The Morning Line

Juicing Our Bull Market Bellwether

Get the forecast for Microsoft right and you cannot go far wrong guessing where the stock market is headed next. This has been an article of faith at Rick’s Picks for years, and it has served us well. The chart shows MSFT either moving in lock-step with the Dow Industrials, or sometimes leading the Indoos with pullbacks and upthrusts that were relatively more pronounced and energetic. In July, however, after notching a record high at 468, Microsoft shares began a gentle decline that so far has gone unmatched by the Indoos. The latter corrected moderately for a couple of months, then pushed back up to the highs, where prices have hovered stubbornly since the beginning of the year.

Based on the chart comparison above, I assumed until recently that MSFT was about to lead stocks lower. Now I’m not so sure. Suppose Microsoft shares are simply taking a breather while the broad averages continue higher. This possibility was suggested to me in the Rick’s Picks chat room the other day by a subscriber who goes by the handle Formula432. An Ozarks-based financial advisor who specializes in high-net-worth clients, he manages their portfolios aggressively for yield, often with covered writes that have been astutely timed. “Where should our focus be now?” he asked. “I don’t think MSFT has the relevance it once did. The rotation is real, growth is breaking, and value is going to be in leadership IMO, if only on a relative basis.”

Hemlock Cocktail, Anyone?

I had to agree. Why should the stock market require Microsoft’s leadership if there are other companies with greater growth potential? As long as the software giant can continue to pile up mountainous revenues without spectacular growth, it will remain a safe “hold” for portfolio managers. As much could be said of some other biggies in the heavyweight class known as the Magnificent Seven. GOOG, META, AAPL, NFLX, WMT. TSLA and NVDA. There’s enough growth potential in this list to kick up portfolio performance in boom times, but also, especially in the case of Microsoft, rock-solid revenues to cushion against a downturn.

It is scary to find myself — a glass-is-half-full-of-hemlock permabear — thinking like a Wall Street shill who produces feel-good features for Bloomberg’s business channel. Some might even take this commentary as a contrary sign that stocks are about to crash. I’m down with that possibility as always and will be more guarded than ever against being caught with my pants down if it happens. However, my somewhat adjusted thinking about “rotation” cannot help but leave me more open-minded to the possibility that the Dow will be trading 10,000 points higher in six months.

Don’t worry; I have no intention of casting off the cynical regard for securities markets that informs and colors my writing. Twelve years in the trading pits taught me that capitalism’s symbolic redoubts are just an epic carnival midway, powered by greed, thievery, huckstering and mass psychosis. Thus, the inspiration for my new mantra: Get Bitcoin right, and you cannot go far wrong guessing where the stock market is headed.  Some of you will be pleased to hear that my highest outstanding target for Bitcoin , currently trading for a tad less than $100k, is a salacious $144,586.

Mainstream Media Muffle China’s Breakthrough

Bloggers were revved up when last week began, trumpeting a warning that China’s DeepSeek R1 threatened to crush America’s capital-intensive effort to lead the world in AI development. ZeroHedge was among the first to jump on the story. “The future of humanity is being decided as we speak,” wrote Mark Whitney. “This is a full-blown, scorched-earth free-for-all that has already racked up a number of casualties, though you wouldn’t know it from reading headlines that typically ignore recent ‘cataclysmic’ developments.”

What had the Chinese done to upend the status quo?  Mark Button, a technology expert quoted in the article, describes the situation:  “Imagine we’re back in 2017 and the iPhone X was just released. It was selling for $999 and Apple was crushing sales and building a wide moat around its ecosystem. Now imagine, just days later, another company introduced a phone and platform that was equal in every way, if not better, and the price was just $30. That’s what unfolded in the AI space today. China’s DeepSeek released an open-source model that works on par with OpenAI’s latest models but costs a tiny fraction to operate. Moreover, you can even download it and run it free (or the cost of your electricity) for yourself.”

