Risk happens fast, especially when markets run on hopium with extended valuations. Whether today’s news headlines suggestive that Democrats may be opening an impeachment inquiry into President Trump will be a trigger with a lasting market impact is too early to tell. After all markets have been quick to ignore all surprises as of late, the attack on the Saudi oil platform, the sudden and hectic repo operations by the Fed, negative economic data here and abroad.
But as I said in Playing with Fire: At 144% market cap to GDP US markets remains priced to perfection in an increasingly imperfect world making markets accident prone to unexpected events. Markets need sustained new highs or face technical consequences.
Fact is markets didn’t make new highs despite popular calls for an imminent market break out:
Incidentally the bear case is by far the most contrarian view out there. That doesn’t mean it’s the right case, but fwiw here’s a sentiment check: pic.twitter.com/JHrfwV9WsA
— Sven Henrich (@NorthmanTrader) September 21, 2019
And that may bring about technical consequences. Recall last year markets peaked during September OPEX week and may have done so again with a slightly lower high versus July:
And by doing so markets have opened up the prospect of a double top and a failed back test as outlined in the Bear Case.
The volatility structure has remained in clean form throughout the summer.
Now as far as political triggers are concerned there is very little visibility on how they can turn out. While the political attention on impeachment is focused on the US it may also have international consequences. Perhaps the pertinent question to ask is: How will the Chinese react?
A president under a formal impeachment process is something the Chinese may want to wait out until the dust settles. The US election is barely 14 months away, an impeachment process can drag out for months.
No situation is alike, but here’s the timeline during the Nixon hearings:
Obviously this impeachment process , if it occurs, may lead nowhere and conventional wisdom currently presumes that any impeachment process will end in the House and it faces instant death in the Senate. That is probably the default position, but then again one can’t know what facts come to light during an actual impeachment hearing. Nixon hung on for months and only when the facts revealed themselves did the public mood change and his congressional support abandoned him.
But what an impeachment process at this stage will introduce is a new element of uncertainty into an already fragile global economic backdrop. What will the Chinese do? Markets, having run toward all time highs again on trade optimism headlines may be ill prepared for trade negotiations to again produce no results in October.
Bulls now have failed twice to break through $SPX 3,000 and above. Identified as a sell zone in the summer this area has now confirmed as a sell twice. Bulls have a lot to prove now in an environment that has just become a lot more uncertain. Two rate cuts and nothing to show for.
But bears have little to celebrate either as no major breakdown is confirmed yet. But bulls are on notice. Watch this space. Market just got interesting.
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