Weekly Wrap
ANNOUNCEMENTS
I am giving a MoneyWeek trading masterclass at the London Money Show on Saturday 8 November. I shall be showing how to trade my five favourite trade setups with lots of current examples. Don’t miss out – there are lost of excellent speakers at the Show.
You can find out more here
In one or two weeks, I shall be changing the format of my blog and introducing an exciting new service in conjunction with the publishers of my book Tramline Trading. It is an Alert service where I will outline promising trade setups, most of which I cover in my book. Look out for details soon.
Deflation is rearing its lovely head
Well, well, well. Suddenly deflation fears are all over the MSM. Panic stories are everywhere. I guess better late than never, but I am wondering if this Damascene conversion from inflationistas to deflationistas is a sign we have a lasting low in bond yields and a temporary bottom is stocks.
I don’t know about you, but a little deflation would be very welcome – what’s the problem? Tech prices have deflated for years and now supermarkets in the UK are joining in the fun by lowering prices – forced by competition. It is only in the topsy-turvy world of bankers (and hedge funds) that fear it because it means they cannot inflate their gigantic debts away. And interest payments will become more onerous, especially when rates rise well above current wonderland levels.
I believe the surge in Treasuries on Thursday was the buying climax I have been waiting for. Trading volumes reached a record on the CBT following the almost exponential climb in prices (see later).
Junk gets junkier
But look at the Junk/Treasury (‘risk-free’) spread:
chart courtesy elliottwave.com
The full risk-on spread of 3.23% was reached in June and from that low, there has been an explosive ascent. This is just the beginning. Wave 3 will top out soon and start a wave 4 down, but then a big rally to wave 5 which will coincide with a big swoon in stocks.
There is no question in my mind that this spread will widen to reflect the increasing fear in all markets.
As I mentioned before, the Treasury (and all other bonds) market is a weapon of mass destruction – and it is not located in Iraq! In particular, Russia and China hold vast mountains of them and with crude oil in freefall, Russian oil revenues must be plummeting. To raise cash, the easiest policy for Russia is to liquidate Treasury holdings. This could weigh very heavily on the market.
96% Treasury bulls – an extreme
In fact, this would be part of the ongoing de-leveraging going on around the world. QE ‘stimulus’ is winding down and the long end of the yield curve is now starting to rise.
Naturally, this week’s Treasury high was made on extreme bullish sentiment – a staggering 96% bulls on DSI! So, for every bear (including yours truly), there are twenty-four bulls. I confess I felt very lonely last week. But that’s just the way I like it – I know that when pain is about to be inflicted after a relentless trend, it is very likely not in my camp.
And the MSM continues to peddle the usual guff about how the Fed is working hard on getting inflation up to its target 2% range, terrified as it is of looming deflation. Ha! As if they can create demand, push up wages and salaries, and keep the dollar stable (which actually is their remit)! All they can do is follow the short term interest rate market and respond to its swings. The dollar has appreciated by almost 10% with or without them (and their mandate is to keep the dollar stable!).
As I have long maintained, Europe is the starting point for the Great Deflation to sweep the world. The PIIGS (not so much Ireland now as it basks in the revenue of its competitive corporate tax regime) are sinking deeper and deeper into economic depression. I am wondering when the riots will resume. This winter seems about right.
The string-pushers of the ECB are looking more and more powerless and its latest wheeze of bond purchases has fizzled. Full-blown QE is still being bandied about, but unless Germany does a volte face, it’s curtains for European shares – and the whole EZ will dig deep into the triple dip.
So here we are one month after the Great Dow Top on 19 September, and there has been much damage to portfolios. My advice to liquidate stock positions remains – preferably on rallies. The best prices are now gone when I issued my first warning.
Gap gaps down – ouch!
Here is an example of what can happen when you are a buy and hold investor. This is GAP Inc:
Oops! Placing a sell stop just under the lower wedge line is normally an excellent tactic, but when the market opened on Thursday, it gapped down 16%. Ouch. That is one reason I trade very few individual shares. The markets are open only a few hours and some nasty things can happen after hours – as here.
DOW
Right on cue when it was all gloom and doom in the MSM and blogosphere, the market reversed direction and posted a mighty rally.
I have one set of EWs where the rally is wave 4. It has carried to the Fibonacci 38% retrace and on an A-B-C. If the wave has not yet completed, it soon will and I expect wave 5 to get under way next week. If not, then the 50% level would be the max upside.
I took partial profits on the drop and now looking to re-establish this position on the current rally. I remain short from the 17,345 level.
T-BONDS (30-yr)
Just admire the stupendous blow-off action last week:
The panic to unload shares and get into ‘safe’ Treasuries – no matter at what price – climaxed on Wednesday with a final spike of almost six handles, driving yields to a very temporary low of 1.85% on the 10-yr.
Does lending money at 1.85% to the US government for ten years make any sense to any rational person? I don’t think so.
We shall soon see how safe these Treasuries really are!
I managed to position short on the second spike at the 146 level. I don’t expect these levels to be seen for many many months, or even years. This will be a very long-term hold, as it is in the Dow.
Crucially, I have been waiting for an opportunity to position short both the Dow and T-Bonds together (usually they move counter-synch). When they really move down together, that will confirm my thesis of a deflationary depression.
EURO
Appears to be rolling over again:
Not only is wave 4 an A-B-C, but it has bumped up into strong overhead resistance on an overbought momentum. The path of least resistance remains down.
YEN
The USD/JPY is a classic ‘liquidity’ cross. When liquidity is rising, the rate increases and vice versa
Again as in the EUR/USD, I have wave 4 about to terminate as it has hit the Fibonacci 38% level on a clear A-B-C rally. This rally matched that in stocks.
I am looking to position short, looking for a move below the wave 3 low when stocks take another tumble.
TESLA
Last week I showed what happens when a major trendline is broken. Here is updated chart:
I have a textbook break, a kiss to the Fibonacci 62% level and then a scalded cat bounce down. Thisis a classic.
This move occured in five clear waves, confirming the trend has changed. With the pos mom div, I expect a rally from here, but the long-term trend is now down.
Also last week, I showed how the market is falling out of love with this giant of the internet and said Google is a goner. It is a company everyone loathes, but a share that everyone loves (until recently):
It fell even further last week and is testing the major support at the 520 level. I believe the market will go on to close the big gap from last October – at least.
Have a great weekend!
