March 16th - Yesterday the FTSE attempted to rally again but the rally ran out of steam in the afternoon. Once again the S&P was to blame for the lack of upward momentum. The S&P continues to pullback and this is not reassuring for the bulls. The decline is now large for a fourth wave and we have an alternate wave count.
Something has changed since last Friday when the nonfarm payrolls report painted a beautiful picture of US economy. As I know, the only good number is the nonfarm payrolls, others numbers are disappointing so perhaps investors have noticed too and this is why they are not so bullish despite the good report last Friday.
Take US retail sales for example, retail sales have been declining for the last three months. The number of retailers going bankrupt is on the rise, US consumers are broke. I expected this scenario to play out because consumers have taken on too much debt and of course with rising interest rates, many will go broke.
And yesterday we got news US import prices rose higher than expected. The import price index rose 0.4% vs 0.3% expected, this is another indication inflation is rising as a result of the low dollar and/or China rising prices. Well this is bad news for bonds, but bonds did not go down and the dollar rallied as investors bet stronger inflation is good for the dollar as interest rates will go up. What they don’t realise is a) higher inflation is bad for the dollar because it erodes the value of the currency and b) who is going to pay the interest when interest rates sky rocket? Consumers are broke, so who is going to pay? That what happened in 2007 when people defaulted on their mortgages because rate went up.
My view is that each time we get an inflationary number people should buy gold and sell the dollar and bonds. Not much happened with the FTSE yesterday the index was trading sideways. The FTSE is struggling to rally, in fact it has been struggling since the low in February. As this index is a leading indicator, I am concerned it is showing the way to the S&P and according to the FTSE the way is down. Before it goes down I still believe it will bounce back to complete a second wave. What I am not sure is how far up it will go before declining again. It will depend on what the S&P does (top wave count or alternate wave count).
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February 28th - Since the low on 9 February the FTSE has rallied but the BTI is still declining. This has created a divergence which is bearish. By now I would have thought the BTI would be rising, at the moment it’s not rising. This divergence is a warning the FTSE will decline, but will the decline occur after a rally to 7400 or not? That is the question.
There is also an alternate wave count on the S&P which is bearish, if we take into account the bearish BTI and the alternate wave count on the S&P there is a chance the FTSE will decline further. Although the top wave count is bullish (we have two potential scenarios), I would not bet too much on a long trade in case stock markets are in the alternate wave count.
Today we have more soft economic data coming from China, manufacturing and non-manufacturing PMIs came in lower than expected and yesterday’s core US durable goods orders plunged below expectations. So I wonder why Fed chairman Powell talked about a strong economy yesterday during his testimony. The economy is so strong that the Fed will raise rates aggressively, that is why the dollar surged but stock and bond markets did not like the message. I guess people were focussing on strong economy = inflation, so bond yields went up and stocks went down. What is clear is that the economy is not getting stronger, it’s the opposite, recently we have had more disappointing than good numbers. And this is happening after nearly ten years of stimulus. You can imagine what will happen when stimulus is withdrawn. The Fed is in a box, QE has failed and this is why the dollar is collapsing.
February 21st - US markets re-opened and closed weaker, the FTSE declined to the 55-period moving average and bounced back. This moving average acts a bit like the trend, when it’s up and the FTSE drops below the average the index finds some support. The Index dropped to 7202 and is now rallying but this drop is not very large, it should be larger in three waves [(a),(b),(c)]. So I expect another drop below the 55-period moving average. May be from higher levels.
We are seeing some disappointing earnings reports from blue chips like Reckitt Benckiser on Monday, and yesterday BHP Billiton, HSBC and Walmart disappointed investors. Perhaps we are starting to see the effect of a weakening global economy. That would be expected given that the world has been flooded with cheap money for so long.
In recent days the dollar has rallied, this is not good for commodity prices, as a result we see gold and oil going down. Oil is clearly in an uptrend and it should rally more. Rising oil prices are linked with rising inflation, the falling dollar will make commodities more expensive in the long run, this will push inflation up. When there is inflation central banks raise interest rates, but to do so you need a strong economy. Right now the economy is weakening, so the central bank has to decide whether to fight inflation or protect the economy. Can’t do both. Fighting inflation will damage the economy. This is why people are talking about stagflation which is the nightmare scenario.
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February 15th - The FTSE is still rebounding from an oversold condition, there are various scenarios at this time, the dollar is going down again. The dollar started to rally after the release of stronger than expected US CPI but people finally realised that higher inflation is bad for the dollar and the dollar turned down. This was positive for the pound, GBP/USD and gold rallied.
Higher inflation means higher interest rates as a result bond yields surged and the initial reaction was a sell off in the S&P. But the sell off was short lived, from a low around 2627 after the news, the S&P is now at 2715 in pre-open, really incredible that there is no fear in this market. The higher CPI is bearish for stocks, yet people are buying. I said that the first wave down of the bear market will not kill the bulls, the buy the dip crowd is still at work as you can see. It will require a larger decline which will come in the third wave down to turn the bulls bearish. I did not expect the S&P to recover after yesterday’s news, but here we are.
At the same time we saw some disappointing US retail sales numbers. As I said US consumers will feel the pain of higher rates and higher inflation, this is reflected in the lower retail sales and things will get worse. This is why people were talking about stagflation on social networks yesterday, the combination of a stagnant economy and high inflation is bearish for stocks. But right now people don’t care, they don’t want to miss the next rally. We have to be careful shorting this market, I am pretty sure it will go down, but before it goes down there is potential for higher prices as the buy the dip crowd is still alive.
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