An Extraordinary Moment Dead Ahead

Everything unwilling to change, will die
Everything that changes, dies only a little

—Ray McManus, Red Dirt Jesus

I’m not gonna lie, I don’t know if the DJI topped today, or has another 300-500 points rally left before making its final top. What I do know is that the season is ripe for investors to pay a large price for their misplaced confidence in the stock market. Robert Prechter, who is not given to hyperbole, Wrote this for an opening sentence on yesterday’s issue of The Elliott Wave Theorist: Breathtakingly precarious conditions in the financial markets have prompted me to publish earlier than usual this month. To understand how historically risky things are, we will examine the positions of four major financial market sectors: commodities, bonds, real estate and stocks, and how they relate to each other. If Prechter and his team of socionomists’ analysis is on target, the next 3-4 years will be brutal in the economy, and in all markets.

The Dow Jones Industrial Average made a new high today. It is the last of the major averages to do so. In this respect, it follows the pattern of the 1929 top. Frederick Lewis Allen wrote, “At the end, it was the generals marching by themselves, the troops having abandoned the front long since.” The Elliott Wave pattern allows for some more rally, but it is not necessary. The breadth of the market has been extremely narrow most of this year. Two stocks, Amazon and Apple have accounted for 32% of the advance in the S&P 500 since March. It’s a very unhealthy market, and quite typical of the condition that precedes a crash.

Stock market valuations have never been higher. Nor has optimism, nor have bullish predictions been more extreme (Dow 100,000, is one of them). What shakes me up the most is the popularity of high yield (junk) bonds. Demand for them is so insatiable that they’ve been bid up to the point where there is little difference in yield between junk bonds and U.S. Treasury bonds. This situation is the best predictor of an economic depression that I know of.

Mike Tyson said everyone has a plan until they get punched in the mouth. Fully invested stock investors won’t believe it, but they’re about to get sucker punched. October is not a good month for stocks, generally, and overvalued markets have a history of crashing in  October-November. I wish my readers good luck and safety in the period ahead.

Cheers,

Rod

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