An Ostentatious Yawn

Predictably, the mainstream media threw everything they had at DeepSeek in the days that followed. The Wall Street Journal led the charge with an ostentatious yawn and a list of bullet points intended to suggest that China’s supposedly killer solution was about as impressive as a set of Lincoln Logs assembled into a working toaster oven. By week’s end, Wired chimed in with a pantywaist report that university researchers had baited DeepSeek with 50 malicious prompts, and that it failed to block even a single one.  If this story had broken a year ago, the old Zuckerberg would have ordered up grief counseling for Facebook’s stasi.

Why did the news media go on the attack? Although we tend to assume they are just shilling for OpenAI, Nvidia and other companies with trillions of dollars sunk into the artificial intelligence story, it is simpler than that. For in fact, journalists are too timid and too lazy to rock the boat with a story that is difficult to nail down.   To be sure, it is not easy to measure DeepSeek’s achievement, whatever its nature against Open AI’s stated goal of “build[ing] computers smart enough and safe enough to end history, thrusting humanity into an era of unimaginable bounty.” Only time will tell whether the Chinese have defeated the pay-to-play model advanced by Nvidia and other big players with an open-source solution that will cost users a relative pittance.

Whatever happens, the news has already deflated stock market valuations, reversing the global “wealth effect” by trillions of dollars. A measurable trillion of the loss will be in Nvidia shares alone. The company was worth about $3 trillion when it peaked in early January at $153, but my technical forecast says NVDA is all but certain to continue falling down to $103 before it finds traction. Although no one knows whether the DeepSeek story will prove to be as earth-shaking as some AI skeptics believe, price action in NVDA cannot but give us a precise answer.  If the stock sinks to $50 after an obligatory, oversold bounce from $103, that would validate the naysayers’ arguments that the AI story was mostly hubris, fated from the start to disappoint.

Nifty Trick Keeps the Bull Alive

I still expect Bitcoin to notch one or two more record highs on the hourly chart, but they will likely be the dying gasp of the bull market that began in 2009. There is reason to doubt that the broad averages will be swept up in this fetid blast of flatulence. That would create a technical divergence of sorts, but we’ll leave it to Microsoft, a peerless market bellwether, to help us gauge its significance. For now, the white-shoed crime syndicate that manipulates the stock for a living is doing its utmost to push MSFT above July’s record 468.35. That’s 5.5% north of Friday’s close, a spread the stock is capable of covering in a mere week. However, it will require a short-covering panic to first punch through the layered peak at 456 that MSFT created in December.

Realize that short covering is the main source of buying power in all bull markets. The cash that portfolio managers throw haphazardly at stocks helps keep them buoyant. However, only bears threatened with potentially ruinous margin calls can muster the kind of urgent buying that is capable of pushing the broad averages past heavy seams of supply. To make this happen, DaBoyz have always employed the same trick: pulling their bids overnight so that a stock falls low enough to exhaust sellers. With no supply weighing on the opening, the Masters of the Universe simply step aside, lending explosive power to even a smattering of buy orders entered just ahead of the bell.

300 Chickens

The result is shown in the chart.  Over the last two weeks, Microsoft has begun the day significantly higher than the previous day’s close mp fewer than three times. Almost no stock changed hands in these gaps, and yet they accounted for $35, or nearly 100%, of the stock’s rise over that period.  This flim-flammery does more than merely keep the bull market alive. It also materializes instantly spendable dollars that count toward the world’s “wealth effect.” Microsoft’s effortless, unearned upsurge added about $277 billion of ‘wealth’ to the macro ledger – enough to actually buy the Brooklyn Bridge and have enough left over to put 300 chickens in every pot.

‘Microsoft Indicator’ Is Fool-Proof

Get Microsoft right, as I continue to remind you, and your forecast for the stock market can’t go far wrong. The tech giant is among the most valuable companies in the world, with extraordinary profit margins tied to an 80% market share in operating systems. The subscription-based revenue model the company has put in place over the last decade is built to withstand a severe economic downturn. And as long as the shares continue to make new highs regularly, it’s safe to assume the stock market will, too.  The trouble is, MSFT hasn’t made a new high in six months, raising the possibility it has entered a bear market. This would have occurred last summer when shares topped at 468 on July 5.  The steep plunge that followed over the next 30 days took the stock down $83, or about 18%. That’s two percentage points shy of a statistical bear market, although investors who have stuck by Microsoft – i.e., every portfolio manager on earth — would find scant consolation in this statistic.

