Weekly Wrap
I read everywhere that stock markets are climbing a Wall of Worry. So many pundits in the media have been calling for a sharp reversal, which is encouraging the bulls to call this the most hated bull market of all time. Oh yeah? That is simply a totally false reading of market sentiment.
Exhibit One: Thursday’s damp squib of the ECB ‘stimulus’ progamme was greeted with almost euphoria with stocks pushing higher. See later.
Exhibit Two: A cease-fire in Ukraine (a result of more positive sentiment) pushed stocks even higher yesterday. Many do not trust this lull and forecast a resumption of hostilities. Also, Gaza has fallen off the media radar since no new conflicts have erupted there (cue more positive sentiment).
Exhibit Three (the killer): Investor sentiment (Investors Intelligence survey of advisors) is running at a 27-year extreme with bulls/bears at 4-to-1. If investors are hating the rally, how come they are buying all dips with abandon? They must be two-faced hypocrites, surely. Could they be telling the survey one thing and doing the other? Actually, most thoughtful advisors are being strong-armed into equities because of a lack of any alternative (as they see it). They are buying, but holding their noses.
No, it is the usual armchair pundits who are hating the rally – those who post profusely on SeekingAlpha and other blogging sites with charts that spell warnings. In fact, I regularly perform a quick scan of the blog titles on SA to see which way the wind is blowing. In recent weeks, a large proportion has been bearish – and that has caused me to question my immediately bearish attitude. Stocks will not top untill these pundits also throw in the towel. Armageddon is being delayed (again). But the day of reckoning is fast approaching.
Several prominent and well-known bears have recently thrown in that towel including David Rosenberg, who has been a bear for the entire five year bull run. Now, after a 2,000 day rally that has taken the S&P to the coincidental 2,000 mark (from the biblical 2009 low of 666), a prominent bear has switched sides. This not just changing horses at mid-stream, but changing it when you have reached the other side! These moves are entirely consistent with the nearby end of the bull run.
Question: How can any major player switch into being a bull after a 200% rally when the bears have retreated into their burrows? Answer: Only at the end of a massive stock-buying mania.
S&P500
All dips were bought last week, but we are very close to the top of the final fifth wave up:
And perhaps the final fifth is in if my labels are correct. I have a good tramline pair (my w4 should be moved to the right), making the week’s high as my w5. The lower tramline has been broken and the rally is back to the underside of the tramline. If this is a genuine kiss, I expect the market to resume its decline next week.
But if there is one more push up, a slight new high could be in the offing, but that should be it for the rally. I will peer closely at market action Monday and Tuesday to confirm the kiss.
If you look at the German DAX (the index most affected by the ECB scheme), it has made a Fibonacci 78% retrace – a critical level. If this resistance holds, expect a sharp decline next week.
We are getting very close to the major tops.
What is happening with my favourite Plunge-ometer, Junk Bonds?
The five waver in July was on increasing volume, as expected. But the August rally was on decreasing volume – a bearish sign. Now the market has turned back down, volume is increasing again, a bearish sign. Also, big bearish cross-over in MACD. This looks very much like a double top to me and the path of least resistance is down – to be shortly followed by shares.
Look out below!
EUR/USD
I have hunted in vain in the media for the obvious headline: “Draghi – A Drag on the Euro”, so I will use it.
Basically, the ECB news was a non-event and will change nothing for the eurozone economy, so that begs the question: If we sold the rumour (of massive QE), can we buy the fact (such as it is)?
This is the daily chart and the decline off the 1.40 top is following my tramlines and is an A-B-C, so far.
I believe last week’s 1.2920 low will hold for several weeks.
Why do I say that, surely going long here would be like catching a falling knife? And since the ECB has been successful in driving the euro lower from 1.40 to 1.29 – a fall of 8% – just by jawboning and announcing QE-lite, they must have enough firepower to keep this up.
But look at the technical picture. The decline has hit my lower tramline support on a slight pos mom div. I have another tramline pair working (see yesterday’s Trader email).
But if this is an A-B-C, wave C = 1.618 times wave A at 1.2907 – only 13 pips from last week’s low. I call that a direct hit. This Fibonacci wave relationship is pretty common.
DSI is only 4% bulls – a level last seen in July 2103 just prior to a massive rally. This is setting the stage for a really big short squeeze.
I shall be looking for a long entry very soon with first target at upper tramline.
T-BONDS
Long-term interest rates are on the way up (see also Junk Bonds above).
T-Bonds topped in late August and we are now in a large third wave down. The scale of the decline will be historic (yields rise rapidly). Yesterday’s action was wild and woolly and after the knee-jerk rally to the US jobs news, clearer heads prevailed and the downtrend resumed. This will be a major Trade for 2015.
I remain short T-Bonds.
USD/JPY
Like shares, this is a liquidity trade and has enjoyed a vigorous rally out of the large wedge (see previous WW). But has the rally done enough?
This is the hourly and I have a nice tramline pair. Market broke lower tramline yesterday and has rallied to plant a kiss. If this is genuine, market should decline Monday/Tuesday.
The market is primed for a big collapse – hedgies have ramped up their long USD/JPY positions and are now – wait for it – nine-to-one bullish. This is about as extreme a situation I can recall for any currency.
I am looking to short.
GOLD
It did break $1275 support but I believe the odds are turning towards a big rally.
This looks very much like an A-B-C and latest plunge has a strong pos mom div. Also, the latest COT data shows hedgies increased shorts by almost 30% in a week (!) and are now only just over two-to-one bullish – a sharp climb-down from only a few weeks ago.
Also, over in silver, the DSI reading is only 10% bulls. This not a record low, but contrasts with the 70% reading only two months ago. Again, as with the euro, the scene is set for some mighty short squeezes in many markets.
I shall look to take profits on short gold trades and then go long on the right signal.
Have a great weekend!
