it should produce a major move – and one I wish to exploit. Of course, if stocks move towards the rather fantastic 19,000 level, the USD/JY will surely follow and the break will be to the upside.
I am awaiting the breakout for a trade.
Have a great weekend! And welcome to the new members of my MoneyWeek Trading for Profit Academy.