Still, most of them probably have little doubt that new all-time highs await, and they could be right. But a chart stretching back to 2023 suggests persistent distribution, along with ponderous supply that has prevented a run-up to new heights. The chart would take on a rosier look, however, if the stock were to pop just 22 points, or 5%, surpassing an important peak at 455 recorded less than a month ago. MSFT could easily do that in a week, and we should not bet heavily against it.

What About Bitcoin?

A second, nettlesome concern for bears who have already placed their bets is the feisty performance of Bitcoin. Like Microsoft, it appeared to have made a very important top a month ago when it hit a record 108,334. The rally came within 0.1% of a compelling Hidden Pivot target, and that’s why I was willing to lay 3-to-2 odds that the top was in.  However, the merciless short-squeeze that powered Friday’s wilding spree was cause for doubt. Although it topped slightly above a technical resistance that I call a ‘voodoo’ number, Bitcoin would need to start the week with a 3349-point dive to suggest bears are about to get a breather.

But they needn’t throw in the towel if Bitcoin explodes to new record highs in the days ahead, especially if MSFT seems reluctant to join the party. That could be considered a bearish divergence, although not the kind you’re likely to find described in a textbook. There are too many other signs that the broad averages have topped, including breadth numbers that have turned ugly. So be on your guard against Bitcoin going it alone for the bull’s last hurrah. That would keep bulls bullish, at least for a while, setting the hook for a new crop of speculators who have never experienced a bear market, let alone a take-no-prisoners killer like the one that’s coming.

Who Will Insure Us Against the Next Disaster?

Although the major indices were down just 1.6% on Friday, it felt like a big day. Everything that matters to the U.S. economy was moving the wrong way: stocks were falling across the board; interest rates and energy prices were climbing; dollars were growing dearer, especially for debtors; and gold, perhaps imagining a bevy of black swans, was stressed with fear, up as much as $60 intraday. Cumulative losses for the week totaled nearly 3%, adding to the feeling that the granddaddy of all bull markets is over.

I am taking this possibility seriously, in part because the S&Ps topped a month ago a hair above a 6136.25 Hidden Pivot target of mine that had been nearly five years in coming. Similarly, Bitcoin, the hophead that has been inspiring speculative excesses in all markets, apexed in mid-December within 0.1% of a $107,343 Hidden Pivot target first identified here when the price was $15,000 lower. If any chart provides a reason for hope, it would be Microsoft’s. Shares of the recession-proof software giant ended the week on a thin ledge, $3 above a key Hidden Pivot support at 415.57. A closing bar decisively beneath it would announce the almost certain start of a bear market. MSFT would be on its way down to at least 374.18 at that point, presumably the first wrenching drop into an unimaginable abyss.

Why This Time?

Why would this market top differ from the mostly minor ones that have occurred routinely over the last 16 years?  Mainly because it is happening with Southern California in flames. Ordinarily, we might expect investors to buy stocks aggressively, as they always do in the wake of natural disasters, since it will require enormous sums of capital investment to rebuild. This time, however, there is a palpable feeling that the money just isn’t there, especially for FETA handouts to tony precincts like Malibu and Pacific Palisades. And even if “we” could afford to restore what has been lost, insurers are not going to stick around for the next fire. Thus would California homeowners become self-insured against fire damage in the same way Florida homeowners already have against hurricane damage.

Premiums are already crushing homeowners in both places, so what will happen when Motherf**ker Nature strikes again?  If the U.S. steps in to cushion losses, Americans will finally understand that, where money is concerned, the Government is actually just…taxpayers. This epiphany will eventually overwhelm us when it extends to attempted bailouts of public pension funds. Illinois, where “politics” and “corruption” are time-honored synonyms, is all but certain to be the first state to go belly-up. When it happens and Gov. Pritzker turns up on Trump’s doorstep hat-in-hand, we will at last realize the limitations of the nanny state. The silver lining is that a radical political transformation is coming that will emphasize a candidate’s qualifications rather than his or her party affiliation. Considering what is coming when the bull market ends, we will need not mere competence to get us through extraordinarily hard times, but deep wisdom. Let’s hope we are able to recognize it if and when it is proffered.

