Social mood and the markets: It’s getting ugly

I don’t often comment on the general news, but the following report from Germany made my blood go cold – and is an omen for a very disturbed 2015, socially and in the markets.

As you know, I believe markets are driven by the prevailing social mood. If this mood is generally positive – as it has been since the credit crunch – markets will rise and risk will be embraced.

There are various surveys of investor/trader/advisor sentiment, especially from the USA, and these follow the general social mood. This is a founding principle of socionomics. As you know, I use these types of readings when directing my trading.

But outside of the markets, there are marked characteristics of society that define a prevailing social mood – and I advise all my readers to keep your finger on the pulse of these changes. If you can judge this mood correctly, you have every chance of being on the right side of your trades.

The change in social mood is sweeping the globe

If the mood is positive and therefore bullish for the future, previously opposing sections of humanity see common ground and conflict is restricted or even resolved. Societies become inclusive for everyone – even for unnatural bed-fellows.

But when social mood turns negative and bearish for the future, groups split into opposing factions and social unrest erupts. In extreme cases, nations engage in war.

What is happening in Germany is a mirror on the abrupt change in social mood that is sweeping the globe.

Briefly, a grassroots movement called Pegida was started in Dresden in October to demonstrate against what the members see as the ‘Islamisation of Germany’. It attracted a few hundred protesters.

The rally this week attracted a lot more – over 10,000 and the story made the international press. Heavily armed riot police were called and the country’s leading politicians were forced to condemn the movement. With that, it now has credibility. And these demonstrations have spread to other German cities.

But what this sudden eruption of anger over immigration has done is highlight the swift turn in social mood that has occurred. Immigration in Europe wasn’t a major problem in the bull market, but now it is. German society (and that of other European nations) is splitting – and this is a very bearish sign.

It is omens like these that can point you towards correct market positioning.

What will happen in 2015?

In my recent posts, I have stuck my neck out and maintained that stocks have finally topped – the Dow on Friday, 5 December – and are joining other asset markets in major bear trends. This is entirely in accord with my theme of a deflationary depression that lies just ahead.

This implies that social mood will turn a lot more negative in 2015.

We are already seeing signs of severe distress in the debt markets with the first-in-line junk bond index – AKA my plunge-ometer – down sharply off its highs.

Much of this weakness comes from companies in the shale oil patch, whose bonds are unable to withstand low oil prices without buckling. Some of these bonds are currently trading under 50 cents on the dollar. That is one haircut!

One by one the dominos will fall – and even the safe-haven Treasuries will join in. Yields here are ultra-low, but the long trade is very crowded – the latest AAII survey of money managers shows bulls at a near-record 95%.

The last time it was this elevated was in October, just before a huge rise in yields and drop in prices. When this bubble pops, it will be a doozy.

Incidentally, in my last Trader post of the year next Monday, I will set out my ‘Trades for 2015’. This has become an annual event for me and my record has been excellent – so far.

Last year, one of my Trades for 2014 was to buy Alcoa, the US aluminium producer. It rose from $8 to this year’s high at over $17.

The other one was to go long the US dollar – a very contrary stance at the time. We know how that is turning out.

Make sure you tune in next Monday for next year’s selections.

Has the Nikkei turned?

One of the more interesting threads on the Trade for Profit Academy forum is an analysis of the Nikkei index from members and myself.

Most people are bullish on Japanese shares, but this chart should give them pause:

Nikkei 225 spread betting chart

The rally off the October low is a rather unconventional – though correctly labelled – motive five-wave pattern, complete with a massive negative-momentum divergence, heralding a sharp move down (which has occurred).

Note the lovely rising wedge for wave 4. The final thrust in wave 5 topped the pattern and when the market came back inside the wedge, that was a clear signal the trend had changed. A break of the lower wedge line confirmed that prognosis – and was an ideal place to enter short trades.

But now there is a clear three waves down so far, and the jury is out whether it is a three-wave counter-trend move or waves 1-3 of a large five down. If it is an A-B-C, that implies a move to new highs. If it turns out to be a five down, then the down move will intensify.

Here is a close-up of the move down:

Nikkei 225 spread betting chart

I have drawn in my tentative tramlines and the first move down is a clear five down, which is one of the signs that tell me the trend has likely changed. There is a small positive-momentum divergence at the lows which is leading to the current rally.

Note the form of this rally – it is an A-B-C, suggesting it is counter-trend.

If the market can rally to the upper tramline in the pink zone, that will be the moment of truth.