Market Analysis

Cliff Climbing

Cliff ClimbingYesterday I pointed out key trend line resistance in the $SPX with more room to run higher, but running into a wall of confluence near 2010-2020. As the $SPX now moves higher every single day with down days a thing of the past it may be time to also have a look at what buying up here means from a historical perspective.

Buyers at these levels not only are buying new all time highs they are also buying the farthest disconnect from the weekly 50 and 100 moving averages ever. Not only in distance, but also in terms of time. Not even the weekly 50MA has been tested a single time since the announcement of Ben Bernanke’s QE3 program in 2012.

While Janet Yellen has continued to reduce QE since Ben left it’s still in operation adding another $2B+ into a very low volume, low liquidity environment today. It’s doing it’s job apparently as the $SPX is making yet another record high.

While QE has shrunk so have trading volumes. Hardly anybody is buying up here. No matter. Prices go higher and disconnecting from these MA ever more:

SPX weekly

Note how regularly these MAs were tested in the past. To add to the dislocation: We are now witnessing a massively negative RSI divergence that has only been exacerbated by the recent near vertical ramp in the past few days.

Currently the weekly 50MA sits at 1854.66 and the 100 weekly MA at 1701.98. Now while I see nothing but bullish tweets and news reports the data points keep telling a critically different story which is that this historically unprecedented disconnect has been bought and financed with unprecedented amounts of debt. I won’t even bother to go into the details of student, auto or mortgage debt or even debt incurred to finance record corporate buybacks.

The reality is that central banks have made cash and other investment vehicles toxic and the hunt for yield is so desperate that cash keeps being pushed into stocks. Pension funds, central banks, retail investors (with margin debt to boot) etc. are all piling money into equities.

They don’t know where to put it. And hence they don’t sell. And every time they have sold in the past 5 years they have ended up regretting it as the pervasive belief is that central banks will not let markets fall. And it may well be true, at least as long they are able to keep all the balls in the air. The consequence? Cash continues to be pushed into markets with record debt.

This morning I tweeted a telling chart from

Investors are exercising the same poor discipline that got them in trouble every time markets were disconnected far from their weekly MAs. In this sense nothing has changed. And so far it has worked no doubt.

But don’t doubt for a moment that a significant portion of the growth and earnings narrative has not been bought via non organic GDP spending via vast increases in government debt. Almost $8 trillion since 2009:

Total debt

which was financed by the artificial reduction in interest rates through a vast increase in the Fed’s balance sheet. Almost $4 trillion since 2009:

Fed balance sheet

These low rates allowed the US government to maintain its yearly interest rate payments at a manageable level:


What do you think happens to the payment schedule above when above mentioned debt has to be refinanced at higher rates? Remember normal rates? And it’s not only government debt, it’s consumer debt as well of course. Margin debt will wane and buybacks will shrivel. In short, the entire push into equities movement will wake up to an ice bucket challenge of epic proportion. Just to make up for the shortfall will require an enormous shift in organic demand. Janet Yellen knows all this and I suspect that’s the real reason she doesn’t want to raise rates or delay raising them for as long as possible. Unemployment is just a faux narrative that already makes her look foolish to use as a front. The truth may simply be that she has no clue how to manage a system that may get crushed under its own weight. In fact, there may be no easy answers at all, but I doubt the Fed will be able to address them while clinging to false narratives.

But these are still problems in the future. For now all we can observe is a massive negative RSI divergence and a record disconnect from weekly MA’s with record negative investor credit balances. All of history says this is not a good combination or time to buy stocks.

Now of course we have seen vertical moves before. They can last longer than anyone expects, but then they hurt. A lot. But then the Fed comes to the rescue and goes all in. But they already are. Still:

ES monthly

But as Charles Grodin’s character so aptly pointed out in Midnight Run: “Oh I’m sure we’re completely safe”:

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