*****

More Answers

To answer the question of who will insure us next time, here’s a link to a detailed commentary, “Is the World Becoming Uninsurable?” published moments ago by my friend Charles Hugh-Smith. And here’s another link to my recent interview with Howe Street‘s Jim Goddard. It is titled Have Stock Markets and Bitcoin Topped Out?

It’s Time to Tune Out Wall Street’s Siren Song

The party is over, or so says the chart above. It is a long-term picture of the E-Mini S&Ps, and it shows the futures rolling down after touching a 6136 target that has been nearly five years in coming. Actually, it has taken nearly 16 years to get there since the longest bull market in U.S. history began in March 2009. The economy was emerging from the devastation of the Great Financial Crash, ready to embark on a fresh cycle of foolishness that has put Americans much deeper in hock. The major stock indices have more than quadrupled since then, and anyone who has stayed fully invested in index futures or a few high-flying ‘lunatic stocks’ would have achieved long-term gains that no portfolio manager in decades past could have imagined.

My analysis has utilized a standard ABCD pattern to project the 6135.25 top.  However, it should not be expected to work precisely for two reasons. For one, it is a blended chart, with key highs and lows derived from many successive contract months. Although the coordinates are matched closely, the result is not seamless, and the ‘D’ target could therefore be off by as much as 10 to 15 points. For two, the pattern is so in-your-face obvious that every Tom, Dick and Harry who fancies himself a chartist would have spotted it more than a year ago and used it to ride the bull to the top.

Obvious, but Potent

Assuming they did, more than a few would have reversed their positions and gotten short at the recent peak. If so, we shouldn’t be surprised to see a short squeeze rip them a new orifice in the weeks ahead. The result would be a jagged top littered with the bodies of intrepid traders. Whatever happens, I strongly doubt that 6136 will be significantly exceeded before the bull market strokes out. Although the pattern is too obvious and its target too widely anticipated to produce a perfect climax on cue, the overall look of it is compelling enough to produce a major top.

So far, the pullback from the 6170 high has not breached any prior lows. However, if the weakness of the last four weeks were to take out early November’s 5724 low, that would generate the first bearish impulse leg we’ve seen on the weekly chart in three years. Still more troubling is that this will have occurred off a target sufficiently well defined to cap the bull market.  Permabulls in particular should take note of this and tune out the siren song of Wall Street’s mighty PR machine. It has never, ever contained a warning, and it will always be loudest at market tops.

My Predictions for 2025? You Don’t Want to Know.

I’m making no bold predictions for 2025, since getting it right in these way-too-interesting times is like trying to guess when a ticking time bomb will explode. When it does, the shrapnel will pop an economic bubble so pumped with folly, greed and hubris that only a Wall Street shill or a madman could believe the soft-landing story. Made-up statistics to support this fantasy are being peddled aggressively nonetheless by the likes of Bloomberg, The Wall Street Journal and a few other mainstream sources whose editors evidently are incapable of imagining what a hard landing might look like.

For starters, a commercial real estate market that has been imploding in slow motion for more than three years will collapse with the swiftness of a black hole, swallowing up a galaxy of underperforming assets in nanoseconds. Tens of trillions of dollars’ worth of imagined ‘wealth’ will be wiped from the global ledger by the tsunami that follows.  And yet, against this likelihood, Wall Street’s newspaper of record can still report with a straight face that some Manhattan landlords are starting to make money with office rentals. A recent article would have us believe the city’s property market may have bottomed. The unfortunate truth is that the relative handful of big companies that are signing leases rather than fleeing New York’s high taxes and rampant street crime have been moving into showcase buildings that represent only a minuscule fraction of rentable space.

