With the Nasdaq and S&P 500 making new highs last week (with the Dow noticeably lagging), investors are demonstrating their unbounded belief in the future. Long-term readers of my WW will know that I believe it is sentiment alone that drives markets up or down. For those who believe it is the economic data, consider this: with the recent spate of less than sparkling data, why are stock markets pushing higher?
It is the confidence that central banks will keep filling the punch bowl. This is bullish sentiment at work. And this bullish sentiment pervades the markets today, as it has for several years. But this sentiment could turn on its head at any time with little warning.
Let’s say that the mood switches and suddenly the prospect of more central bank ‘stimulus’ now becomes a warning sign that global debt is getting out of hand (which it is). And if this occurs when interest rates are on the rise, then the prospect of more ‘stimulus’ will be seen negatively and markets will then decline. Same stimulus, opposite result.
You see, for the very same economic data, investors can choose to interpret it either bullishly or bearishly (or neutral). It all depends on how they are feeling internally. And the herding effect today means that money managers are punished for not being fully invested. There is little idle cash in accounts – the continued rally crucially depends on a constant (and growing) flow of new funds.
So, when confidence and conviction in the future is growing, bull markets operate and investors become bolder as markets rise. And the stronger the bullish sentiment becomes, the more risks people take. When bullish sentiment becomes extreme, some extreme examples of boldness and confidence are revealed – even rashness.
US CEOs are super bullish – a grave warning sign
Just yesterday, Bloomberg reports that the CEO of American Airlines (in a notoriously cyclical industry) has decided to take his mammoth salary 100% in company stock. He joins the CEOs of Facebook, Kinder Morgan, Google and Fossil Group in shunning cash for equities – yet another example of the current mad dash from cash that I mentioned in yesterday’s MoneyWeek Trader email (Cash is Trash).
Naturally, this CEO rationalises his decision with the most revealing being his belief “I wouldn’t be doing this if I thought it was still the same old airline business, because it’s not,” Doug Parker said on Friday in a quarterly earnings call, explaining his reasoning two days after American released executives’ 2014 compensation. “I’m not suggesting there is not still risk in airline stocks, but we’re really bullish on what the outlook is for years to come.”
This CEO believes that the recent plunge in oil prices (which has decimated his operating costs), together with solid flyer demand with no reduction in fares will perpetuate “for years to come”. If he has a crystal ball, I’d like to make him an offer.
He acknowledges there is risk, but he chooses to totally ignore it (otherwise, he would take a mix of cash and stock). This is off-the-scale 101% bullish.
And would you believe it – with immaculate timing, crude prices are now on the rise, killing the golden goose that airlines have been enjoying. Maybe Mr Parker’s statement will go down in history as infamous as that of the economist Irving Fisher who stated two weeks before the 1929 Wall Street Crash: “I believe stocks are on a permanently high plateau”.
The airline industry has been a graveyard for investors since its inception, but now this CEO believes it is a transformed industry – no more boom and busts ever (where have I heard that before?). The AA share price has rocketed recently – and this always brings out extreme bullish behaviour.
In other words, conditions are ripe for an historic reversal of massive proportions. I know I may have been somewhat early in previous calls, but we are in a months-long topping formation that once complete, will herald the biggest collapse in asset values since the South Seas Bubble burst.
Tulip bulbs, anyone?
It made a slight new high and is thrusting out of the wedge (green lines):
The wedge has the requisite five major waves, indicating it is a fourth wave and this thrust is the final fifth wave before the market tops out. But will it make it to my upper tramline which has been in effect for over six years?
Momentum and advance/decline ratios are weakening into this thrust and if this continues, I expect to be identifying the top and positioning short.
Big fall yesterday after some promising base-building, but has carried to Fibonacci 62% retrace and is setting up my EWs nicely:
With that dip, the waves are looking in better proportion with purple waves A and C equal – a common relationship). There is an outside chance we could see a decline to the Fibonacci 78% level at $1160, but I would place that at lower odds. And with currencies on a tear, I do not expect gold to trade much lower for too long before big wave C starts.
The EWs are setting up beautifully:
All it would take to confirm is a plunge through my solid line of support just under Friday’s close. That would set up a lovely H&S pattern and would project a measured target at the 115 level with lots more possible after that.
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Have a great weekend!