A vision of how markets unfold from here....
As previously written up in several Elliott wave posts (search for E-wave subject in the FAQ search bar, then click on Elliott wave tag at the bottom of posts, apologies for discrepancy), I think we are now in a 5th wave up on the monthly chart in the bull market that began in 2009. 5th waves are typically exuberant affairs, al la 1998-2000 and 2006-07, then gold in 2010-11.
But here's the catch - we won't see the same euphoria for stocks as we did in the previous bull market highs of 2000 and 2007. Because it is utterly obvious that the real euphoria is in bonds, and principal driver of the 2010s rally has been the central banks. BoJ aside, they have been buying bonds, not stocks. Stocks have benefited to be sure, but is rates and bonds that have had the most dramatic move.
I'm not a libertarian, but I've lived long enough in a rent controlled city to know that nearly all government policies, no matter how well meaning, have unintended consequences. (I have a few thoughts on what those have been, but let's save those for another time.) Actually, any study of history will confirm this. And as the saying does, "Those who do not learn from history are doomed to repeat it." It is rather ironic that merely two decades after "the fall of communism" which we can mark at the collapse of the Berlin Wall in 1989 and subsequent rapid disintegration of the USSR, was so quickly followed by the heart attack for capitalism that was 2008.
Somehow we were brought back from the brink, and central bankers played a large role in saving the system. Bernanke, Draghi, then Kuroda, Yellen, and others - the high priests in the temples of capitalism - were defending the banks to the death, and desperately want that kind of crisis to never, ever, happen again. No matter what the cost. No matter what the cost to savers, to income inequality, to pension funds obligated to buy bonds, whatever. No stock market crashes goddammit! And now, less than 25 years after the fall of communism, central bankers, portfolio managers and investors think that various committees can move markets - indefinitely! We are beyond irony to the preposterous. Do we really think that governments can control markets forever according to their 5 year plans? Wasn't that supposed to be over in Berlin 1989? And wasn't the crisis over, say, March 2010 with stocks a year off the lows?
Armed with with hundreds of billions of dollars, yen and euros, actually well into the trillions at this point, all being utilized to push down interest rates, policies have been effective for a long time. They could be effective for longer still. But eventually, no matter who much the capitalist banker Politburo presses down, at some point, the market will escape the clutches and act on its own accord. The return of the repressed may not begin violently, and maybe even welcomed for a while. This would be like peristroika and glasnost in Moscow in the 1980s. Eventually, interest rates will erupt; and the wall will crumble from the weight of too many years of being forced to hold itself up.
So the translation of my historical and vaguely psychological references is this: maybe interest rates start to rise, and this is initially welcomed. Financials would rally, and money would come out of bonds into stocks. This will be enough to lift SPX into my ideal target zone of 2250-2500 from 2017 Q2 to 2018 Q2.
But when interest really starts to move, stocks for sure will be unsettled, and then drop violently. Why? Because corporate CFOs and asset managers around the world, the real controllers of global purse-strings, have planned their debt, stock buybacks, hirings etc, and allocations, on this crazy world of 0-2.5% interest! Or perhaps if they are living in Europe or Japan, they are doing their spreadsheets based on numbers less than zero!! It is also clear that the most feared event for markets is not weak GDP, low earnings or valuation - it is higher interest rates.
So far my top call on TLT is still holding. I'm not totally certain that it does, but with TLT below the AugP then hold your shorts if you took that trade. Regardless, if TLT can rally again, then I think this will be a *very* key high. It might be higher, perhaps a double top, maybe lower; but after this, I will be quite bearish TLT and bullish rates. I am basing this opinion on the Bollinger band and RSI action on TLT across timeframes, some timing work, and the aforementioned perspective on government intervention in markets.
So, if all correct, rate increases might not initially tank stock indexes. It will depend on the speed of the move. But eventually, bond market volatility will unsettle stocks enough for a serious drop. Until then, we are in the calm before the storm. This calm could last another 6 to 18 months according to my ideal high model (I will revisit this shortly.) And then, forces of nature, the invisible hand, ha - and not committees of central planning government bureaucrats - will have their say.
Central bankers have manipulated markets nearly to the extent of the communists in the 20th century. Why anyone thinks they can pull this off successfully, historically speaking so soon after Berlin bricks hit the road so to speak, is beyond me. Surely all the bankers had courses in math, but didn't those economics PhDs running the central banks have any courses in history?
By writing this post I am publicly joining several billionaires and many others who have sounded the alarm of all this central bank intervention. Privately I have been expecting a decrease in confidence in the omnipotence in the centrals for about a year, and this has indeed occurred in terms of the FOMC / DXY stall, BoJ / NKY and ECB / DAX. Basically, I think the billionaires like Soros, Druckenmiller and more recently a Rothschild, and many others, collectively speaking, learned in history class, and the bankers did not.