Market Analysis


Lots of chatter about a coming melt-up coming in stocks. And why not? If fundamentals or earnings growth no longer matter and markets are drowning again in artificial central bank liquidity may as well forego any valuation or fundamental discussion.

Yet as we speak markets are getting to key historical levels of technical resistance and points of confluence just as they are getting heavily overbought while the nature of the rally to new highs is extremely poorly constructed.

Let’s take note of some data and charts and ascertain the melt-up scenario as well as reasons as to why this either may not be the case or end in a valley of tears.

Firstly, note the Fed has managed to turn markets into a graveyard. Void of any pulse, void of any intra-day price discovery. Ever since the introduction of ‘not QE’ the character of markets has changed:

The one way nature of the pice action, driven largely by overnight gaps and void of intra-day price discovery, has resulted in many indicators getting to extreme conditions as also evidenced by the CNN Fear & Greed index:

In the Fed’s desperation to control rates the TINA effect is back and money again appears to have little choice but to allocate back into equities. When yields collapsed this summer pension funds were forced to allocate to record levels into stocks. 47% allocation of assets into risk assets, the highest since 2007. Risk assets are again viewed as risk free.

The constant distortions now accentuated by the need to ‘calm’ money markets have brought us back to the old QE days. The Fed is either in denial or outright lying about the impacts of their actions.

This week markets hit 145.8% market cap to GDP and may even move higher. The great distortion of everything.

In my view all this ultimately will fail. It may make sense to apply such policies at the brink of crisis but not at 145% market cap to GDP. What does this accomplish, but kick the can? Every new high in stock markets is a celebration in more wealth inequality.

Populist anger, largely driven by said wealth inequality, is tearing democracies apart. The US election next year will be as ugly as we’ve ever seen it. Populations are driven apart by ever widening perceptions of realities. It’s all bubbling under the surface.

And yes, without ever admitting to it, the Fed and cohorts are afraid. Afraid that the construct will blow up in their faces. And I can’t blame them, it’s daunting.

But the Fed will fail. Why? Because they never saw it coming. To react this massively only 10 months after they projected a completely different reality (rate hikes and autopilot QT) they are now doing the opposite with guns blazing. There is no grand plan or control, they are reacting, chasing the fundamentals requiring ever more debt expansion to produce ever less incremental growth.

Hope is for another 2016 repeat. And what was 2016 but $5.5 trillion in central bank intervention?

Fact is the natural interest rate market wants to go somewhere else. Without the Fed’s interventions overnight rates would be much higher radically changing everything. It is for this reason we see these daily repos.

While markets are calm on the surface the larger market forces are gnawing at the construct.

And so their only solution is to blow the bubble even larger.

Price drive sentiment. Always does, and now that markets are at all time highs people are getting bullish again. Not because of earnings, or growth or anything fundamentally related. Because price is higher and why is price higher? Because of the Fed, simple as that.

When will we know that all this fails? When there is not a marked turnaround in growth as a result of these actions.

It remains a question of efficacy. For now the efficacy has proven to again produce marginal new highs. And yes 2-3% are marginal new highs. And as we saw last year and this year, marginal new highs of 3%-3.5% were sold off. With a similar run we could even see 3119-3134 on $SPX:

In structure this market is replaying the same script we’ve seen for months now, bottoms on Fed promises and then tight channel rallies in rate cuts that ultimately get sold off:

But perhaps the “not QE” program has changed that dynamic as we now move above the trend line:

Yes that poke above the upper trend line, the infamous megaphone pattern. Is that null and void now?

Perhaps, perhaps not. I’ve always said we could have a massive blow-off top on a China trade deal of substance and we keep getting headlines every single day that aim to promise just that. How much of that is real versus a giant bubble show I can’t tell you.

What I’ve said technically is that this pattern need to break out and the breakout needs to be defended on a test. So far it’s not been tested at all.

