Before you go all “here he goes again” I’m not calling for a double top, I’m highlighting the risk that markets may have made a double top and that has implications.
Let’s explore the evidence, then let’s discuss the risk.
Firstly, a set of plain facts: $SPX made a marginal new all time high in July. 3028 was the peak print. The Fed cut rates in July and markets sold off. Blame trade tensions all you want, but then markets rallied on trade optimism into September, the Fed cut rates again and $SPX peaked at 3022, a slightly lower high, and now has sold off again:
Those are the facts ma’am.
Now is this a confirmed double top? Not necessarily. Get a trade deal and off to the races we go right? What if there’s no trade deal and all you got are regressive earnings? What if the employment cycle is turning? What if the yield curve actually means something? What if decades long trends actually mean something? I’m asking for a friend.
See here’s the thing: Double tops are very rare and when they occur at the end of a business cycle one better pay attention.
But the Fed has our backs, nothing bad happens when the Fed cuts rates right? There won’t be double tops with the Fed cutting rates. Surely.
But we hit 3000+ in July and rejected. We hit 3,000+ in September and rejected. Both rejections have come on Fed rate cuts. What happens when the Fed cuts rates in stocks sell off anyways?
Well, we already know the answer to that question, here’s the $SPX during 2007:
Looks awfully similar to the current $SPX chart doesn’t it?
Funny enough a record high in July followed by a marginal new high in October after the Fed cut rates. That was it. Lights out. Rate cuts did not bring about growth or a rising stock market. The initial instinct was the buy the rate cut, but then it didn’t matter and stocks were sold anyways. For now we see the same thing here and rate cuts are being sold.
But Wall Street is all bullish and says the Fed has our back you say. Yes that was the attitude back then too.
After all in December 2007, with the double top already in place Wall Street projected nothing but new highs for 2008, ignoring the prospect of a double top in place:
A double top was in place and everybody ignored it.
Are they ignoring it again?
Here are famous double tops in recent years:
All have one common characteristic: Negative divergences on new highs or close to new high. In 2000 and 2007 these double tops had especial meaning because they came at the end of a business cycle with unemployment having based at the lows and the yield curve inverted and yields declining.
Again, I’m not calling for a double top, I’m highlighting there is risk of one and the only way to invalidate this risk is to make new highs. No new highs and it looks the technical consequences could be dire.
Remember: Tick tock
Tick tock. pic.twitter.com/P0Ol4oJreI
— Sven Henrich (@NorthmanTrader) September 19, 2019
I posted this chart as a warning on September 19 with $SPX at 3006. Yesterday $SPX closed at 2887 confirming the risk of these 3,000 prices a few week ago.
And all this price action is occurring in context of the larger pattern structures we’ve been discussing:
I don’t know why this all being ignored again, but there it is. Megaphone, broken 2019 uptrend and now a potential double top with sell-offs following two rate cuts with a lot of open space below. But ok.
Double tops are only obvious in hindsight and this one remains unconfirmed, but it is a risk for bulls and they need to invalidate it soon. A trade deal may do it and perhaps must do the job as for now the Fed intervening is not showing signs of being able to produce sustained new highs. And yes there will be rallies, but if they fail to produce new highs watch out below.
As I outlined yesterday next week’s trade meeting is shaping up to be critical.
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Categories: Market Analysis
With manufacuring and non-manufacturing ISM dropping fast in unison for the first time since the last recession, and corporate insider selling on pace for a two decade high…yes, this “double-top” event might be different, even with a possible trivial trade agreement next week. With monthly corporate bond sales hitting a record this month (due to central banks creating another investor panic for yield), the question remains if companies buy back their own shares (BAC view) or buybacks remained more muted (GS view). The old saying “Follow the money” has never been more critical in determining the temporal fate the central banking liquidity cycle. I am guessing the ZIRP/QE monetary tricks of the past (2012/2016) will not save Wall Street as it would seem Main Street is ultimately too financially stretched, on too many levels, for cheap debt to “fix” the consumer once again. This time I think Main Street will take down Wall Street this time, versus the typical vice versa of past recessions.
Northman …. Thanks for all the work you do. Been following for months now and learning ALOT..
The final step is, of course, QE to the Consumer. QEC, let’s call it.
This whole endgame will all take a while to play out. There’s still a lot of “faith and credit” in the dollar that can be strangled out by hapless central bankers and politicians. I think there’s enough left to dig out of one more recession so long as it doesn’t go too deep. What a brave new world.
amazing times….I gave up trading this market 6 months ago. Lost too much money the last 2 years. I do am convinced this will end in a total fiasco….yes, they probably will do QEC….and that will be the final end of our current system that has been in place since WW2
Maybe this nonsense will continue until US bonds also trade with negative rates???
Eventual Horizon – seems we are very close to a recession event horizon. As many cheer the 3.5% unemployment rate at a 50 year low, one needs to ponder the average lag of two months between the historici unemployment “troughs” and historic recession start dates.
As far as “QEC”, I hope they make it $10,000 per every adult 18 or older. In 2018 there where about 253 million citizens older than 18 in the United States, so assume a cost of $2.53 trillion, which is less than the amount of QE thrown at the banks, coporates, and rich elites during the last recession. If the fed really wants 2% or higher inflation, that would do it for a few years. Yet best case in reality, due to the fact the government wants to direct government debt toward their own political will, is a $253 billion QEC program or much less, most likely ties again to the Social Security tax reduction we seen from Obama during the last recession. $1,000 per working man or woman will not do much, but I expect this to be the limits of the political system at the time (2020/2021).
I do believe there is a high probability of a wealth tax in the next 4 to 8 years. “Two cents” is a catchy phrase, and I think it will become a nightmare just like AMT was (and will be again in 2026). It will be complex, expensive to enforce, easy to avoid with an army of lawyers, and wasteful to people below $30/$50 million in net worth, who have to prove otherwise every year. And 2% this year turns into 4%, 8%, 20%, it will keep going up over time. Instead I would change the income tax back to the previous 1963 high tax bracket of 91% for incomes above $100 MILLION per year. I would also set the estate tax at 100% rate beyond $1 Billion. It would allow those who have the money to keep it for their life times, and they would have $1 BILLION to give to their heirs. I have had some experience with multi-billionaires, and I have a lot of reasons why I believe it is not positive for society. Extreme greed is a mental disease IMHO, and even billionaires could benefit as retaining and growing their uber wealth can be extremely stressful and unproductive. In many ways capitalism is a zero sum game over multiple generations. At some point, a small minority own most of the income producing assets, and the rest of society leases their lives to survive. Wage slave, debt slave, survival slave…it has yet to end well for any empire throughout documented human history.
Yes, income tax bracket to 91 % …but for salaries above 1 million….and estate tax of 100% beyond 50 million. This enomrous gap between rich and poor is simply morally and ethically unacceptable. Frankly, life is a lottery and when you have so much money….it’s simply because of good luck. But of course, those people will say it’s because they worked hard and deserve it….yeah right