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I have not much to add to my thoughts from last week on the market except to say we are getting much closer to a major turn. I have a MoneyWeek Trader email yesterday (“Has the bell rung on the Dow?”). The short answer is – not yet, but they are positioning the clappers.
One news item last week went under the radar – the US budget deficit continues to shrivel up like the Wicked Witch of the East when Dorothy’s house fell on her. The 2014 deficit is expected to be only 2.8% of GDP (4.1% in 2013). This is a ratio that Eurozone nations can only dream of (the UK ratio was 5% last year). This will put upward pressure on the US dollar and Treasuries, of course.
In terms of T-Bonds, many are baffled why this bubble hasn’t burst yet. The above is one reason – the Treasury doesn’t need to sell as many securities to fund government. Other reasons are: flight to safety as risk-on small cap stocks are tanking, little prospect of inflation rearing its ugly head (crude oil plunged last week to $100 – an 8% drop in little over a week), and not forgetting the bearish market sentiment.
The Fed taper continues, and this is having no bearish impact on Treasuries, contrary to received wisdom. I had believed yields would rise last week, but with the crude oil plunge, yields actually fell and now my charts are confusing. I will stand aside until the fog clears.
I have had great luck catching many of the twists and turns in the T-Bonds this year and I am in good profit overall. It is time to sit back and watch – until I see another trade open up.
In terms of the Dow, the market has all the hallmarks of a very tired bull indeed. Momentum is weakening, put/call ratios are weak, sentiment among the professionals is manically bullish, and the advance/decline ratio continues to weaken (fewer and fewer stocks are taking part in this rally). The market will fall of its own weight soon.
The short-term chart is looking decidedly interesting:
The past six weeks of action has been contained within my tramlines. The dips have been turned at exact Fibonacci levels, including last week’s. And the highs all have neg mom divs, warning of buying exhaustion.
With the multitude of support levels at the 16,800 level, if this level is breached, the selling should be ferocious.
Is on the verge of another big leg down:
Wave 2 has a satisfying A-B-C feel and a break of the pink zone would validate my EW labels.
Note that off the w2 high, I also have a smaller w1 down, w2 up and now a w3. The break of support would therefore be in third of a third waves – the most powerful of all moves.
I remain short EUR/USD.
Is pushing up against my upper tramline:
This shows the power of wedge breakouts which I cover in my book (text, pp 33-38, 71-80, 152). It has been virtually straight up since the wedge break last October in the $8 area.
I decided to take partial profits last week near the $16 level.
Has resisted my call for a small dip in a b wave and marches upwards towards my target:
Momentum is weakening and so I am not convinced we shall see a sudden lurch to my upper trendline this week. A stock sell-off would initially boost gold, but I believe that would put in the highs of my E wave and wave 4.
This is not the time to be filling your boots with PMs – rather, unloading holdings seems the correct stance now. That big wave 5 following the w4 high will be the one to catch.
Is testing major support again:
It’s only a matter of time before the selling floodgates open in a large third wave down (text, pp 118-120).
Latest COT shows hedgies now an eye-watering seven-to-one bullish USD/JY. It’s time they got a reality check.
Why would the yen advance when Abenomics is trying to weaken it with QE (as it did last year). One factor could be the flight to the yen’s traditionally safe haven status when the risk-off mood really takes hold. Remember, the USD/JY is a liquidity play, just like stocks. They have been trading in synch during much of the QE period.
One other piece of news that crept under the radar last week was Japan’s collapse in orders for equipment and machinery. So much for Abenomics boosting the real economy. This will have a dramatic impact on the yen and Nikkei.
Have a great weekend!