Last week we closed our short on FTSE 100. The index rallied again and we went short again, we closed the trade today and took 187 pts profit. I closed the trade because I am not sure what the S&P 500 will do next.
Not all the indicators are in a perfect position for the market to decline. The main concern for the bears is positive sentiment (rising BTI). We follow sentiment and we try to trade in the direction of sentiment. However there are times when we will go short when sentiment is bullish. This happens at the end of an Elliott wave up, in general sentiment is bullish at the end of a wave up.
But markets are not perfect, sometimes not all indicators are in the perfect position yet the market will decline as it happened on 23rd January.
The BTI is a good indicator of sentiment and right now it is bullish. I believe the time to sell the S&P 500 will come when the BTI turns bearish, this could happen at any time. Indeed the S&P is very much driven by sentiment, when people are in positive mood they follow the Fed. When they are in negative mood they follow the economy. For example on 16 March the Fed cut rates and announced $700bn stimulus package but the mood negative at the time and the S&P collapsed.
Right now the mood is positive that is why the markets could rally further, until the mood changes.... The other thing about positive sentiment is that people focus on the good news (they are optimistic about the future). Because they are in positive mood they believe the economy will recover quickly. History however tells us otherwise. The only way the economy will recover quickly is if scientists find a vaccine for Covid-19. Think about it, how can the economy recover fully with social distancing in place? Many businesses will never operate a full capacity, bars, restaurant, cinemas, airliners....will be half full. And what is the probability of finding a vaccine? Low. As Niall Fergusson writes in the Sunday Times "Do we have a vaccine for Malaria? No, Tuberculosis? No, HIV-Aids? No".
It could take years to find a vaccine, yet the Stock market is rallying on hope. One of the greater investors is Warren Buffet, he is a smart guy, he is worth billions of dollars. why did he sell all his shares in Airlines? Because he knows Airlines will not recover, it will take years before they and other businesses recover.
The Fed can print unlimited amount of money this will not help demand for products and services which is what matters to companies. And if companies don't do well, earnings will drive the stock market down. The excess money in the system will simply produce inflation, slow growth and rising inflation which is called stagflation. Because when the economy goes down, production falls but demand does not fall in proportion because people still get paid by the government so they continue to spend. Either the government stops paying people and the economy suffers more, or they continue to pay people and inflation rises sharply and people are not better off. There is no quick fix.
So I think following the Fed is a mistake. It may work in the short term when sentiment is positive but when sentiment is negative people will focus on the economy and the stock market will collapse. Elliott wave says another leg down is coming. But this could happen after another rally because it is a second wave and sentiment is positive.
Elliott wave says that at the end of the second wave of a new bear market optimism will be as high as it was at the end of the previous bull market. Optimism is high when the 34-day BTI is above 400, right now it is above that level. On the chart above a rise above the red horizontal line is overbought. So I think we will get a multi-week decline soon, probably after sentiment has turned negative.
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