While market headlines speak of record highs the actual market environment is doing a great job of lulling everyone to sleep. Endless tight ranges of nothingness interrupted by the occasional gap. The record low volatility environment continues to frustrate traders that love actual price ranges to trade.
My view remains that markets are setting themselves up for a major volatility event which will surprise the most complacent and will leave the non positioned in a ‘snooze you lose’ conundrum.
But for now those that expected Janet Yellen’s long awaited balance sheet reduction announcement to finally produce some volatility were left sorely disappointed. But why would it produce volatility? The Fed didn’t raise rates and the Fed’s meager $10B/month reduction announcement is but an insignificant droplet compared to the still ongoing deluge of liquidity coming from other central banks.
After all the global response was as polar opposite as it was swift. Just this week:
1-BoJ’s Kuroda: We are still a while away from 2% price target, will continue easing persistently for price goal
2-Hungary cuts deposit rate further below zero
3-ECB: Seen keeping option to prolong bond-buying again in 2018
The net net remains continued central bank intervention in global markets:
Bottom line: Nothing has really changed. After all: Janet Yellen speaks and stocks rally, that has been, and continues to be, the primary price discovery script:
SPOTTED: Price discovery explained pic.twitter.com/cFGjTm2rdX
— Sven Henrich (@NorthmanTrader) September 20, 2017
Artificial liquidity remains the name of the game and perhaps with more just around the corner as Republicans keep pushing their tax reform agenda and many participants continue to look to hold off on any portfolio positioning changes until clarity emerges on this front.
I can’t project how these things turn out, but I can focus on technicals and charts.
As markets have reached my upper technical risk zone of 2500 on the $SPX (see market analysis for further background) I wanted to take a few moments and share some updated charts and thoughts regarding what’s next for markets.
During the 2485-2490 $SPX tag I had outlined the likelihood of a coming visit to the 100MA. We got that in August with the move toward 2417:
As I had outlined in The Relevance on Technical Charts there were plenty of reasons to be mindful technical signals that suggested a bounce was coming.
Since then the same program that has been running all year has taken over again and new market highs were reached exceeding by a few handles my original risk zone. We’ve been sellers of this risk zone, but we are cognizant of additional upside risk presenting itself.
Indeed Goldman Sachs seems to have a similar technical risk assessment:
Their potential upside into 2530-31 is also supported in the charts and has been our internal risk view as well as $SPX has been following a very well defined channel in recent months and this channel continue to appear relevant:
Yet there are no guarantees that price will reach that trend line again, but it’s certainly possible.
After all global markets remain a one way street in price appreciation:
Volatility continues to be compressed into the historic deadzone:
Plenty of market participants continue to press the short volatility button, indeed ever more so (chart via @jessefelder):
…while expecting nothing but positive things to come for stocks going forward:
At a time when global stock values have reached 110% of global GDP:
And debt levels continue to expand into historic territory:
None of these constellation have mattered or bothered the stock buying universe. Indeed I get it, the trend is on autopilot and one could even make the case that the $SPX action this year is somewhat reminiscent of 2013:
However here’s why any coming downside may produce more downside than anyone expects at the moment:
Recent new highs on $SPX have followed a very familiar pattern: A negative RSI divergence on the weekly RSI. This is following a larger negative divergence from earlier in the year. It’s indeed extremely similar to the same pattern we saw in 2007. 2007 as you may recall also came on the heels of record volatility compression at that time.
I continue to be a big fan of divergences, positive or negative.
In this case we see negative divergences all over the place. I’ve pointed them out before and, as tops are processes, they take time to form & play out.
Here’s a zoomed out view in time to give the larger context of time:
Doesn’t mean a top is in, but it means that highs are being formed on negative divergences and when downside emerges it will come with this context.
Consider also: Again new highs came on a weakening internal picture:
And the clocks of volatility compression continue to be wound tight. And I mean tight:
And while the $DJIA also made new highs it did so by tagging the underside of a broken trend line:
For now investors feel content to buy the highest valuations in many years. Earnings have bounced back in the last year, but that’s all they have done. What has risen are multiples as GAAP P/E’s are up to 25 or about 20-25% above the 2014/2015 run rate.
While investors are confident shorting the $VIX and adding to an ever more expensive stock market one investor class has quietly started to dampen its enthusiasm, those on the inside:
Buybacks have started to shrink. Janet Yellen will start to reduce the Fed balance sheet. Republicans may get their tax reform or they may not, but either way this legislation will get priced into markets. And once that’s done, what other perfection can investors price in? More debt? Less central bank intervention? More sky high asset prices?
Indeed Deutsche Bank asks:
“In the end, $34 trillion of stimulus and QE has delivered only very low growth, subdued inflation and sky-high asset prices around the globe,” they wrote. “This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?”
The quarter to coming to an end this coming week. There will be plenty of political news in terms of health care, tax reform, etc. Markets remain extremely complacent and any tiny dip continues to be bought.
For those that can no longer imagine any 2 way price discovery I’ll offer a technical case that could be of interest. While I see plenty of support at 2450 and 2350, there’s a curious confluence emerging by way of multiple factors this fall:
4 trend lines, the January gap and even a fib zone in the same area all converging in the 2240 zone. Doesn’t mean price will get there, but as far as magnets are concerned this one looks technically very interesting. Incidentally it would represent a 9%-9.5% correction from current highs which fits with the previously mentioned 2007 constellation:
But those were crazy times back then. Price actually was a 2 way form of discovery.
Oh I jest, but let me be serious here: This current program of volatility compression courtesy a free money party will not last and traders/investors best avoid being lulled into a complacent slumber. You know the old adage: You snooze you lose. Best stay alert. We certainly are and we welcome you to join us.