The world's central banks are now the market, says John C Burford. So far, they have been the buyers. But will they turn into forced sellers at some point?
Consider this: The Fed is buying $1.8trn of AAA bonds each year out of an available market of $2trn. This is totally unprecedented.
Then, the world's major central banks who regularly collude - now own $20trn in bonds, equal to around 25% of global GDP.
The fact is central banks are now the market! So far they have been the buyers, but will they turn into forced sellers at some point?
What they say and do have always had an impact on markets, but today it is even more so.
I certainly would not want to be in Bernanke's shoes. The whole weight of the financial world is on his shoulders and he knows it!
But we all know that this central bank propping up of markets cannot go on forever, and this is why investors/traders have been busy positioning themselves for what they hope is the correct interpretation of his words.
And the longer this game goes on, the harder it will be for the Fed to engineer a soft landing'.
But the pressure is on to begin starting to announce a plan to try to tip-toe out of quantitative easing (QE) long-term bond yields are already strengthening, contrary to the Fed's intentions (or hopes).
As a trader, I try to ignore my own views in this case, I am open and focused on what the others are doing.
From this and other sentiment data, it is clear that the small traders/investors have been buying equities with abandon.
Remember, this is classic topping behaviour, especially coming after a strong four-year rally.
Now here is the data for the $5 Dow:
Swipe to scroll horizontally
($5 X DJIA INDEX)
Row 0 - Cell 1
Row 0 - Cell 2
Row 0 - Cell 3
Open interest: 110,852
Commitments
45,533
5,485
141
47,755
86,549
93,429
92,175
17,423
18,677
Changes from 06/04/13 (Change in open interest: -5,289)
-3,240
120
5
-958
-3,213
-4,193
-3,088
-1,096
-2,201
Percent of open in terest for each category of traders
41.1
4.9
0.1
43.1
78.1
84.3
83.2
15.7
16.8
Number of traders in each category (Total traders: 97)
30
15
4
34
29
66
46
Row 8 - Cell 7
Row 8 - Cell 8
This data is telling me that the consensus believes that the Fed will make no substantive changes to the QE programme. What I think doesn't matter.But with the long side as overcrowded with specs as it is, there is scant room for error.
Bubble tops are too tricky to call
But here is an equally attractive alternative labelling:
The 22 May high is now my wave 3 top, the decline this month is a new wave 4, and we can expect a new high for wave 5 under this labelling.
This actually looks better, as my new wave 3 has a clear five-wave pattern within, whereas the old wave 3 did not have such a clear pattern.
Now, I can draw a new tramline pair, with my upper line having good touch-points.
With markets and Elliott wave labels we are dealing with probabilities, not certainties.
The bottom line is this: As a coward, my policy is to sit this one out, as bubble tops are notoriously tricky to judge and the top may be my new wave 5 which lies above 15,540. We shall see.
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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