Who exactly is buying this booming market?

As stock market bears gasp in disbelief, the Dow powered into even higher highs  in the scorching post-Christmas rally yesterday.  Does something smell fishy to you about this stunning move?  It certainly did to me – until I discovered who the big buyers are.

And as yet another classic demonstration in why it is not the news or data that drives markets.  Late in the week, US retail figures came in dreadfully weak – here was Bloomberg’s headlines:

US Growth Outlook Weakens after Disappointing Retail Data.

Economists slash tracking data for Q4 GDP

“It certainly caught my eye”, said Fed Governor Brainard

Naturally, there are two main ways to interpret that.  One is that the economy is weakening and that will lead to lower company earnings and hence lower stock prices.  or you could say that the Fed will suffer less pressure to raise interest rates, thus boosting stock prices.  Is the news ‘good’ or ‘bad’?

And yesterday, US Industrial production was down a whopping chunk for the lowest reading since May.  Yes, the latest data does appear very ‘bearish’.

Can you predict the correct market move from the data/news before release?

I have a question: Before an important data point (such as this US retail data or the Industrial Production), can you say with certainty which way stocks will move afterwards?  I didn’t think so. Neither can I, nor can anyone else.

So, with the US economy growth forecast set to decline, who is it that is filling their boots with equities in such a contradictory way?  Why, it is our old friend, the corporates buying back their own shares!  Here is a fascinating chart

Admire the gung-ho corporate buying mania since 2018 with the current level reaching a huge record.  Of course, these buyers are totally price-insensitive.  All they want to do is to propel their share price as high as can be – and reap the huge rewards in mammoth bonuses at the end of the year!

Already this year, buy-backs are running 80% higher than at the same time last year, which was an all-time record itself.

But that’s not all, folks.  At the same time, money managers are baling out of equities in droves.  Despite their reputation, they may know something the Chief Financial Officers of buy-back companies do not. It is all perfectly understandable when you understand that the CFOs are pushing the share price to the top of the hill (with borrowed money), pocketing their bonuses, and letting the chips fall as they may afterwards.

So are shares of companies not being self bought-back taking part in this rally?  One measure of the negative answer to this question is the fact that IPOs are suddenly being pulled at the last minute (three majors pulled this week alone).  The appetite for risk just isn’t there as it was – except for buy-backs of course.

With the corporates going all-in with both feet since 2018 as they throw caution to the wind, and their propensity for buying big-time at major market tops, can the high be too far away?

But this whole thing surely must be a lesson to the conventional analysts who sadly do believe that the news/data makes the market. They really don’t have a leg to stand on.  Either a data point is ‘bullish’, ‘bearish’, or neutral according to them.  And if the market moves in the ‘opposite’ way, how can they rationally explain that?

The vast majority just shrug their shoulders and dismiss the non-compliance as ‘just one of those things’ – and move on.  They fail to see the dilemma their belief system forces them into.

But for those who adhere to the Elliott Wave model, there is no such dilemma.  The market is driven by the ever-changing waves of sentiment that are patterned according to the well-known five/three wave structure.

Show charts of two totally unrelated markets (name withheld) – such as the Dow and Orange Juice – and I defy a conventional analyst to identify which is which (unless they study charts, this is).  They will have similar-looking waves up and down with fives and threes and wedges/triangles and Fibonacci relationships between the waves.

Many traders/investors ‘marry’ a particular company share or market such as the Dow. If you can properly analyse a chart using my Tramline Trading method, does it really matter whether you make a profit in the Dow or in Orange Juice or in any other public market?  If you ‘know’ one market, you know them all.

Tech-heavy Nasdaq is reluctant to move higher with Dow

While the Nasdaq did make a new high for the move yesterday, it was by no means as vigorous as the Dow.  Here is an alternative wave count:

The move down off the ATH is a three (always counter-trend) and the January/February rally is in a five (in line with the uptrend). I also have a good wedge pattern and a building momentum divergence – that is the bearish aspect at present.

This is an alternative scenario to my usual more bearish one.  But whichever one wins out, I expect a substantial decline phase to kick in very soon.

Now the market is rising to the previous peaks around the 7150 – 7350 zone which represents very powerful resistance. So if the market extends its rally next week, I will be looking for a major turn down in this zone.

In extremis, a push up to meet the crossing of the upper wedge line and the Fibonacci 76% at around 7250 is possible.

Here is the S&P showing the huge resistance up ahead at the 2800 area (Dow equivalent at 26,100 – 26,200)

I also have a lovely wedge on the rally with the upper wedge line crossing the 2800 resistance and also the Fibonacci 76% retrace.  That would be a very neat area for the market to resume the downtrend!

The bottom line is that the surge in all indexes are all approaching critical levels, and an answer will be forthcoming very soon.

I have some very pretty tramlines in Silver

Sometimes, we get to see some exceedingly good pictures.  Here is the Silver daily since 2016

Amazingly, the six highs line up perfectly on my upper tramline.  But even more amazingly, the lows line up on the parallel line!  In fact, having available the upper tramline in August enabled me to forecast the 15 cent low then and to recommend long purchases.

But for the two years, the hugely overlapping waves were very tough to trade with no major trends.  But with bullish sentiment on the floor last summer, the odds were good my forecast rally phase could get started.  And it did.  In fact, that is when I recommended buying FRESNILLO shares for PRO SHARES members (which we still hold).

Here is a closeup of the rally:

It has made a zig-zaggy move that looks very much live a five-wave continuation in the making (see my text pp 38 – 39, 144 – 145).  If that is correct, I have a much higher target – above the upper tramline.

But note the highs and lows line up on two parallel lines.  Lovely!

ANNOUNCEMENT  I will be taking a break in Cape Town for two weeks and will return 7 March so will have no blog in the meantime.  Happy trading!