Meth-Money

Bitcoin’s inevitable implosion could set an even bigger disaster in motion. The collapse will inflict long-lasting psychological damage on securities markets, but it will also purge an important source of meth-money from the financial shell game that sustains global GDP. The possibility that Bitcoin will fall from whatever peak it achieves above $100,000 to under $100 exists because it is mostly greedy fools too young to know the devastation of bear markets who have pushed valuations of something fundamentally worthless to insane levels. Anecdotal evidence of this comes from Florida women I’ve dated over the years. Every one of them had a son with a day job that paid low-to-mid six figures but who supplemented his income gambling on cryptos.

In earlier days, none of us knew a centi-millionaire, let alone someone who had made that kind of money overnight. Now, even kids are doing it, and frequently enough to turn the story viral. That’s where all the ray-rah, sis-boom-bah is coming from, and you can hardly blame avocado toast-eating, hard-seltzer-drinking, would-be titans of finance for believing that cryptocurrencies are the ticket to easy riches. The adults in the room are financiers themselves who know better. They doubtless find the spectacle entertaining, but also regard Bitcoin as a limitlessly expansible source of liquidity for a banking system powered chiefly by hot air. When the bubble pops, dreams of easy money will go down hard. If the severely depressed economy that results mutates into a state of barter, don’t count on digital money to replace hard cash for purchasing necessities. Of course, one’s digital wallet would become infinitely less useful if the power grid were to turn balky.

Last Week’s Plunge Was Worse than It Seemed

[The following analysis was contributed by my friend  Larry Amernick. His work has appeared here in the past, including excerpts from The Amernick Letter, which is no longer published. He is a former president of the Technical Securities Analysts Association of San Francisco.]

Last Wednesday’s brutal response to a mildly hawkish Federal Reserve announcement triggered two opposite market signals. First, the unusual nature of the sell-off in technical terms told us that the great secular bull market that began in 2009 is probably over. Second, the intense selling generated oversold readings that were bound to produce a short-covering rally, as they indeed have.

The stock market is always coming and going at the same time, depending on which time frame one is using to measure the trend. It is an irrational and sometimes fragile creature of human emotions, and that’s why it can be so difficult to predict. Nevertheless, let’s take a closer look, using the October 1987 Crash for comparison. It turns out the tape was actually more bearish this time, even though losses in percentage terms were nowhere near those of the earlier crash. In 1987, the McLellan Oscillator, which measures breadth, was a scary -110.14; on Wednesday, however, it registered an astounding -203.34. The advance/decline line differential was just as scary: -1921 in 1929 versus -3468 this time. The three-day exponential moving average was -1594.85 versus–2444.89.

3% Versus 22%

Why did the market drop a mere 3% on Wednesday, compared to 22% in 1987, even though tape action was arguably worse this time? Although many stocks fell, they did not collapse; they moved only a few percentage points lower. It was the astounding breadth readings that made the difference.  Call it a foretaste of what could come in January.

For good measure, I have applied a volume momentum indicator recently created by Buff Pelz Dormeier. I use a variation based on a 34-day Money Flow Index. In 1987, the indicator was close to being oversold, while last week’s reading was closer to an overbought peak. This discrepancy gave us to expect the short-term bounce that ended the week, with sellers spent.

Yield Curve ‘Normalizing’

My proprietary model turned negative in June for four consecutive weeks. Usually, the model issues one or two signals before a major market change occurs. But never have there been six signals in one year, as has just occurred. What was missing earlier was that the yield curve was inverted and had been that way for nearly two years, the longest inversion ever. Since then, it has begun to normalize, with longer-term rates slowly rising above shorter-term. (See graph above, from WolfStreet.com.) The process has further to go before the spreads widen to historical norms.  However, markets have a tendency to fall apart not when the yield curve inverts, but when it starts returning to normal. That is why I have interpreted my data somewhat more bearishly than I might have otherwise.

And if you’re superstitious and believe in curses, there is this headline from the latest edition of Barron’s: “Stocks Could Gain Another 20% in 2025. Embrace the Bubble”. Contrary indicators don’t get better than that.  Famed market technician Martin Zweig was the first to write about this phenomenon years ago. He argued that Barron’s cover stories at market extremes were contrary indicators.  We are hardly going out on a limb to expect a short-covering rally this week, possibly into next, followed by a painful drop toward the beginning of 2025.