Rally Into Bear Market
Very early in my stock trading career I got sick of pump and dump schemes - around the time of the Y2K Dotcom bubble. Granted trading against a bubble is very hard, but it's not impossible. All it takes is a lot of patience. There has never been a bubble that didn't implode spectacularly.
Going back one week, these were the Barron's morning headlines as they pertained to the supernova Artificial Intelligence bubble:
Oct. 11th: AMD and Tesla are victims of (too) high expectations.
Oct. 15th: Nvidia Rally Can Last
"Nvidia is the definition of a crowded trade but that doesn’t mean it’s the wrong trade."
Oct. 16th: ASML AI Bubble Fears
"Was ASML’s disappointing guidance a sign of the artificial-intelligence bubble popping? No, but it offered a preview of the fear that could engulf the market if it does."
FR comment: Let us know when fear is actually engulfing the market. We'll get a time machine and go back a week.
Oct. 17th: TSMC Rides To The Rescue
"Taiwan Semiconductor Manufacturing has ridden to the rescue...That should be enough to reassure stockholders in Nvidia and other AI plays that there’s no sign of a popping bubble yet."
Super bullish, Barron's admits over and over again that AI is another asset bubble but they deny over and over again that that it's ending.
Of the five stocks mentioned above, only one is at new all time highs - Taiwan Semiconductor.
That stock is having its largest six week % gain since the early days of the pandemic. The only larger gains were in 2020 coming off the lows and in 2009 coming off of the lows.
More importantly, this same pattern occurred in 2022 - the rest of the AI sector peaked long before Taiwan Semiconductor and then when TSM went parabolic the entire sector collapsed into a deep bear market.
It was a rally into a bear market:
Here we see the entire semiconductor sector peaked back in July.
What's clear is that most pundits are NOT traders and therefore they don't care if they are wrong about this AI bubble already imploding and about to enter the MOST painful phase of decline.
Here we see U.S. Financial Manager companies - the ones that give financial guidance to mom and pop investors - are having their biggest six week gain to an all time high in history - life of data which is 20 years.
What do you think these companies are telling their clients right now?
This momentum driven rally will continue. Valuations don't matter.
I have consistently warned that the Chinese stock rally is just another massive pump and dump scheme. One that is now ending badly:
"(Bloomberg) -- A word of warning for traders who’ve been pouring billions into Chinese-stock ETFs like never before: The strategy is not only prone to big reversals, it has also lost a cohort of ill-timed investors a fortune over the past decade and counting."
“It’s ultimately a fear-of-missing-out trade...an opportunity to make money and chase it and hope they can get it out before anyone else.”
This is Shanghai Surprise, deja vu of 2015. What hedge fund manager Hugh Hendry called "Imagined Reality".
Many people reading this are equally disgusted by these rampant pump and dump schemes that now pervade ALL asset markets. This idea that you must trade momentum rallies and then pray you get out before the rally explodes.
These false rallies are a direct result of central banks taking over markets and using stimulus to engineer a fake wealth effect in a desperate attempt to manipulate the economy higher. A gambit that can only leave the majority of investors much poorer.
Remember that the global central bank balance sheet is still far larger than it was pre-pandemic and there has never been a normalization of the Quantitative Easing that led to global asset inflation. Central banks are petrified that full normalization would collapse asset markets.
In this pump and dump paradigm, cyclical bull markets will end when the fewest people expect them to end. And they will therefore cause maximum pain for investors.
It's only a matter of time before the S&P 500 becomes the biggest wealth destroyer in human history.