Weekly Wrap
New highs all round! More QE is on the way, folks – the arch-dove Yellen has as much as promised us that yesterday (what a surprise!).
You have to be mad to be a bear now, surely – with the new Fed chief signalling her clear intent?
Stocks are up over 25% this year on the S&P – and there is a massive Santa Rally around the corner to add icing on the cake! Who knows – will the S&P zoom past the 1800 level and on to 1900 and even 2000 next year? It all looks so great, doesn’t it? What could possibly go wrong?
Mad or not, I prefer to remain in the bear camp – my friends are few. but they all know the lessons of history.
Just last week, the Investors Intelligence Advisors Survey shows only 15.5% of us are bearish.
This is the lowest reading since the 1987 Great Crash (which I well remember).
There’s some history for you to digest.
So, 85% of advisors are bulls. That is some herd. For every bear, there are almost six bulls.
Imagine them on a ship with bulls to starboard and bears to port.
The bulls are partying like mad at the punch bowl, while the bears are a sober bunch as they cast an envious eye on their happy friends across the deck. Some even decide to join their party as they don’t want to miss out on a good time – and a decent drink.
Do you think the ship is listing even more to starboard just a little? Is it in danger of capsizing from even a small puff of wind?
And if the market continues its relentless climb, do you think the ship will list even more, thereby putting the ship in even greater danger?
Am I happy being on the port side without a drink? Of course.
Is QE always good for stocks?
One of the great myths in the market is that QE is good for stocks. Yes, it was in 2009 as we faced an end of the world scenario – and when there were few backers amongst the pundits!
Today, everyone and their dog believes QE is great for stocks -even the bears! But, as one wise person said: “When everyone thinks something is true, no-one is thinking”.
So, even if QE is maintained under Yellen – even if true – will stocks automatically keep partying?
My guess is that the market will make its turn even with QE in full flow – and the catalyst will come from left field. Maybe it will be the rising long-term interest rates that the stock market will finally see.
Maybe it will come from Europe as it enters a deflationary phase. Maybe from China.
But come it will – and we are getting closer to that day. I am keeping my powder dry for such an event.
NASDAQ
It has edged closer to my upper long-term tramline off the 2009 lows:
If you look at the daily since 2009, you will see this latest rally leg has been near-exponential. And we all know what happens when that type of trend ends – in a massive collapse (see gold in late 2011, and currently Tesla).
We could see a poke above the tramline in the coming days, but if the market then falls back below my line, that would the the first sign of a major turn. And if the market gets back to the recent low (pink bar), that is a major sell signal for me.
EURO
Is making a feeble relief rally to the big move off the 1.38 high:
The overlapping minor waves tells me the rally is about to run out of steam at or near the lower tramline with maximum rally to the pink zone for a Fibonacci 50% correction. I am not sure it will even make that. But a tramline kiss is certainly possible.
I remain short from near the 1.38 level.
USD/JY – My Trade of 2012 (and 2013 and 2014)
Has made the wedge breakout I have been looking for at the start of a large fifth wave:
I am looking for breaks of previous highs (pink bars) in due course. Any declines should be contained by the upper wedge line which is now acting as support (was resistance until last week).
This fifth wave move should be very large – one reason is that wave 4 was huge and lasted six months. This enabled a huge pile of wrong-footed bears to build and these need to be squeezed before a meaningful top can be made.
One worry is the COT data, which shows a 5.5-to-1 ratio of bulls to bears. This is a similar ratio as exists in the Nasdaq (almost 8-to-1 bulls to bears).
My first target remains in the 105 – 106 area with potential for much higher values. But there will be dips along the way
I remain long.
GOLD
Is making a valiant rally attempt and is in a very interesting position vis a vis my tramlines:
The low was made on a large neg mom div ( a ‘get ready for a rally’ signal) and now I can draw up-sloping tramlines with yesterday’s $1280 low in place. The market bounced off this level and has made a potential upper tramline break.
If this is genuine, we should carry up to previous high (pink bar) and on to my upper tramline in the $1305 area.
One very encouraging factor is the COT data of yesterday. It shows hedge funds have been taking Goldman Sachs’ advice and filling their boots with short trades and reducing their longs by a very wide margin.
In fact, they reduced their shorts from 106,000 to 82,000 – a 24% reduction in one week. That is a massive shift in sentiment in a short space of time.
If this rally is genuine, I can see a target of $1400 within days.
I am now long gold.
Putting all of these markets together – stocks about bought-out and weakness in crude oil, and now a potential big gold rally – the scene is set for huge reversals.
Fireworks ahoy!
Have a great weekend!
