Weekly Wrap

ANNOUNCEMENT

I am now writing articles for Interactive Investor and every Monday I cover a major UK share in Chart of the Week.

Here is my latest article on BP plc

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Market Commentary

It hasn’t been easy keeping a generally bearish outlook while stock markets zoom off into the stratosphere.  I had little company – and even fewer bears in my corner in recent weeks (many bears turned into bulls this year). In yesterday’s Trader email, I posted the chart of the Dow against the Investors Intelligence survey showing the bull/bear ratio at a 28-year high.

As I wrote, the last time it was this high was just before the 1987 Crash (which I remember very well).  Even at the two previous major highs (dotcom and credit crunch) this century, the ratio did not reach this extreme.

Make no mistake – the rapidly-approaching tops will be once-a -millennium historic.

At all major tops, bullishness reaches manic proportions and complacency becomes the norm as almost everyone assumes stocks will never fall, except for an occasional ‘healthy’ dip.  This is when the sky-high predictions emerge.  We saw it in gold in 2011 at the $1920 high.

Just a scan of the mainstream press reveals how complacent people are.

For instance, in today’s Telegraph, there is an article : “FTSE pauses at all-time high”.  Note the use of the word ‘pause’ – assuming the market will definitely continue higher after this ‘pause’.  How’s that for complacency?

In the same issue, there is a sky-high prediction that FTSE would reach 10,000.  Even more complacency.

When can I see a prediction for a FTSE decline to the 2,000 level, I wonder?  You guessed it – when it is trading at the 3,000 level, of course!

There is nobody more confident than an investor, who has watched the bull market since 2009, decide that this is the time to get back in.  Everyone is saying the bull has legs and buying the dips has worked out spectacularly for years, so here goes and damn the torpedoes!

But I have a different take – especially now that everyone is on board and on one side of the ship and swilling the champagne, too drunk with confidence to notice the heavy listing of the vessel to starboard.

But approaching are the torpedoes – but what kind are they?  Are they of the looming  Grexit variety?  Or perhaps the interest rate shock variety?  Or even something on no-one’s radar?

I have a feeling we shall soon find out.

The divergence between the weak revival of the real Main Street US economy and stock markets is getting even wider.

Bulls say TINA – in an age of ZIRP, There Is No Alternative in a Zero Interest Rate scenario.  Bond yields are minuscule and commodities are in bear markets.  Where else can you put your money to ‘make it grow’?

That rationale is about the lamest investment philosophy out there. And I have a feeling it will be sorely tested when interest rates do start climbing off the floor.

S&P 500

I have been tracking the multi-year tramlines on the daily chart and it appears the market is in a critical place:

 Last week, it very nearly hit my upper tramline on a major momentum divergence.  I have a valid EW count with a very long and strong wave 3.  The lower tramline picks out the waves 2 and 4 lows nicely.

Basically, if the bull market has legs (see above), it needs to push up through the tramline PDQ.  What are the odds of extending wave 5 up there?

Here is the hourly:

That is one heck of a nice wedge – and with the mom div, I am getting ready for a trade.  I would like to see a five down on the 15-min or 1-hour off the 2120 high to confirm the top.

But odds are shifting our way, at last.

Of course, a break of the Dec-Feb lows would be almost decisive.

I am preparing for a trade.

EUR/USD

A couple of years ago, when the prospect of one or more of the PIIGS eventually leaving the eurozone was floated, I said that instead of the euro crashing to the ground (the common assumption at the time), it should fly.

 No longer hampered by the euro-sucking weak nations, the eurozone would end up having only the stronger members such as Germany and the northern states – and no bail-out obligations.

I have a feeling my original idea will be tested soon.

I had my EW labels wrong, assuming the 1.11 low was the final wave 5 down.  With Feb’s action, it is clear that was wave 3 and wave 5 is in progress:

Thursday’s break was confirmation the Feb rally was wave 4 up.

Now we have a looming huge pos mom div and market is only 100 pips or so from making a new low in wave 5.

But in terms of sentiment, hedge funds remain hugely bearish with a five-to-one ratio of shorts to longs in futures (www.cftc.gov).

I shall wait for confirmation of a major turn before taking long euro positions.  Even a 50% retrace of the big wave down implies a rally to the 1.25 area – well worth gunning for.  A short squeeze would certainly achieve that.

Maybe a news flash of Greece actually leaving the euro in the weeks ahead will produce a spike wave 5 low with the awesome rally to follow.  This baby is going to get real exciting!

 You can follow my trades in my TT Alert service.  Details here.  We are short T-Bonds and added to positions last week (see previous WWs).

And if you want to receive my trades in real time as I make them, drop me an email at ttburford@gmail.com and I will send you details of membership in my VIP Traders Club.  

Have a great weekend!