Last week, my headline asked: Will the Fed lower interest rates next week? Of course, I already knew the answer because the market was already yielding lower rates and the Fed always follows the market as night follows day. Just a glance at this chart should dispel any doubts
chart courtesy www.elliottwave.com
For all of the six previous rate rises, the market moved up – and the Fed was forced to follow it up with no exceptions. And on Wednesday, as market rates had been falling since April, they were again forced to follow the market lower, despite howls of anguish from many who thought it was the wrong thing to do as signs are growing of the economy not needing it!
Even if they wanted to, they could not avoid matching the market lower! That would have put them at odds with reality – and the market would quickly smell a rat.
But it is obvious the Fed lies on the horns of a dilemma. Lower the rates too much and too fast and the market will believe they are running scared at what it sees coming down the track. Don’t lower them and the stock market would take fright as it sees the high stock valuations have been predicated on much lower rates to come for ever.
So they chickened out and reduced by 0.25% rather than the 0.5% which would have precisely matched the market. And if market rates stay around current levels (or even work lower) they will be forced to cut again at their next meeting in August.
But in fact, I believe too much emphasis is placed on the Fed’s policy on interest rates by the pundits, except to say that with a zero and negative rate regime in many places, asset prices have been sent into the stratosphere. Some day, interest rates will revert to a more ‘normal’ regime – and where do you think asset prices will head in the meantime?
Just to give one example of excess – classic cars. I see a Ford Escort Mk 1 Mexico – a car I nearly bought new for less than £1,000 in the 1970s – is on sale for £65,000. OK, it was a decent car in its day, but it was no Maserati.
And of course, houses. The UK housing market has been on fire since the 2007/2008 Credit Crunch, but take a look at the chart of housing prices since 1955
The shape of the chart is a clear five up and we are in the final fifth wave. When this wave terminates it will be hard down, despite the received ‘wisdom’ that bricks and mortar can only go up (we heard that in 2007 at the wave 3 high!).
Yes there is a ‘shortage’ of homes in the UK but they are unaffordable to many, despite record low mortgage rates. I cannot see incomes rising fast in the coming years to make them so, and something has to give especially if/when rates rise.
As prices fall (along with most or all assets including stocks), there will be less heard of young people wanting to jump on the housing ladder. Near the lows, they will be writing about jumping out of the window! But that lies a few years away.
I have a sneaking feeling that after long delays, a prospective huge programme of house building – especially ‘social’ housing – will coincide with a general turn down of the market. Hmm.
Are we at peak interest rate exhaustion?
The question I now ask is this: Have markets reached peak interest rate exhaustion? With Wednesday’s damp squib from the Fed, and their reluctance to push Fed Funds lower by the full 0.5% as was expected by many analysts, is this a signal that marks a top in stocks – and a low in bond yields?
I have been following the Dow and S&P like a hawk for such signs. As you know, I like finding trendlines on my charts (top tip: three accurate touch points make a valid trendline) and this is the crucial line I discovered a few weeks ago that I felt would likely mark the turn
The yellow line is from drawing it off the wave 3 and ‘b’ wave highs and extending it after the ‘b’ wave high on 4 October last year into this year. And lo and behold, the ‘d’ wave touched it last month – a full nine months after the ‘b’ wave high! How did the market ever know nine months away that was a suitable place for the market to aim for – and then turn down from? It seems like magic, doesn’t it?
So, just two days after the Fed damp squib, the Dow is off by around 1,000 pips
VIP Traders Club members are short.
Apple hits my target – and overshoots
As a great example of how sometimes a trendline target is hit – and then overshoots only to come back to the target, Here is Apple:
Our latest trade was long at the $180 mark in June as I believed a new ‘c’ wave was starting to lead it up towards the yellow trendline at around $205. And that is where we took profits and I confidently advised PRO SHARES members to take a short position with a close stop loss at $209.
Of course, I expected the market to bounce down off the trendlidne as it has in the Dow chart above. But the rally had more legs and moved up to the $220 level in a spike move on Thursday. That took us out of our short trade for a small loss.
But then yesterday, it came shooting back down below the yellow trendline and thus created an ‘overshoot’ (these patterns indicate a buying exhaustion) and heralded a change of trend.
So now the wave labels are pretty clear – we are at the start of a big wave lower. Note that we took a loss on our first trade but that did not deter me from making another attempt. Sometimes, trendline resistance fails to hold at the first asking, but a close tracking can yield a good result. And this one may well be in time.
Bitcoin surges – again
I have long believed Bitcoin would emerge as the premier crypto above all others – and so it is proving. It recently moved under the $10k ‘psychological’ level but that was a great opportunity to buy in to what could become a major rally phase.
I have been advising VIP Traders Club members to accumulate long positions and my latest trade was last Wednesday at $9,700. I see this morning that it gapped up to trade currently at $10,800. This gap, if not closed soon, may be a breakaway gap that signals an acceleration phase ahead.
And that latest buy follows a string of well-timed buys at major lows. Recall, our first trade was taken at $3,575 back in February. The price has almost tripled since then. And that shows how very profitable a long range vision can be – provided you have an accurate system to time your entries well.
So now, it seems to be working clear of my yellow support line and heading for major pink resistance around $11k.