Has the last bear thrown in the towel? And if so, are we at a major top?
What heresy! I have plenty of critics who say stocks are going to the moon as the Fed cannot even think of turning off the money taps. But read this from one prominent bearish fund manager who has closed down his shop and given up the fight. This is what he said in his final letter to investors:
Markets have now become a political choice. US markets are essentially a bet on the Fed unable to raise rates, and congress unable to regulate big tech or raise corporate tax rates. Commodity markets have now become a bet on Chinese policy objectives, and currencies have become a bet on what Chinese policy objectives are too.
Give me an economic problem, then I can properly gauge risk. Give me a Chinese political problem – I am taking a guess as much as the next person. Did I think Alibaba was going to fall 50% this year? No, not until the Chinese government told me to think that way. Is Alibaba a good short now? I have no idea, and like everyone else will have to wait to see what the Chinese government says.
In a nutshell, I believe most professionals are just as mind-blown by market action driven by the Fed and politics, but since they are paid to follow the trend, they keep buying (so long as the Fed spigots remain wide open). To hell with valuations – they’re so last century. But ‘traditional’ individual shares are nowhere near their highs – it is the mainstream big name techies and the many new tech start-ups that keep the bullish flame burning.
Recently, we have seen just what over-riding influence Chinese politics has. The government started a war on tech and the internet and that swiftly produced a 40% ‘correction’ in the China A50 in just three months. Imagine what a similar war in the USA would do with everyone all in! But that is not likely to happen (yet) with the Fed doing all it can to avoid frightening the horses. With everyone all in (and the few remaining bears hibernating), any discordant word from the Fed would almost certainly unleash a torrent of liquidation. The lesson from China has not been lost on them.
Basically, the Fed cannot move the policy rate higher by much – at least not yet. But with inflation rearing its head, a moment of truth will arrive – unless as they claim, price inflation really is temporary.
But there are so many signs at present US stocks are due a decent correction at least. My bet is that a decline of some size is imminent. Here are my signs:
- DSI bulls at 93% – an extreme not seen for many months. Only 7 US investment pros are bearish while 83 are bullish! I call that extreme herding.
- See above for bearish hedge funds closing down
- Record by far massive fund flows into equities this year
- I see no bearish MSM articles – only what to buy
- Investment pros are 1110% invested in shares (they are margined to a record 10%). They have borrowed money to invest – a dangerous sign.
- YOLO sentiment pervades the US retail market (You Only Live Once). I could add my own YOLYSO (You Only Lose Your Shirt Once!)
- Last week I mentioned Squid Games that went from nothing to over $3k and back to nothing in a flash. That is how great the level of sheer inexperienced wild speculation has reached. Younger retail ‘investors’ treat share trading as just another computer game – and it’s over in a flash and then on to the next hot stock
- And the Nasdaq has hit a major upper trendline on a good mom div
So at the very least, odds favour a correction. There is a large mom div into the high which indicated buying pressure is waning. But if the Nasdaq can push strongly up from here, all bets are off and we really would be in a doozy of a melt-up. Nothing is impossible in the financial markets, but some outcomes are more likely than others.
For those not familiar with how the Elliott wave model works, you should know that my wave labels are not written in stone (only in hindsight can you do that). In real time, there are usually several valid options and the one in the above chart is one of several. Every Elliottician must judge which option is the more likely to give an accurate forecast using clues from other sources (such as sentiment). All forecasts are thus an exercise in probabilities . Incidentally, the EWT is the only method that can offer definite high probability price forecasts (which is why I use it).
US Consumer confidence at historic low while stocks push to new ATHs
The much-watched monthly University of Michigan Consumer Confidence Survey was issued yesterday for October and stunned observers who expected a pick-up in sentiment as the lockdowns are being eased. In fact, they fell heavily to a new 11-year low on the back of surging price inflation (food and energy up a huge 10% yr-on-y).
This must be one of the largest Walls of Worry I have seen in a while (the other was the onset of the pandemic that saw 40% wiped off the Dow).
