Market Analysis

The Icarus Effect

It’s not different this time, it never has been. The historical script: Bulls take everything to ever more extremes and keep raising target prices along the way ignoring the technical charts that scream caution as technical disconnects keep stretching to historical extremes. Icarus flying to the sun with no consequences is the pervasive theme during each bubble.

I mean come on, this was the moment $AMZN peaked and has dropped 25% from since:

Buy, buy, buy and zero warning. Don’t ever sell. Right.

In contrast this was the chart of warning I had posted on the same day (see also Lying Highs):

In fact it’s turned in an absolute bear market since for these stocks:

I could go on, but I trust you get my point:

But also a standard script in bubbles: People like myself who warn against this nonsense get made fun of and ignored along the way.

I’ve been warning about these technical disconnects all year and made the point that they were not sustainable and reconnects were going to happen.

Case in point: In July I issued a Tech Alert and showed a couple of charts to highlight the point and I said the following:


$AMZN is now 49% above its yearly Bollinger band and 67% above its yearly 5EMA.

$NDX is now on its 10th uninterrupted year up:

17% above its yearly Bollinger band and 31% above its yearly 5 EMA.

My premise remains: Eventual technical reconnects are coming with all of these and this defines the correction risk in this market. As the larger indices are now very much dependent on its largest market cap components continuing to ascent

I submit the combination of the factors above suggest that investors are greatly under appreciating risk in tech, hence the tech alert here. $812B in market cap appreciation came in 5 stocks in just 6.5 months. History suggests that vastly extended charts making new highs on negative divergences at points of extreme low volatility are subject to risk reversion and large market appreciations can disappear more quickly than investors are usually prepared for.

For now they keep on chugging along and perhaps will make further highs. But the warning signs are very pronounced”.

Here are the updated charts:

Duh. You get my point: They slammed them higher, told everyone to buy and now there’s blood in the streets.

It’s not different this time, it’s the same every time, the Icarus effect.

People believe their own narratives and paint a fantasy of ever rising prices. That works until it doesn’t and then it’s carnage.

Case in point: $NVDA

Cut in half after making all time highs 35 days ago. What? You think it’s normal a stock goes up 13 quarters in a row? No it’s not, it’s called asset price inflation beyond the fundamentals and 5 quarters of gains just got wiped out in a few weeks.

$NDVA is perhaps an extreme, but for $FAANGs, who have been the driver of index price extension as well as some of other high fliers, it was time to reconnect. With what? The quarterly 5 EMAs at least:

60% of Goldman employees are now 30 years old or younger. These guys have never seen a bear market, or corrections that last. Indeed the last 20% drawdown in $SPX was in 2011, what were these kids doing then? College? High school? Come on.

The financial world’s price discovery mechanisms have been so warped by artificial liquidity for so long that once again people assumed things to be true that weren’t. And the corrective pains we’re seeing now in some of these stocks is a teaching moment.

I’ve shown some of the quarterly charts, let’s put this in yearly chart perspective to really highlight the point: If you were buying stocks this far extended above their yearly 5 EMAs and Bollinger bands you deserved to get spanked because it was, technically speaking, reckless.

Some people like to mock linear charts, but I don’t care. These charts told you this was coming:

Even $BA:

But as much as these stocks have fallen they are still far above their yearly 5EMAs which is really bad news for bulls. These reconnects are still to come. If they are coming still this year we’re crashing, so best hope these reconnects are coming next year when these moving averages will be higher.

And the index charts highlight the risk:

We’re still historically extended and the eventual unwind has a lot of room to go, especially as the GDP growth fantasy is being burst and reality is sinking in as to future growth:

But it’s not all doom and gloom yet.

Note these reconnects are important as they also lend support. This has been a cleansing of excess and this correction is obviously a major warning sign, but it’s also cleared out a lot of late buyers and at some point will bring in bargain hunters. Yesterday’s down day was expected, but seasonality is shifting rapidly in favor of bulls. There are potential triggers lurking that could radically change the outlook and it’s very clear now to everyone that the market wants a resolution to the China trade war.

Trumps financial constituency can’t be pleased with what’s happening to their portfolios and their business outlooks. Long gone is the afterglow from tax cuts as CEO confidence is dropping:

Remember record optimism? It’s gone. And that means none of these guys will commit to future investments until they have clarity which means it spills into CAPEX, production and, gosh, perhaps even into buybacks.

Speaking of buybacks? Where are they? Actually they seem quite active, otherwise hard to explain the massive positive money flow in some of these:

Massive on $AAPL. Consider it another checkpoint on this being possibly a head fake. There’s buying going on into the weakness.

And keep in mind hedge funds are in major major pain right now after their worst month in 7 years in October:

September down. October down, how’s November shaping up? The incentive and pressure to salvage something into year end will be enormous.

Internals were obviously gruesome yesterday:

Indeed $NYAD hit the lowest print in November:

And yet $USHL actually IMPROVED yesterday:

You know what else showed odd strength? Financials:

Indeed on a monthly chart they actually have a green candle at the moment:

Is that a bull flag? Cause if it is a face ripper is coming.

So yes I’m a bit perplexed here, especially if I look at some of the other signal charts.

$NYMO barely red:

Which is either bad news or good news. Bad news in the sense it’s not even close to oversold and that’s a problem I have with a lot of these charts still. Good news: It may speak to a head fake scenario.

$NYHILO still hasn’t even done anything here:

And $NYSE actually held in pretty well:

So there are mixed signals here, indeed volatility also does not seem to reflect the carnage out there:

These are still H&S patterns, not what I would expect to see with tech stocks ravaged like they have been.

Another odd outlier here: $JNK. As hammered as it has been and as much it is made to be the culprit of imminent doom, it actually printed a green candle yesterday:

Go figure.

Keep in mind we’re at key trend line support territory here:

The latter trend line being tagged in overnight action. I’d be frankly surprised if we didn’t see a major defense of these trends being launched at some point soon.

As of now $NDX is printing new lows versus October on a positive divergence:

Now having said all this, all this may change on a dime if we get a sustained break of last week’s lows and selling panic ensues. New lows could come in a hurry and put us inside the lower risk zone:

And frankly perhaps this is what needs to happen for Trump to capitulate on China.

Buckle in. Icarus is in descent. Will he manage a soft landing?

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Authored by: Sven Henrich

Categories: Market Analysis

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