Most investors don't understand or subscribe to Elliot Wave Theory. That's why it works. If everyone was aware of social mood and their proclivity for getting caught up in market FOMO, they wouldn't be doing what they are doing right now, which is going ALL IN...
Once upon a time, I used to worry about making accurate predictions across all of the various markets. Just like Zerohedge and Jim Cramer, I wanted to be "right" all the time, except not by reversing all of my own calls at the close of trading. Unfortunately, in this type of market that is not possible, because since the global all time high, we have watched as risk and complacency have BOTH grown in lockstep. Which means that bulls can be tactically "right", while being totally wrong as to the inevitable outcome. Think of it as a winning gambler who doubles down with each hand until he ultimately gives it all back. In other words, the sheer magnitude of this impending disaster vastly eclipses any micro call being made by the financial punditry. Everyone who is riding this Ponzi rally higher has NO exit strategy other than to believe they alone will get out first. No one has informed them, that's not possible. And they can't figure it out for themselves.
Yesterday was the highest greed reading in at least two years, likely far longer, however the dataset is limited:
This week, the Fed finally paused rate hikes for one meeting while still vowing to tighten later in the year. The ECB tightened again yesterday. And Friday (today) the Bank of Japan continued their disastrous free money experiment which now looms like a Damocles Sword over global markets. A $3 trillion global margin call merely waiting for RISK OFF. Carry trade unwind does not require a BOJ monetary policy change, all it requires is a massive Yen rally the likes of which took place last Fall during the Yen intervention. Or, a global RISK OFF event would cause massive short covering as we see in the middle pane below.
Either way, note the correlation between Tech stocks and the $USDJPY carry pair since the Yen intervention last October. Whereas before they were negatively correlated now they are 90% correlated.
June 5th, 2023:
The irony for bulls is that the more they front-run a REAL Fed pause, the less likely it is to happen. Why? Because investor FOMO feeds back into risk premia and loosens financial conditions. Which means that investors can only get themselves more and more lubed up ahead of ANOTHER tightening.
What investors seem to forget is that the last FOMO melt-up also took place during the week of an FOMC meeting in January of this year.
That was merely wave 'a'. This pullback will make that one seem like a picnic.
In other words, the only way the Fed can stop tightening is if markets crash. Otherwise, they have to keep tightening until markets crash.
That is the bull case in a nutshell.
Also, what happened in 2008 and more famously in 1981 was that inflation re-accelerated as soon as the Fed paused.
If we get a higher inflation print at any point in time from this week onward, then markets will be in meltdown mode.
It will be Volcker 2.0.
Another crowded trade is short Treasury bonds, which makes no sense whatsoever. Speculators are betting that the Fed can thread the needle between rate hikes and hard landing. So they crowd Tech which is a deflation trade while shorting bonds which is a more extreme deflation trade.
Nevertheless, as we see they don't have a good track record.
In summary, what it all comes down to is the fact that cycle DENIAL is a VERY crowded trade.
"The German multinational bank's top research team believes Washington has sparked a boom-bust cycle that now is nearing its end stage"
