Markets – Macro – Technicals

Fork in the Road

ForkI’ll make this simple in 5 easy charts. And while I don’t believe in hyperbole I can’t stress enough how defining the next two weeks may be for US stock markets. The set-up is quite simple: We’ve had an early year correction, we’ve had a strong recovery driven largely by a bounce in crude, massive global central bank intervention and record buybacks, not by earnings expansion. Currently markets are heavily overbought and buybacks may soon retreat again as the next quiet period begins. So the basic question one needs to ask here: Can markets maintain momentum here or will they all fall apart again?

Firstly let me just point out that markets still remain largely uncorrected. I say this because the chart says so. Where’s the correction? And how does it compare to the past?

SPX M

The fact is every single small correction over the past 2 years has resulted in immediate multi-week recoveries. Buy the dip remains the basic modus operandi. I would consider a basic correction to be a move toward the .382 Fib which would be mild compared to the two previous big corrective moves.

So while a major trend line has been broken still no basic correction has taken place.

But principally we all know why there haven’t been any deeper corrections: The constant and increasingly desperate interference by central banks to prevent one from happening:

DJIA W

How desperate? Well, consider what it took to get price back to green for 2016: The most unusual quarterly candle in stock market history. On what basis is this kind of price action rooted in any history? On declining earnings no less? I think that’s a fair question:

SPX Q

There are 8 trading days left in the quarter. Either this candle will sustain this tail or it won’t. It’s a binary scenario and hence represents a big fork in the road for this market.

And if the market doesn’t have the strength to maintain this candle than participants must grapple with the fact that $SPX may reject Friday’s close above the weekly 50MA:

SPX 100

The technical consequences should be obvious.

While April is seasonally a strong month we have yet to see any evidence that markets can sustain price without active buybacks and/or additional central bank intervention. And if it can’t, then the $VIX, which has been pummeled to a pulp in recent days, may indeed still surprise to the upside:

VIX

I, for one, will be watching closely how this quarter will close. Then we may know toward which side of the road this fork may be inclined to fall.

 

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9 Responses »

  1. A great post! Thank you

  2. Any further rise drags food, energy, and precious metals with it. Not bullish

  3. Great charts as always, Northman. The Market will do what it wants. Still, it has been very frustrating trying to place bets with the constant Central Bank cocaine injections.

  4. Greed is high at extreme level and the VIX is low, $NYSI is in overbought territory. SPX is in overbought zone. After a huge run up from February lows. Crude has had a huge short term run up do for profit taking also So who wants to be a buyer now? Who want to take profits ?Who want to go short now? With your own money. It’s still a gamble and the odds favor a short term pull back. Perhaps the sell in may and go away come early this year? Had a real good rally up from the February lows. Greed is at extreme high level. Fear is at extreme low level. Sell Greed Buy Fear. Hear comes April and markets in a overbought zone. Its not rocket science folks.

  5. The market is moved by buyers and sellers. It has nothing to do with central banks, who eased all the way down in 2008/09, and yet the crash continued.
    Irrespective of which way the market turns at this fork (it will be down), I do hope the lazy thinking that believes the CB meme will be put to bed once and for all.
    And on to the next meme….

    • Central Banks are responsible for the massive rally to a large degree, but it wasn’t QE and rate cuts that started it, they just maintain it. The real start to the rally was the FASB rule 157 change from “Mark to Market” to “Mark to Fantasy” in March 2009. Until banks could fudge their balance sheets with accounting tricks to hide toxic assets(aka MBS products), Central Bank intervention was ineffective. Confidence only really returned to the market because accounting lies could be told without any consequences. The rally from that point has simply been a 3 legged stool of front-loading with free money (QE) + mispriced cost of risk (ZIRP) + accounting lies (FASB 157 “Mark to Fantasy”).

  6. We’re not anywhere near a new high in any index and we’re already overbought. We’re in a bear market trend with lower highs and lower lows–and will be so until that price action changes. With profits falling, on a fundamental basis, the fair value of this market arguably is about 1875, so we’re unlikely to see new highs.

    Also, there are significant dollar funding stresses continuing and building as the big banks shed “eurodollar” and derivative exposure. It’s reflected in sharp losses at nearly all the money center banks especially in Europe and Deutsche Bank, UBS, RBS, etc. There have been multiple capital raises, canceled dividends, layoffs from most big banks as revenues shrink and profits turn to losses. This is a huge warning of financial distress. Remember this: shrinking finance means shrinking economy. Global trade is stagnate to falling. China is a huge disaster lurking that is so bad that it will likely end ultimately in revolution. (A revolution is already happening in the US but likely will happen at the ballot box unless people negate the people’s vote) A large yuan devaluation is very likely coming which will be like kryptonite to risk assets. Negative interest rates are a huge disaster. One day, the failures of this policy will be so clear that even a dumb-ass, idiot central banker can see it. A knee jerk reaction to end it could crash the bond market from negative yields to something quite positive! The losses will be enormous. We’ve already seen flash crashes in Japan which I consider worrisome as I have a very high personal exposure to bonds.

    Oh what a tangled web the central planners have woven. None of it is good.

    • The central bankers know exactly what they are doing.
      You should consider they meet regularly at the BIS, and the BIS pulls the strings.
      Also, the BIS controls the FSB, which is directly responsible for those bank shrinkages you mention.
      It’s all part of a grand plan, but it must play out over decades.
      Eventually the world will reset, many currencies will collapse, and the petro-euro will fulfill its role.
      Meanwhile, don’t blame central bankers, blame the govts, blame the voters, they’re driving the gravy train of socialism over the cliff at full speed.

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