Too Many Bullish Factors

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Last night FOMC statement did not have a significant influence on the markets, investors were struggling to find anything bullish or bearish in the statement. Basically the Fed is not sure whether to raise rates, do nothing or cut rates. The committee is not concerned about a significant slowdown in economic growth. That would be expected, Fed officials will never say things that are bearish for the markets. This is why people tend to buy ahead of a FOMC statement. However, many experts on the economy are warning of a recession next year, as always the direction of the stock market will tell us who is right and who is wrong.
The stock market tends to move ahead of economic developments, so if the stock market goes down for a prolonged period of time this will be a warning that a recession is coming. But as long as the stock market stays near current levels we should not worry too much about a recession. You will recall it was the stock market sharp decline last year that prompted Trump and the Fed to change policy. They listen to the stock market.
What is clear is that the economy is fragile, any small increase in interest rates will have serious consequences on growth, that is because economic activity has reached its limit, central banks pushed the limit higher with vast amount of stimulus, the stimulus has come to an end and there is little governments can do to keep the economy growing. Even if they add more stimulus there is a limit, there is a limit on how much we can buy and consume.
So ultimately the stock market should go down, it should lead the economy. And the Elliott wave model tells us the stock market will go down after the current period of euphoria. The rally from the December low was a reaction to a change of policy, after all that was a good move by Trump and the Fed to avert a recession. Now the rally is done or nearly done, there is not much the Fed can do to strengthen the economy, the economy will remain fragile until the stock market starts to go down again.
The only question is when will the bear market resume? That is a difficult question to answer because we know Trump and the Fed can move markets higher, they will always come with something but they can’t do it for ever, here too there is a limit. If a government or a central bank could manipulate the stock market for ever, bear markets would not exist. That is not the case, bear markets have always occurred and some crashes have occurred too. In fact if you manipulate the stock market, bear markets will become more frequent.
There are simply to many bullish factors that have boosted investors confidence, they think the stock market is a one-way bet. The trade deal with China, the dovish Fed, the share buybacks, the end of quantitative tightening…The rally will end when the bullish mood reaches its limit. Indeed, it is like anything else, once everyone is bullish the mood turns bearish. Stock market rallies end when sentiment is extremely bullish, righ now bullish sentiment is not extreme. I use the 34-day BTI as a guide to identify extremes in bullish sentiment, when this indicator is overbought as it was in February bullish sentiment has reached an extreme and the FTSE 100 will decline. At the moment it is not yet overbought, this indicator suggests the rally will extend before we see the top.
Thierry Laduguie is Trading Strategist at www.e-yield.com

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