Signs of a market top?
Abraham George Market Musings
In the last few articles we were very thematic. Our main theme was how we got to blockchain and how that will revolutionize everything that we engage in going forward under Web 3. There is still much to write about the blockchain revolution but it is time we looked at the global markets too.
While I have been cautioning about a market top, I have not advised anyone to get out of the markets. I myself am fully invested in the markets. Calling the market top is a very risky and dangerous exercise. My common refrain has been, “nobody will ring a bell at the top”. Therefore we should be very cognizant and aware of what could actually lead to that market top but stay invested within your internal risk parameters. In my over 45 years in the markets, many people have claimed to have called many market tops and bottoms but the one I can clearly remember was when Robert Prechter the leading authority in the world on the Elliot Wave Principle (he holds the copyright to most of R.N. Elliott’s original works) asked all his subscribers to completely get out of the markets two days before the 1987 Oct crash. To date, the 1987 crash was the biggest fall in a single day but it was also the fastest recovery after the crash.
Prechter became very famous after that and so did people’s attempt to study the Elliot Wave Principle. Prechter was holding fully sold out seminars in London, Singapore and Tokyo. Even I flew to London to attend a GBP 1000 two day conference which had 500 attendees. Prechter is an enchanting speaker.
Paul Tudor Jones who is a great friend of Prechter and a follower of the wave theory made over 200 pct for his clients that year and even profited over 100 mio USD for himself.
Wave Principle combined with cycles is one of the very few reliable forecasting tools one can look up to but it is really hard work to understand the principles as it involves years of study and experience. The principle is never wrong as there is an explanation for everything in hindsight. Prechter has made so many wrong calls after that but he is still in business and will be always remembered for calling out the 1987 top to the day.
The Fed’s policies and timely actions has everything to do with the current recent highs in the markets. But in a few days, we are approaching a Fed meeting where they could start withdrawing their generosity.
In addition to the QE, the Fed went nuclear (outright buying of ETFs) to gain control of the stock and bond market last year. That explicit action led to the doubling of the markets in a little over 18 months. The monetary and fiscal extravagance the Fed showered gave people the confidence to invest and spend. The net result out of that should be runaway inflation. But the bond markets have yet to show any signs of that happening.
In the post-financial crisis, we were emerging out of a debt crisis. In such a situation any amount of monetary stimulus and fiscal benefits will not incentivize people to borrow and spend. But those people buried in debt want to save and pay down their debt.
In the pandemic, we have had a supply and demand shock. The economy contracted by over $2 trillion in 2020 from Q1 through Q2 but the money supply has increased by over $5 trillion. The response was far greater than the requirement. This should result in higher inflation. So at what stage will the Fed really start acting on interest rates? That’s a million dollar question. That could seriously determine how heavy the headwinds will be for the stocks. So, keep your eyes wide open and your feet firmly on the ground.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.