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Politicians, central bankers and CEOs have a hidden agenda, they want you to believe everything is great. They have created the great disconnect between the economy and the stock market, and people should be worried. Despite talks that the global economy will improve next year, this disconnect is not going away . The latest warning came from FedEx, the parcel delivery company. FedEx missed Wall Street expectations and lowered 2020 financial guidance. The company blames the slowing economy. The global economy is not getting better and we have many indicators showing the malaise, yet stocks in the US are at all-time high.
President Trump, the Fed and CEOs are all doing their bit to push stocks higher, in the process they are creating a huge bubble in the stock market. Trump promises a trade deal with China, the Fed injects liquidity into the banking system, some of the money is used to buy stocks. The objective of the Fed is to make sure companies don’t run out of cash. At the same time the Fed puts pressure on interest rates, this explains why bond yields will continue to decline near zero. Meanwhile companies have plenty of cash to fund share buybacks and they can borrow at near zero interest rates. Share buybacks reduce the number of shares in the marketplace and boost earning per share. Stock prices are inflated by share buybacks.
Governments, central banks and CEOs have one objective, to keep confidence in the system. They want people to keep spending and investing so that the economy continues to grow. Everything is rosy, look at the stock market, that is what they tell us. Don’t be fooled. If people knew what was coming they would reduce spending and protect their cash, this would crush the economy and the stock market.
This process is a temporary fix, in the end the gap will close, as the economy is slowly deflating, stock markets will crash to catch up with the economy. According to the pattern this will probably happen in 2020 after a final move up in time for the US election. The FTSE 100 should rally to a new all-time high in 2020.
The rally from the low in 2009 appears to be an ending diagonal [(1),(2),(3),(4),(5)]. This pattern is characterised by wave (4) overlapping wave (1) and each wave up is in three legs or a variation of this pattern like a double zigzag. Wave (3) was in three waves, wave (5) should also be in three waves [A,B,C]. This is a terminal pattern which means the long term advance is nearing an end. That is why each rally does not unfold in five waves, each rally has the structure of a counter trend rally.
We are now in wave (5) inside wave 5 (circle), the final move up. This final move up will be in three legs [A,B,C] and wave B ended at 7004. Wave C up is now unfolding, this move should end near the upper line of the ending diagonal near 8300 sometime in 2020. This will mark the end of the larger degree wave which is wave 5 (circle). The next move will be a bear market. The completion of an ending diagonal has severe consequences, in general prices will retrace back to the start of the pattern, in this case near 3500.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
