Market Analysis

Battle for Control

Markets are engaged in a clear battle for control: An active Fed eager to extend the business cycle using asset price inflation as its primary means to generate further debt financed growth on the one hand and deteriorating fundamentals and technicals gnawing at an artificial market construct on the other.

Let’s call a spade a spade: Markets would not be anywhere near new highs were it not for a Fed flip flopping and racing from dovish media event to dovish media event. I’ve been very vocal in my criticisms of their efforts and sense they are playing a dangerous game here. Hence I don’t want to belabor the point here today. But as a follow up: Friday’s desperate efforts on the side of the Fed to backtrack market expectations for a 50bp rate cut at the coming July meeting, which they themselves caused on Thursday with multiple Fed speakers, has revealed again the Fed’s singular role it has to devolved into: The market’s primary price discovery mechanism. As markets dropped below $SPX 3,000 this week dovish Fed speakers caused a renewed rally above 3,000 and as soon as they tried to walk it back with a conspicuous WSJ Journal article on Friday markets again soon rolled over.

That’s the circus atmosphere they have created and appear to be supportive of. The Fed is very aware of its role in all of this and it’s shameful. Like Alan Greenspan or not, but at least he was a cryptic speaker that left markets guessing and played his cards close to the vest. But over the years the Fed has devolved itself into this clown show we have now, a day to day manager of markets. And markets have learned to react to every single pronouncement and utterance.

Just stop:

Seriously, just stop. It’s embarrassing and it’s not your charter to manage markets. Nobody elected you to do that. Well, then nobody elected you in the first place. You’re appointed. By politicians. And now we have politicians that overtly want to dictate policy to the Fed. A toxic mix as the Fed’s independence is risking utter bankruptcy and is already lost in the eyes of many.

But as with cheap money, once you go down that road of daily massaging markets it’s hard to extract yourself from that mess. Now markets expect daily soothing and when they don’t get it they react, as did futures Friday following close when Rosengren uttered slightly less dovish words. “I think we should wait”.

Yes, this is what our markets have devolved into. A giant Fed gaming operation and it’s safe to say that the entire month price action will be greatly influenced by what the Fed does on July 31, the last day of the month.

But by setting expectations they have cornered themselves into a position where they constantly need to feed the appetite of the beast they themselves have created: A Fed dependent market that needs and wants more stimulus.

And now here we are, at some of the highest valuations:

With come key stocks massively technically extended (see also: To the stars):

Yet earnings growth having ground to a halt:

While profit margins have started shrinking:

Not the recipe for multiple expansion. But nevertheless here we are near all time highs once again, thanks to the Fed’s, so far, successful efforts.

But this is where the technicals come in and they put a at least temporary red line in the bull sand.

I am probably one of the few out there that has outlined the potential for a larger sell case on equities at this stage. The vast majority of analysts are looking for a massive expansion in prices primarily due to the Fed. From what I’ve seen earnings growth is really no longer part of the calculus. Easy money is. Fine. It may happen, I can’t deny that possibility and I’ve outlined in my weekly briefs when the sell case would be void.

And let’s be clear: Putting out technical setups in public is not an easy task. Especially on the sell side. Technical setups are about risk/reward and they are not guaranteed, they can be invalidated and if they don’t work out one gets hammered with ridicule and hate. And I’ve been wrong before. But I’ve also been right plenty of time.

Last year it was Lying Highs, a sell call which culminated in a 20% sell-off. But the call came out in September and markets didn’t top until early October. Sells are processes, bottoms are events. Like the one in December. I talked about Imbalance on December 23rd and called for a major technical rally into MA reconnects, worked nicely. Did I expect new highs on deteriorating fundamentals? No, but then this is where the Fed comes in, jawboning things higher. Yet again Lying Highs II informed us of another sell set-up coming and indeed we saw a larger sell-off into May before the Fed once again came to the rescue at the beginning of June.

No, sell calls are much harder than buy calls. After all you have an entire market machine designed to levitate asset prices higher and most people are bullish all the time, so a sell call is what the majority doesn’t want to hear. Indeed you can even make a great technical sell call, be right and still get hate, as I saw with Boeing when I called for a sell at $441. It dropped 6% in the week after the call, but then the plane crash happened and I got accused of taking joy in people dying. What nonsense, but still there it is. The stock was massively technically extended and the fundamentals took over (for the worst reason) and the stock plummeted 25% from the sell call. But it wasn’t the crash that was the problem, it was the underpinning design flaws that were the trigger and the technicals said that the long side was dangerous. And it was.

In some cases technicals are cleaner, like Gold when we called for a big rally when Gold was trading at 1270 in May, it hit 1450 on Friday a 14% rally from that bullish call.

I’m pointing all these things out to highlight how complex sell calls are, yet technicals matter and they mattered again big time this week.

Since June and into early July I presented a potential major sell case on $SPX. In June (It’s different this time, Sell Zone, Distortion) and again last week in The Choice I’ve pointed to the chart below allowing for the possibility of an upper trend line tag on a megaphone pattern that could lead to a major sell-off. This is the chart shown in June:

Indeed we saw this tag on Monday this last week which then reversed:

In fact I pointed to it first thing on Monday morning:

Here’s the updated chart:

This does not mean the larger sell case is validated yet, it’s not, but the 2990-3050 sell zone case I had outlined in my writings and on CNBC has so far produced a result.

But as it is a battle for control between the Fed and a still needed technical confirmation the jury is still out.

For a run down of the technicals please see the video below:

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21 replies »

  1. Each day the American public is getting a true view of the very unnecessary and destructive institution called Wall Street. The irony is that Wall Street wants to push these markets up another 10% this year, which will only increase the economic destruction when it crashes 40-60% for the third time in 20 years and makes everyone question the usefullness of the entire financial industry. The entire centrally controlled scam wil end sooner than later, and the Fed is moving up the timeline and ensuring the next crash will be epic. So say hello to MMT, goodbye to Wall Street Greed…as things will be upside down in a few short years…

  2. With the top 1 percent owning 50% of all American stocks and 401ks, and the top 10% owning 84% of all American stocks and 401ks, and foreigners and foreign entities owning almost 1/3 of all American stock markets, here is a question for everyone to ponder:

    Wow is it not financial treason for the U.S. government to pump up the markets for only 10% of the citizens (plus foreigners), and risk another economic hell for the other 90% of American citizens who have gained nothing but future financial risk and uncertainty during this government controlled ponzi scheme? What happens when the 90% wake up, perhaps after the next crash? The 90% will spend the next twenty years electing politicians who will strip mine assets from the top 10% (and the corporations), and the Fed is only attempting to delay this inevitable outcome with pre-emptive rate cuts. Do you really think we will have a federal reserve in 20 years IF/WHEN the top 1 percent own 99% of everything. We have reached a tipping point, so enjoy the unjust wealth while you have it, as getting something for nothing was never going to last forever.

    • Exactly all this wealth is simply artificial…as it’s printed money that just went right in the pockets of the 1%. Of course many of these 1% think they are geniuses…The system (growth obsessed) we live in is simply disgusting: it only works for the top of the pyramid while it destroys our beautiful planet.

  3. thanks for sharing your knowledge on the charts and the markets been trying to make sense of the moves lately

  4. Thanks Sven. Your loyal listener from Singapore. Although market still have not corrected, your research have produced a lot of insights in my trading.

    Jonah Trader

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