Wall Street is all about marketing. Their job is to sell you stories. To make a story believable there needs to be a kernel of truth buried somewhere deep inside. Now I'm not on some crusade to cure all of the ills of Wall Street. Frankly, I need Wall Street to execute my strategies. However, if I can shine a small light on how the cycle goes maybe it will help. I dunno, but let's see.
I read a lot. What I'm seeing is a growing optimism over Europe. The narrative is starting to shift. This mental shift is starting to transform itself into high prices. The notion is that Europe is cheap and the banks are not going to fail, so now is your time to get in. After all, if you are going to invest in another country where do you look first - the banks!
In the price graph above, I'm illustrating Deutsche Bank (DB) as a proxy for European banks. I'd watch a basket of banks, but the majority of their price graphs are visually similar. So in the trading history of DB, you have a price low established in the Fall of '16 and now you have a higher low that was recently set. I'm assuming that a price break above the recent high will attract a whole new group of buyers. Why? Because the stories are floating around that economically Europe is turning up and it is manifesting itself in higher prices. And the higher the price goes, the stronger the story and the self-reaffirming cycle continues.
But what if you are a trapped buyer? What I mean by that is you've been long this whole time and you know that the gig is up. If you are a trapped long at this point, you operate in size. This type of buyer is long-term in nature and thinks and acts well beyond a couple of quarters. They are no speed boat. In order to exit a long-term hold position, you need individuals and other institutions to absorb your supply. Basically, they need to create buying power, so that they can sell.
When you step back a bit further, I hope you see what I see. And this is commonly referred to as a false flag. The long-term trend is negative. This rally, that looks so intoxicating by the weekly view, is to be considered nothing more than a rally in a downtrend. The market structure is to fool you, not make you money. Given the obvious structural issue with the EU, it will take years, perhaps longer to repair. Europe is literally drowning in a pond, meanwhile the ECB is on the shores with fire hoses filling up the pond with more water. Until this insanity stops, I have no interest here. I believe long-term players in Europe see their fate and need a nice rally to save their bacon to sell their holdings. And if I'm wrong? Like a patient who has just suffered a major heart attack, it takes awhile before they are up and moving around. I've got time. I have no interest in picking bottoms. I find that stock market participants fall into two camps: One is the person who would rather be in a position wishing they were out, and Two is the person who doesn't have a position wishing they were in. I'm clearly a "two." I'm not in it for the action. Beware of people selling magic beans and false flags!
Proceeding with caution!
P. Franklin, Jr.
May 6th, 2017
* I, nor Franklin Trend Management, have any positions, long or short, DB.
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