March 21st - We saw a dovish Fed statement yesterday but the S&P 500 closed down. That was a surprise, I guess investors expected a dovish statement, they bought the rumour and sold the fact. It could also be the first indication the mood is changing from bullish to bearish. After a 20% rally in less than three months, the mood will have reached extreme optimism and this was confirmed by the 34-day BTI rising above 400, this is often followed by a change of mood.
One reason markets are pulling back today is fear that the Fed is making a mistake. Being dovish is good for the markets because not raising interest rates will help the economy, but at the same time the Fed signalled it will end quantitative tightening in September, this means it will stop decreasing the size of its balance sheet and stop normalisation, which means the Fed fears the economy will deteriorate further.
If the economy deteriorates the fear is that the Fed will launch QE again which many believe was a mistake following the last financial crisis. The FTSE has rallied considerably since December, on the weekly chart below we have a near 61.8% retracement. From the all-time high at 7903 the FTSE declined to 6536 to complete wave (1) of a five-wave decline. The rally that followed is wave (2) and the 61.8% retracement is at 7380. A push above that level is possible as wave (2) does not appear to be complete. Wave (2) is a triple zigzag [W,X,Y,X,Z], we are now in wave Z in three waves [a,b,c (circle)]. Wave a (circle) ended at 7350, the current pullback is wave b (circle) expected to end near 7200. After the pullback the FTSE should rally above 7400 to complete wave Z and (2). This will be textbook because second waves are large, they tend to retrace more than 61.8% of the first wave.
February 21st - Yesterday the FOMC issued a boring statement, the S&P 500 briefly spiked to 2790 before pulling back, the index went sideways for the rest of the session. The Fed was vague about its policy, the term data dependent has been used many times by the committee’s members, probably to describe an uncertain future. I believe the Fed is trapped by low interest rates, a bloated balance sheet and slowing economic growth.
The Fed used plenty of ammunitions after the last financial crisis, this resulted in a bloated balance sheet. Last year the Fed was reducing the size of its balance sheet (quantitative tightening) and raising interest rates at the same time. This gave a fright to investors and the stock market crashed. Having realised how bad the situation was the Fed made a u-turn, promising an end to higher interest rates and an end to quantitative tightening. This re-assured investors and the stock market rallied, the S&P 500 is up 18% since the December low.
Why did the fed make a u-turn? Probably because the Fed realises a recession is coming and because the Fed has limited ammunition, it is becoming increasingly inefficient when it comes to maintaining economic stability. This explains why the Fed is so focussed on the stock market, a declining stock market is bad for the economy, bear markets tend to be followed by economic slowdowns. This is why the Fed had to intervene. Rising asset prices provides some comfort to individuals and corporations.
The thing is, we have been there before, when the Fed was doing QE asset prices surged yet the economy lagged badly. And now the economy is slowing, a recession is now a high probability. This demonstrates that rising asset prices alone can’t revive the economy. The Fed is now talking about ending quantitative tightening before the end of the year, does that mean we are back to QE? Logically, yes. If quantitative tightening ends and the economy slows, the next step will be quantitative easing (QE). Interest rates are already too low to be an effective tool to stimulate the economy. QE is bearish for the dollar and bullish for gold this is why gold is surging. Many investors have figured out what the next step is.
So we are back to the same cycle, too much focus on asset prices and not enough on the economy, this will lead to more frequent stock market crashes. It’s groundhog day all over again.
January 31st - The S&P was unable to pullback last night, a dovish FOMC statement pushed the US index above the 18 January high. In the process the pattern which was a potential triangle is no longer a triangle. Once again the news distorted the pattern, investors are buying because they rely more on the Fed for market direction than on the economy. That is because since the last financial crisis the Fed has been instrumental in dictating the direction of the markets.
Twenty years ago the stock market was driven by earnings and the economy, today it’s driven by the Fed. You can see how the economy is suffering (except the job numbers), again yesterday we had news that US pending home sales fall to lowest levels since 2014. Many companies are issuing profit warnings, economic numbers are downgraded, yet for some bizarre reason, the job numbers are good. China economy is slowing too, yet the stock market goes up. It goes up because the Fed is back to its old trick which is playing with interest rates and / or providing stimulus.
The Fed has not admitted they will do QE but their message can be translated as if they have the option to do QE. Basically if the economy continues to deteriorate they will do QE. As investors follow the Fed, and the Fed has suddenly turned dovish, they buy stocks. As the stock market goes up, they believe even more in the Fed’s power and they buy more stocks. It is a self fulfilling prophecy that will end in tears, the bottom line is, the economy won’t get better, it will get worse.
If people think the Fed can save the stock market they are wrong. Have they not learned their lesson from the last financial crisis? The Fed did QE for six years yet the stock market crashed last year. Because the global economy is deflating after so many years of excesses, culminating in very high level of debt. But the central banks won’t let it deflate, they have a few tools to reflate the economy, like lowering interest rates and doing QE. The problem is, these actions only inspire confidence in the system, you can see people are buying stocks. The truth is, it does not work. Look, if the economy is going downhill with interest rates at 2% after six years of stimulus, there is a problem. In the 1990s the economy was doing fine with interest rates at 6% or 7%, do you remember? In those days we had a real economy, now we have a fake economy.
Today the economy is struggling with rates at 2%, the reason is the Fed stimulus program is negative for the economy. It is positive for asset prices but negative for the economy. This is why the stock market will continue to crash, these crashes will become more frequent. Remember, the Fed’s actions are mainly directed at boosting the stock market, so we must go with the flow until the next crash comes. The Elliott wave pattern will guide us, for example right now there are a few scenarios on the S&P but we know there will be another move up, after a pullback.