So what is going on here? The public are getting gloomier about their own economic prospects while Wall Street pushed stock prices ever higher. This chart is typical of the yawning gap between Main Street and Wall Street
They started going their separate ways around the time of the 2008 Financial Crash when for the first time, massive QE injections by the Fed were heaped not on Main Street (where it would have done most good), but on their mates on Wall Street, In one chart, the gross mis-allocation of capital by the Fed is revealed – and explains why our hapless Fund manager above has thrown in the towel. He has realised that you really can’t Fight the Fed since they have almost unlimited capital to control the markets.
But can this situation persist for ever as stock bulls maintain? Can the public become ever more gloomier as consumer prices keep rising and real wages keep declining? And can Wall Street keep pushing shares ever higher? Will a point be reached – a Wile – E – Coyote moment – when some traders say “Whoa! This is nuts – I’m getting outta here”. That may happen only when there is a sudden shock from left field (a new war, new pandemic, China letting the property sector crash, etc).
One clue may lie in the crypto markets which I consider a bellwether for global investment sentiment…
Are the Cryptos poised for big sell-off now?
In recent days the headline-grabber, Bitcoin, has made a new ATH just above the previous April £64k top. But I see problems ahead. Here is the Crypto 10 Index of the 10 leading cryptos.
From the April high, it fell in three clear waves to the June low and then climbed back up in five clear waves to make a potential Double Top on a mom div. For more clues, here is the closeup of the a-b-c corrective pattern. It is textbook in pattern and waves.
The recent high at 27,460 on Wednesday. It then fell and bounced to the Fib 62% retrace. Providing this level can hold, the trend is now down and my first major target is the 22,000 area (latest 25,460).
If this analysis is correct, it will mark a sudden shift in market sentiment to bearish and that will indicate a general cooling of speculative juices in all markets stocks included. We shall see.
I expect huge reversals in many markets soon. If you are excited by these prospects, take a two-week Free Trial to my VIP TRADERS CLUB where we are running campaigns in Stock Indexes, currencies, commodities and others. There is going to be some great action in many markets. Already, we are seeing huge moves in Crude Oil and NatGas and in more off-the-radar markets. I specialise in precision timing of trade entries using my Tramline methods and have a unique and simple money management system to limit losses if they occur (no-one is perfect!).
In my PRO SHARES service, we have some terrific trades/investments working (see last week’s blog) – take a generous three week Free Trial here.
Brazil’s weather is the key to soft commodity prices
Brazil is the key global soft commodity producer – and it is the major supplier of soybean, corn, coffee and orange juice that any other nation. We trade these markets for VIP Traders Club as last year I recognised the great potential for major gains from the near record low commodity prices then.
We have been following the strong bull trends in all of them since last year and in that time, Brazil’s crops have been frozen, roasted and dried out in the fields in extreme and severe weather swings that has devastated crops.
And yesterday, the already tight coffee supply was given another tight squeeze (as it also did for Orange Juice BTW!) by reports the July frost damage was worse than expected and that boosted prices to a new high by a massive 5% in one day.
Yesterday it rallied by 10 cents to match the 2014 high at 224 which also lies at the Fib 62% retrace of the bear market off the 2011 ATH. This could be a significant barrier to further upside in the near term but if not, I expect prices to go on to test the old 2011 high around $3/lb.
A personal note on trading
My job as a swing trader is to try to catch good-sized swings either up or down. I look at the clues every day and assess the probabilities for entering a potentially profitable trade at low risk. Sometimes I get it right and sometimes wrong. If I am wrong on direction (or my timing is off – which is the same thing), I limit losses with a stop loss and move on.
Although I have been looking for downside reversals in stock indexes (sometimes successfully as in January last year prior to the 40% Dow Corona Crash) for VIP Traders Club, I have been buying individual shares for Pro Shares with excellent results. I summarised a few in a recent blogpost.
When I am asked what is the one factor that separates trading success from failure it is this: Keep an open mind and expect the unexpected. Always question the Groupthink views and find valid reasons to disagree. That is four factors I know!