My heading last week was “Have stocks really topped?” And on Tuesday, as the stock indexes were resuming a normal uptrend following a small dip, we got the answer as they very suddenly turned tail with a vengeance at 2 pm UK time – just as the latest US economic report was issued. The Dow was off by hundreds of pips in minutes.
Of course, the pundits ascribed the collapse to the dire PMI data just issued. That is pure bunkum. If that was the case, how come the markets took no notice of all the previous weak data and merrily observed the business-as-usual ‘bad news is good news’ theme?
Suddenly, bad news was now bad on Tuesday. So the question is: Why the sudden switch from good to bad? Naturally, the conventional analysts have no answer for that – but that doesn’t stop them in their perpetual belief that it is the news that makes the markets. Why the lack of curiosity? That is simply because most humans find it well nigh impossible to abandon a long-held irrational belief – and anyway, their current belief is in tune with their peers and so their livelihood is not threatened!
When your job depends on believing a fantasy, you can easily convince yourself it is true.
No, the reason for the turn-around was that bullish sentiment (Investors Intelligence Bullish Percent reached a record 72%) had reached boiling point and the markets were tracing out reversal patterns such as this one in the Nasdaq. Here is the big picture weekly showing the precarious position it is in:
The ATH was made last July and following a hard dip, has been in relief rally mode of late. The crucial point is that the rally to my wave 2 high did not make a new ATH and I was still waiting for a turn beneath 8040 to set a purple wave 2 top in place. That arrived on 12 September and since then, has been working lower with Tuesday’s kick to augment the slide.
So the bearish die was cast last week and all I had to do was to find a low risk entry to short. That came on Tuesday. So now all I need now is a hard break below the blue trendline to put the icing on the cake for my extreme bearish stance. If I am correct, we shall see some savage declines next week and beyond.
And after Tuesday, the MSM headlines were full of the usual “Ignore the blip – stay invested!” Every time the market suffers a set-back, this knee-jerk reaction is always reliably trotted out. But that is a very lazy attitude. Yes, we are still near ATHs in the indexes (although may individual shares are near multi-year lows!), and staying invested (in the winners) has proved correct. But one day – and I believe that day is now – it will not be the correct strategy and staying in cash will be correct.
Of course, at this time at an historic high, we must expect sharp counter-trend rallies – and we certainly got that yesterday with the Dow up 350 pips on the day
As I never tire of stating, the US dollar controls all markets. It has been flying of late, but as I have outlined in my blogs, it is turning – and that will impact many markets, including stocks. One illustration of the influence currency values have on stocks is the under-performance of the DAX as the euro rallied last week.
The DAX has only reached a Fibonacci 38% retrace, while the Dow has regained better that 50% to yesterday’s close.
Not accidentally, the value of EUR/USD made a major low at 1.0880 on Tuesday just as stocks began their slide. I expect that low to hold for many months.
Here is the lovely five down in the DAX to the Thursday low
and now we are in a normal three up. I expect a hard down phase next week after perhaps a further push up early on.
Has the crude oil slide been overdone?
I have been looking for a bottom in crude for a few days now and so far, it has evaded me. But yesterday, I see signs of hope for a major turn-around
But here is the big picture showing the Crude Wedge
And if the Christmas $42 low is my wave 5, that implies an eventual push up to test the upper wedge line around $70.
Up until the mid-September surge to the $63 high, hedge funds were filling their boots with long positions with the result that they held a record 7.5/1 long/short position. That was obviously pretty extreme and that is why I did not chase the market upwards.
Of course, after mid-September, the inevitable happened – a pull-back that has reached longer and lower than I had believed. Here is the daily
The rally off my wave 5? is a series of A-B-Cs connected by an ‘x’ wave and if correct, should see a good rally in wave ‘c’ off the major support trendline.
The slide from the ‘a’ wave high at $63.50 in mid-September has undoubtedly dented the extreme bullish sentiment and could set the stage for a good rally.
Is there any hope for Marks and Spencer?
Many months ago, I sensed there would be a great shake-out in the UK (and US) retail sector with the dinosaur High Street giants in the firing line. I believed they were less likely to engage with the developing online business model, unlike the new upstarts such as NEXT, That put Marks and Spencer in my sights, and we have been shorting the shares for a long time.
And last week, the shares hit the low of 170 area which was last seen in 2000. In nineteen years, the shares have gone precisely nowhere. Here is that sad picture
So the question is this: Will M&S actually survive? Or will it go the way of BHS or Debenhams? Recently, it has been dropped from the FTSE 100 list and that action has forced the mighty index funds to sell out – right near the lows. That selling pressure has drawn it below the blue trendline last week. But has it done enough to suggest the selling is easing up where taking profits on shorts can be justified?
It is almost unthinkable that this company that has been the most well-regarded on the High Street will just vanish. But if it does, it would mark a new low in retail – and the overall economy.
I mentioned above that although the indexes are near highs, some individual shares are at their lows – and this is one of them. As they say, the stock market is a market of stocks. And M&S is not alone down in the dumps – and these divergences are symptomatic of a fractured equity market with bearish consequences.
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