Today markets are higher on trade optimism, once again the Trump administration boosted the markets. Kudlow said a trade deal with China is getting close. This has been a regular thing since October, they talk about a deal but we are still waiting to see the deal, meanwhile markets rise.
If they keep promising a deal, markets won’t fall. The thing is the Trump administration uses these trade talks to boost markets, each time they say a deal is getting close the S&P adds about 10 points, as they say this several times each week no wonder markets are still going up. The S&P is now over extended, stock markets are ripe for a decline but they are being supported by the promise of a deal.
When the markets are ripe for a decline but they continue to rise, if what is expected is not delivered (the deal) markets will fall sharply because all the good news which is in the price must be removed from the equation. And if the deal is delivered but that news was expected, upside is limited. So we are in a situation where upside is limited but downside is potentially large. Therefore it is not a situation where you want to go long. It is a situation where you want to be short but it is frustrating because the decline is not happening yet. But a few days ago I posted this chart of the Dow Jones. It shows a clear pattern in five waves and the current rally is wave v inside wave (v) ending near 27900. The rally is ending.