We will go long but we won’t go long at current level. If we follow the Fed we buy after a decent pullback, there will be one. I believe until the trade talks between the US and China are sorted the markets will be supported. People always speculate on the news, they expect a deal, so they will buy each dip. The bear market will resume after a deal is done.
January 8th - I have said many times, when the stock market is too low governments and central banks will come to the rescue. Last Friday the Chinese government and the Fed came to the rescue and engineered a massive rally. There was simply too much good news last week.
First the Chinese government announced a meeting between the US and China, remember any talk of a trade deal is bullish. The news came before the open on Friday. Then in the morning we got news that China would provide more stimulus to the economy, this gave a second boost to the markets. Then at 1.30pm we got a bullish nonfarm payrolls report and a third boost. Finally Fed chairman Powell spoke about the economy and said the “right words” to boost the markets further. Suddenly the Fed has become dovish, which is what investors wanted to hear.
When I saw the news before the open on Friday I knew markets would be strong, this manipulation by government / central banks gives a temporary boost to the market, in the process this manipulation distorts the wave count. This is why we have alternate wave counts on the FTSE and S&P. In a bear market these announcements create selling opportunities. A trade deal will not change the bear market, remember a bear market was due long before Trump came to power, long before the trade war started.
The world economy is in depression, the depression started in 2008 and this is accompanied by deflation, when prices and asset prices fall. We don’t see a depression because the Fed and other central banks created enough inflation with massive money creation to cover the depression. It is like saying underlying prices are falling by 3% but if you add 5% inflation, the real inflation is 2% which is what we have now, that is why nobody notices the depression, the fed always reminds us that inflation is low because they have engineered it.
The deflationary forces will continue to drag the economy down, and the Fed will have no choice but to become even more dovish, and the dollar will go down and stocks will go down. At that moment the job numbers won’t be as good, the job numbers and GDP will deteriorate. It is when investors realise that the economy is going into recession that they will sell the Fed dovish message. But this time the Fed cannot save the economy, interest rates are too low to have any effect if they are cut and the Fed is deleveraging its balance sheet, a u-turn i.e. printing more money would panic the markets.
So we are waiting for the bear market to resume, this temporary boost could push markets higher, we still have to wait for the outcome of the meeting between US and Chinese officials, this should happen tomorrow. A trade deal could rally markets further. Plus if Trump decides to re-open government the markets will like it. At this stage we need all the news out before going short again.
December 19th - The FTSE 100 continues to decline supported by the S&P 500 and GBP/USD. No one is buying the dip in the US, I warned this would happen during the third wave down. Yet I believe there will be a big bounce soon, this is a normal process, when the stock market is too low the government / central bank will intervene to boost the market. In a bear market a rally would run out of steam quickly, so if tonight’s FOMC is bullish for the markets, I will use the bounce to go short.
The FOMC statement will be released at 7pm, at the same time the Fed should raise interest rates, this is already priced in stocks. People expect another rate hike, but the Fed could well announce an end to rising interest rates, this would be bullish for the markets.
Not raising rates in 2019 makes sense, the economy is suffering right now and higher rates don’t help. This could explain why the dollar index is not pushing higher after completing a bullish triangle. I was expecting a rally in the dollar based on the chart and also based on investors behaviour, when the stock market is in turmoil investors see the dollar as safe haven. A sharp sell off in the stock market boosts the dollar.
Well, stocks are plunging but the dollar is not going up, this could be because investors fear an end to higher interest rates. If rates go down the dollar will go down. We also see lower bond yields and higher bond prices despite the Fed selling bonds to reduce the size of its balance sheet. Normally the Fed’s action should push bond prices lower and yields higher, but stocks are plunging so I suspect bonds are supported by money moving from stocks to bonds.The imporatnt thing to remember is, whatever the Fed does the stock market will go down. If the Fed boosts the markets that will be great opportunity, we will be able to short from higher levels.
November 20th - The FTSE 100 is not rallying but sentiment is still bullish. My sentiment indicator (BTI) is still rising. Normally sentiment should be bearish, if the trend is down sentiment should be bearish. Maybe sentiment will change in the next few days. But as long as the BTI rises there is a risk the FTSE will rally, especially now that we are in a positive seasonal period.
There is also the pound to consider, this week the pound could cause the FTSE to rally if the risk of a no Brexit deal rises. I recommend to reduce your trade size this week because if the pound moves sharply up or down the FTSE will suddenly become unpredictable.
The risk of a sharp decline in GBP/USD is real, if Theresa May is forced to resign I think GBP/USD will drop sharply. A group of MPs have launched a leadership challenge, if they succeed Theresa May will step down.
I have been saying that investors will start pricing in less aggressive rate hikes in the US and the dollar rally will stop. Last week the warning became louder when the Fed admitted they are concerned about global growth. This prompted a sell off in the dollar, investors now suspect the interest rate tightening cycle may not have much further to run.
We could well see an end to rising interest rates, higher rates hurt the economy as the cost of servicing consumer and corporate debt rises. It reduces disposable income and when prices rise at the same time, consumer can’t spend as much as they would like. This is bearish for the dollar.
If the dollar is going down as I suspect this will be bullish for GBP/USD and bearish for the FTSE (assuming Brexit goes well).
The FTSE appears to be near the end of a third wave, while there is downside potential in the short term, this third wave is expected to end near 6750. This target is realistic because if the S&P 500 declines into a third wave and GBP/USD rebound because of the dollar weakness, the FTSE could reach 6750 before the end of the month. This means we could still have a Santa Claus rally in December, the FTSE next move will be a fourth wave up.
August 31st - how to use the trade signals from the FTSE intraday and FTSE short term forecast services