What a terrific week for we merry band of stock bears! The Dow plunged by over 600 pips on the week – and my other two trades in gold and EUR/USD similarly went the right way. The critical point is that the 2 March high in the Dow remains the all-time high. The recovery to the 18,200 level last week fell short of that high (see S&P chart later).
This shot across the bows by the bears is a warning to the bulls – intoxicated as they are by the Fed’s E-Z money – who have had their first hint that the Fed’s 100% proof punch bowl will not forever be replenished – and that monetary tightening is starting. The bubble is in grave danger of finding its pin.
The speed of the decline was marked and suggested a hint of panic. Also, trading volume picked up sharply on NYSE – a bearish sign (the smart money is cashing out). Which means that provided the 2 March high holds, I am treating this move down as the start of a third wave and trading from the short side.
The internals remain dreadful. Most of the recent gains have been the result of stock buy-backs (financial engineering) and most measures of value remain stretched. But of course, this hasn’t stopped the algos from buying all the dips with cost-free Fed loans. After all, stocks are the only game in town.
And US economic data continues weak with no sign of lift-off.
Is the Skyscraper Index saying major top is in place?
It is well known that plans to build “the world’s tallest skyscraper” have coincided with major bull markets in history (New York’s Empire State building being the most infamous example from the 1920s). When social mood is very positive, grand record-beating infrastructure schemes are proposed (HS2 in the UK?) – and skyscrapers are a sure sign of overwhelming confidence about the glowing future.
Now, Saudi Arabia is planning a record-shattering one kilometer high structure in Jeddah in an obvious escalation of the ego-displaying rivalry with Dubai’s Burj. Yes, it is one kilometer high. Naturally, extreme engineering problems must be solved first, so it may never get off the ground. But the thought is there.
The point is this: skyscrapers are the most visible manifestations of supreme confidence of the future – the higher, the more extreme this confidence. They are always planned during extreme bullish times, but their construction (if it happens) usually starts as social mood deteriorates – and markets start falling.
Also, the tallest building in Europe (at ‘only’ 380 metres) is being planned for a small Swiss village, of all places. That is another sign of extreme positive mood – as mirrored in stock markets (see the DAX).
Skyscrapers are built to the sky – as are stocks! Until they crash, of course (stocks, that is).
China is in a gigantic bubble
The Shanghai stock market is only open to domestic ‘investors’ (read ‘gamblers’). Not only have the number of brokerage accounts reached skyscraper-like heights, but now teenagers have the urge to get rich and are trading like fury. Read here.
Apparently, they are given the funds to trade from their parents, who themselves are trading. Can you imagine what will happen when the market turns south? The leverage upon leverage will collapse like a house of cards – and will send shock waves around the globe’s markets.
With the market making new highs over there, it is yet another massive disconnect between the stock market and the real economy, as in the USA. China is slowing fast – iron ore prices continue to plummet new lows as steel demand wanes, and China is dumping cheap steel around the world. Naturally, this is yet another facet of the deflationary wave sweeping the world.
Is this good deflation?
Incidentally, do not believe the gurus when they try to reassure that the deflation we are seeing is OK, nothing to worry about – a ‘good’ brand of deflation, not the ‘bad’ kind. We see it everywhere in consumer-land. In the UK, intense competition is keeping supermarket food prices under pressure and now, even once red-hot London property prices have started to cool. These are all outward signs of at least a slow-down in the growth of cash and credit – the drivers of price.
And when Chiba devalues the yuan, expect even cheaper imports!
Big reversal last week with a weekly key reversal, where the week saw a higher high and a lower low with a lower close than the previous week. This is always considered a bearish sign.
On my weekly chart, I have my long-standing tramline pair showing a huge loss of momentum going into the last rally, which did not get as high as the upper tramline. This is significant – and backs up the weakening buying pressure theme.
I managed to extract 500 pips from shorting the Dow last week and I am now looking to short the rallies. I am not sure of the likely direction early next week, but it appears we are in a small wave 4 which could extend a little higher. But a new low for the move is very likely before a decent rally can be staged.
Gold is fulfilling my roadmap almost to the letter:
I managed to pinpoint the low and went long in the $1160 area. The rally has carried to the $1220 spike high on Thursday, where I took partial profits of over $50.
That was either wave 1 of a five waver or A wave of an A-B-C. The next move should be a dip to either wave 2 or B and then a rally to a new high above $1220. My first target is the Fib 50% just above $1220 but could reach the Fibonacci 62% level at around $1250.
Interestingly, yesterday’s COT data reveals the hedgies hardly blinked at the $50 rally – they still remain bearish with little change to their holdings. And that is very bullish, of course.
I am buying the dips.
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Gold – over $50
EUR/USD – 350 pips
USD/JPY – over 100 pips
JUNE T-BONDS – 250 pips
DAX – break even
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Have a great weekend!