Sentiment is bullish and when sentiment is bullish people take on more risk and become complacent. What should put them off buying stocks is ignored. Chinese stocks are soaring, they are soaring not because the economy is doing well but because people are hoping for more stimulus.
When the stock market rise out of thin air, people should become more pessimistic about the future, they should be more cautious. Well, this is not the case. I hear from my contact in China that people have gone crazy on the stock market. For many ordinary people the main subject of discussion is the stock market. They are so convinced they will make money that many are now borrowing to buy stocks. The thing is, when the guy polishing shoes in the street starts trading stocks you know the game is up. That’s the signal that tells you to get out. It could well be China that kick starts the next bear market.
The strong dollar has contributed to a softening US economy, this means the prospect of a US rate rise has been postponed. At the FOMC meeting this week, I expect a dovish statement. The US stock market has been slow to make a new high, now it’s made a new high it is about to turn down. The terminal pattern coincides with the same terminal pattern in the UK. The FTSE appears to have completed its pattern on 16 April when the index hit 7119.5. But a new high can not be ruled out because the S&P has not yet completed its own rally. In any case and even if the FTSE breaks above 7119.5, upside is limited because the pattern is terminal.