A zombie stock market is a dying stock market being kept alive by the central bank. I predict that the stock market will remain in a long term sideways range, long term investors will lose interest because a buy and hold strategy won't work.
The problem: the central bank creates FOMO (fear of missing out), markets rally but the economy does not recover to previous levels. The stock market becomes disconnected with the economy, the bubble bursts and the market crashes. A new cycle starts.
This cycle has been in progress since 2009. Quantitative easing (QE) started in 2009. The first crash occurred in 2011 (-21%). The second crash occurred in 2015 (-15%), The third crash occurred in 2018 (-20%). The fourth crash occurred in 2020 (-35%). Each time the length of time between crashes becomes smaller. These crashes will become more frequent, the next crash will happen within a year.
It seems there is a relationship between the amount of stimulus and the economy, the more the Fed stimulates the economy, the weaker it becomes. We saw in 2018 when the Fed tried to reverse QE and raised interest rates the stock market collapsed. If I am correct the next crash should occur in the second half of the year or early next year.
If you are a long term investor like a fund managers who buy and hold for the long term, it will be hard to make money because even the best stocks will get dragged down by these crashes. You need to trade in and out of these moves to win. My analysis focuses on these short term moves, I use my sentiment indicators.
Right now my sentiment indicator is bullish, however it has reached a high level of optimism which normally occurs at the top. For that reason you need to be cautious when going long because soon the markets will correct.
Take a look at the dollar
The dollar index has completed a correction in three waves [A,B,C], the dollar is at the start of a major rally. Considering that the dollar is a safe haven, such a move could indicate that money will move into the dollar because the stock market will go down again. Indeed, the dollar is negatively correlated with the stock market. This is another indication that the next collapse in the stock market is not far away. The only thing I am not sure is whether there are five waves inside wave C, it is not clear on the chart. Wave C should be in five waves before it ends, so if there is another dip to new low this dip will be short lived, the next move is up. Note that the dollar should also rally because bond yields are rising (demand for US bonds) due to the economic recovery and the US economy will be stronger than the EU economy, another positive for the dollar.
Given the position of the Elliott wave, the high level of optimism, the expected rally in the dollar, the stock market is near a turning point. At this stage I do not recommend to go short because there is still some upside in the short term but the rally is maturing.
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