the tendency to seek distraction and relief from unpleasant realities, especially by seeking entertainment or engaging in fantasy.
synonyms: fantasy, fantasizing, daydreaming, daydreams, reverie; imagination, flight(s) of fancy, pipe dreams, wishful thinking, informal pie in the sky
Investors are gobbling up what Heisenberg is selling them and markets did what any junkie not wanting to confront reality does: Seek out another high and indeed proceed on the path we envisioned a few weeks ago (Something Big is Coming). Viewed in a vacuum the charts are speaking for themselves. Large breakouts to new record highs. It is very impressive indeed with nothing but clear sailing ahead or so the story goes:
Even the long dragging Value Line Index ($XVG) finally managed to cross into record territory:
Charts like the above are signaling that the party is just getting started. Weekly charts show plenty channel room to the upside:
Worst for any remaining bears or underinvested bulls this rally is not even overbought by standard metrics. Short term, perhaps, but RSIs are still well below 70 and other indicators signals plenty of the room remaining to the upside. Examples:
Stocks above their 50MA:
And high/lows are expanding:
The headline: Bears are dead. After all everything is wonderful:
This market is indeed high. But on what? It’s not earnings as earnings projections for 2015 have declined from $137 to $119. That’s an over 13% haircut for those that like to count.
Visually expressed the disconnect from last year’s bullish narrative to slowing macro economic data and real earnings is widening rapidly as seen in the charts below:
This is called multiple expansion in the face of deterioration of underlying fundamentals. The driver remains the same: Liquidity.
The M1 chart speaks for itself again. A jump to new highs precedes new highs in the $SPX:
In short: These markets are setting themselves up for pure escapism: Liquidity trumping all real data and fundamentals, hence all economic misses are completely ignored. Bad news is good news as Momma Yellen will keep the junkie supplied with his favorite method of escapism: Cheap rates, continuing the free money train of cheap financing of stock buybacks, the largest marginal buyer of stocks. This last week’s Fed minutes was another reminder that the Fed is too scared to even raise rates one quarter basis point. As we outlined last week debt keeps expanding and nobody will ever pay it back.
Normalizing rates would make the entire debt construct unsustainable. Interest on debt would rise to unserviceable levels.
Hence the discussion on Greece is an illustrative example. Speaking the truth is not welcome:
“The disease that we’re facing in Greece,” Greece’s finance minister told the BBC, “is that a problem of insolvency for five years has been treated as a problem of liquidity.”
This view would not seem outlandish in the academic world that Mr Varoufakis recently quit. Few believe that Greece’s debts, worth over 175% of GDP, will ever be repaid in full. But saying so betrayed a woeful misunderstanding of the euro zone’s rules.
If the European Central Bank shared Mr Varoufakis’s view, it would have to cut off Greek banks, potentially driving Greece out of the euro. Indeed, earlier this month, when the minister visited the ECB in Frankfurt, Mario Draghi, its president, snippily told him to keep his opinion to himself. He has not repeated it since.
No, the plain truth is debt levels are only sustainable though low rates. But in continuing on the path of ZIRP and NIRP central banks keep alive the illusion of consequence free debt. And more often than not this illusion brings out the voices of “It’s different this time”.
It’s not. What we are witnessing now is a global slowdown DESPITE record QE and low rates. This part of the equation is the undiscovered country. Central banks may indeed now be the primary cause for a global melt-up in asset prices while earnings expectations and macro economic data decouple from said assets.
Yet there are signs that this exercise in escapism may suffer the same fate that all junkies eventually experience: A rude snapback to reality.
Let me outline some critical signs of caution here.
First, oddly enough, the new highs we just witnessed came at a new negative divergence. Bullish allocations were reduced:
Bullish folks like Tom Lee or Byron Wien will tell you this is bullish because it means more people will have to chase again at higher prices. That indeed may be the case during a melt-up. But even Tom or Byron don’t pretend any longer that this is a market based on earnings expansion. It’s one of fund allocation, and chasing. Frankly the type of set-up that will eventually hurt people badly.
What they and others won’t or haven’t told you is this: Every major correction in recent years (remember those?) has been preceded by negative RSI divergences in the face of new highs. And this is precisely what we are witnessing now.
This next chart makes this point very clearly:
The main message: This market has an appointment with its weekly 100MA. It is rising rapidly and is already above the October lows. But this meet and greet is coming and the chart above is signaling this.
What is unclear is the when and how given the massive liquidity about to hit markets again in March with ECB QE flooding the streets.
In fact given the trend lines outlined earlier one can easily envision a bullish channel bounce scenario such as the one below:
Not until the lower trend line is broken do bulls really have anything to worry about. But note these negative RSI divergences are getting more pronounced and are very noticeable even in the strongest and biggest of stocks.
What does this mean from a trading perspective? Have fun, but know what party you are attending. You can’t argue with drunks or people on highs. They can be fun to be around, but tend to be a lot less fun when they snap back to reality. Know when it’s time to leave the party with your senses and wallet intact. Escapism only works for a while.
But not to worry, the party must go on as Janet Yellen is on tap again on Tuesday to be her usual dovish self in front of the House and then it’s off to month end mark-ups just a couple of weeks before the ECB launches QE. The highs must keep on coming. Consequence free of course:
Categories: Market Analysis