Weekly Wrap

So what does a real bear market look like? I believe we are about to find out.

For those shorter in the tooth than me, the last really dreadful bear market occurred in the 70s (see my film review later). Of course, we had a major swoon in 2007-2009.

Last night, the bottom fell out of US stock markets in the final hour’s trading with the Dow off 200 pips on the day – just after my Morning Call post calling for just that – days when we will see 200-300 pip losses as the angry bear awakes. He has been hibernating for a very long time – understandable, considering the coldest spring we have had in decades.

But with the weather hotting up – as is social and political unrest around the world – the bear will be making up for lost time.

Incidentally, I note a new film version of the Great Gatsby has just been released. It is the quintessential Great American Novel and centres on the excesses of conspicuous consumption and false values in the USA in the Roaring Twenties – just before the Great Depression. Is anything sounding familiar?

But a curious fact is that the last film version was released in 1974 – when the economy was mired in a very large bear market. An omen of things to come?

Now, suddenly, good news is bad
Last week, I wrote that the market top will be accompanied by very high bullishness (I insisted on it!) – and last week, we had a plethora of ‘good’ economic news culminating with yesterday’s high Consumer Confidence reading for April.

When consumers (making up 70% of the economy) are confident, they spend, spend, spend. And boy, have they been spending on financial assets!

House prices are going through the roof (sorry!), stocks are rocketing (or at least, they were in April, when the data were taken), and there were plenty of jobs available.

Anyone without knowledge of Elliott Waves and the meaning of extreme sentiment readings would be tempted to join the party – the economy is improving, so the downside must be limited to normal profit-taking (called a ‘technical correction’ by the MSM).

Buy the dips! The only way is up!

But we know better – these are precisely the conditions that make a major top highly likely. In fact, without extreme bullishness, a major turn down cannot occur.

But of course, taking the other side when all around you are bullish is no easy feat. When everything you read (especially on the BBC and MSM) assumes growth will pick up soon (2014? 2015?) and which sector is best for investing in.

It takes real courage to swim against the tide. But I believe the rewards will be well worth it. Cash will be king again.

And yesterday, we had our first example of ‘good’ news being bad – overturning a long tradition that the Fed has encouraged that all news is good. The high Consumer Confidence reading yesterday was the ‘excuse’ trotted out to suggest the Fed will be tapering off QE sooner rather than later, with a consequent impact on shares.

I say Nonsense. The market turned because all Elliott Waves have completed their development to the upside (as I have outlined in previous posts), and now we are in a new period of rapidly declining social mood. This will be reflected in falling markets.

The Elliott Wave patterns delineate the swings in mood of investors – a positive mood produces rallies and negative moods produce declines. It’s really that simple.

Off with their heads!
We are seeing major signs of a major shift in mood already – I have mentioned the waves of revelations of wrongdoings by powerful people from politicians to sexual predators (going back many decades!). The latest example here in the UK is the vocal criticism of giants such as Apple, Google and Starbucks over their tax arrangements – many believe they fiddle their corporation tax payments to the UK and many demand more tax (punish them!).

During the bull market, did anyone raise any objections then? I thought not. The mood was different – more understanding, more accommodating.

But now, the mood is turning nastier and revenge is on the air. Things will only get worse with the glaring income and wealth inequalities making their mark on society. Why should large multi-nationals get away with a low tax bill while we are all struggling to pay our gas bills?

This is the negative motivation behind the attacks on them, and it won’t go away. This will be reflected in the stock markets.

I say: Bring on those 200-300 pip days. The bears are coming out to play!

I can confidently forecast that sentiment measures will start to turn down and the US economic data will also reverse down (these are both lagging indicators). The stock market will be out in front of all these.

This growing negativity will feed on itself as more bulls abandon ship and new bears are created. This is how markets have worked since Day One – and will continue to do so until armageddon.

DOW
For a change, here is the weekly chart which puts recent events into perspective:

The 2007-2009 move was impulsive (five clear waves) and in the four years since, the relief rally is a double zig-zag. Now, with all waves within the final C wave complete at many degrees of trend, we have a top – the 22 May high at 15,540. This is a date that will go down, not in infamy, but in history. I was lucky enough to have forecast this a few days in advance (see my posts around that time).

I believe the move down from here will be sharp – and my first major target is the support area surrounding 14,000. That is 1,000 pips from here. It is starting to get really exciting.

I am short the Dow and FTSE and will be looking to add to positions on rallies (if we get any).

CAC-40 France Index
The French economy is in a real mess – and now the ECB are going public about its concerns. It must be serious.

There is a very juicy shelf of support which I am gunning for, so watch this space.

I am short the CAC-40 from late yesterday.

NIKKEI
This index was the first to crack as it hit my Fibonacci 76% retrace (see previous posts) and bounced off the 16,000 level:

It has now lost 16% in a few days as investors are doubting that Abenomics can miraculously rescue Japan from its era of deflation. The high hopes of a few days ago is melting before our eyes. Now, the Nikkei is riding down the Slope of Hope that Robert Prechter describes so well. The exponential chart since last year was the bubble-ometer that heralded this collapse.

HIGH YIELD BONDS
Wow – take a look at this collapse:

I call that another burst bubble. Investors are jumping out of the massively over-bought junk bond market in droves. It was driven up by the notorious yield grab. as Treasuries yielded too little. Investors convinced themselves that with HYG yielding just over 5%, the spread was 2 or 3 pc – and gratefully accepted it.

What they closed their eyes to was the risk (the clue is in the name).

This baby is about to head over the cliff. I warned of this at the top a few days ago.

EURO
The euro rallied and hit my long-standing 1.3050 target and backed off from my upper tramline: