Markets – Macro – Technicals

Weekend Charts: The Sound of Silence

Hello darkness, my old friend,
I’ve come to talk with you again

And the people bowed and prayed
To the neon god they made.
And the sign flashed out its warning,
In the words that it was forming:

More QE.

bunnyWhat do you do after a 10% global equity ramp in 11 days? Well you introduce new QE of course and destroy your currency. For those of us who were curious how markets would handle the FOMC ending its record third installment of QE we didn’t even have 48 hours to find out. Japan launched its own version of a hydrogen bomb on global markets by not only going full ape on expanding QE, but also giving its largest pension fund the green light to not only expand further in buying Japanese equities, but also to go on to buying international equities.

The reaction was swift: The Nikkei went lock limit up over 8% in one day, the Yen dropped over 2% and all global equities went ablaze in a giant buying-gasm. As it was fiscal year end for many mutual funds who had been busy painting prices the concluding short massacre produced new closing highs to boot.

The end result: Global equity prices have rallied between 10-17% within 12 days:

EWJ

Before I go into charts let me speak plainly: In Econ 101 you hear about a basic economic principle: Supply and demand. What central banks have been doing for years is to manipulate the supply and demand equation of money under the mistaken belief that higher stock prices will produce growth, lending and employment.

And the way they have done it is by destroying the value of holding cash or savings. With 0% interest rates and now negative rates in many cases, they have ruined the safety net and fixed income of those that relied on it, they incentivized corporations to buy back their own shares buy taking on debt (and therefore reducing supply) and they have created a massive shift in demand for yield. This yield must now be found in riskier assets and EVERYBODY is now buying the same assets. Everybody:

1. Corporations buying back shares

2. Pension funds buying global equities

3. Central banks buying global equities

4. Record margin debt in trading accounts via cheap money

5. Fully bullish mutual fund allocation with a bull/bear ratio of 0.09 = All in.

There is no alternative. And this desperate chase for yield is, in principle, destroying any means of price discovery as price is artificially inflated by shifting all demand into one asset class and supply is reduced through leveraged buying back of shares at all time high prices to produce artificial and not organically driven earnings growth.

What does it produce then? Well we know the rich are getting richer. Global growth? Not so much. But it does produce charts like this:

Visa:

V

Only a $30B market cap increase in 2 weeks. $AAPL? Another $70B in 2 weeks. That’s $100B in market cap added in just 2 weeks in just 2 stocks. Vertical ascents? Not a problem, all is a chase and has been for a while with the latest one being in a class of its own:

IWM

That hanging man at the end of this chart? You can find a whole string of them. $SPX:

SPX D

My favorite remains the tech sector which keeps rising despite earnings bombs from the likes of $FB, $AMZN, $NFLX, $LNKD, $TWTR, etc:

NDX

Just don’t call it investing.

The monthly charts in particular have left the realm of precedence and history. A monthly hanging man after having covered 5 months of price history in just 2 weeks:

QQQ M

The same on $SPX:

SPX M

And the $DJIA? Almost 12 months of prices covered in just 3 weeks. Sure, why not:

INDU

Is this sustainable? Well who launches their next QE program? The ECB’s jaws must have dropped at the action coming out of Japan. So who knows what they will do. I would humbly submit even hardened bulls can’t be thrilled about this erratic action precisely because of the likely consequence of vertical price ascension: They are not signs of a stable bull market. They are signs of a system in stress and panic buying may make for a good trade, but invariably it ends up in tears.

For now we can note vastly stretched charts and massive overbought readings, but saved trend lines. The hanging men candlesticks are worth of caution alone, but a couple of indicators also are flashing warning signs.

The $NYMO at 85. Only 5 similar occurrences in the past 5 years coming from oversold conditions, all producing pullbacks:

NYMO

And the participation index just jammed up to the max:

SPX weekly

But the key chart of them all in my book: The monthly $WLSH chart. Despite the most massive rally in years this move has done nothing to alleviate the bearish configuration in the RSI:
WLSH M

The monthly MACD cross-over had been averted for now, but that giant hanging man may make November a month to remember. We shall see.

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1 Response »

  1. Will say looking at this and seeing how we are so blow up as to price this has to be the start of a top coming in as next the ECB will have to chase with big QE. When this does fall apart as it will some day going to hurt so bad !

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