One primary concern about this rally is that it’s all about overnight gaps. One gap fine, 2 ok, but 5, 6, 7, 8 all unfilled. Getting a bit cheesy especially in the following context:

In April I outlined the Combustion scenario, a technical pivot level, the 2.168 fib level on $ES. In Combustion I suggested that there are multiple long time market trends that all look to converge in the October time frame, and the 2.618 fib being one of them.

Well, guess what? We just hit that level in overnight trading on November 7th:

And of course note all the trend lines converging here. You can see it on the linear as well as log charts:

Hence I remain skeptical of the melt-up case. Can I be wrong? Of course. That can happen and given the overwhelming amount of liquidity that’s being thrown at these markets perhaps we should be surprised that we are not even higher yet at this point.

Personally my view is that chasing equities with this backdrop is madness:

But then I could’ve made the same statement in November of 1999 and not seen a top until March 2000:

Was it correct to call this idiotic back then? Yes. But when has something being idiotic ever stopped humanity from fully embracing it?

Would you’ve gotten run over for 4 months trying to fade this? Yes. Was it the greatest selling opportunity ever? Yes.

But timing is everything.

So I can’t say when this nonsense stops and the consequences of all the excess come home to roost.

In the earlier chart you couldn’t even call a top in early March so steady was the trend. Between November and December there were hardly any dips, mostly just 5 EMA tags and one 50MA/lower Bollinger band tag. A dip to buy for the final run.

I’m not suggesting we face something similar here, but I want to raise awareness that we could and confirmation of an end won’t come easy.

But then I look at stocks such as $MSFT and I see the vast technical excess already all present and I see key technical pivots and points of long term resistance being reached as markets are becoming heavily overbought, extreme greed is pervasive and complacency is the going currency. And it is in this context that we are seeing calls for melt-ups while being a mere 2% above the previous highs.

In 2019 markets have been running on multiple expansion on the Fed put and trade optimism. To expect a melt-up is to also need to see markets break above a 10 year trend, bust above multiple long term trend lines and continue to ignore the underlying earnings picture:

I submit that the combination of factors above make this market a highly dangerous environment. In April I called it the combustion scenario. Well, we’re here. At a point of technical importance that reveal the answer to us soon: An artificial liquidity driven melt-up setting markets on a path toward a larger market cap valuation not seen since the 2000 bubble with much larger consequences to come down the road, or will we see technicals take control and force a re-alignment with fundamental reality from here intros general area?

From my perch nothing’s been proven either way yet whether this is a breakout or fake out remains an open question, but I’m also not blind to the grip central banks, the Fed in particular, again have over these markets. We’ll know more once the retest occurs. In my view the $VIX has a coming appointment with the 17 level. The nature of that appointment may well decide everything.

For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

Categories: Market Analysis

38 replies »

  1. This is no longer a market. It’s a racket. Therefor it’s a mistake to apply technical analysis. It is different this time because it’s a different reality.

    All human history, with all its suffering, was the result of a mistake, The mistake of not having enough money. The debt scolds imagine we have hit some kind of ceiling when in fact we have barely taken off. Tens and tens of trillions will be printed to buy financial assets. Soon stocks and corporate debt.

  2. We live in Disneyland….the absurd is getting even more absurd. There is only one certainty: this is gonna end in one big chaos. When? Nobody knows…it could go one for another year…or longer. We will probably also see Helicopter money…

  3. I have this irrational feeling that today was THE top. It’s based on zero evidence or logic (that hasn’t been staring at us for many months) and will probably be disproved tomorrow, being a Friday.

    OK, I can rationalise some logic: trade talk tweets, Fed jawboning are both having very diminishing effects; fundamentals and earnings are dire and getting direr; buybacks are starting to ease; Trump is getting impeached… but none of these are impacting stocks as yet. When they do it’s a looong waaay doooon. A very long way.

    There is really only one positive counterbalance: liquidity transfusions. But maybe they have just about done all they will.

    If, insanely, I am correct, then I’ll add it to my 9th August 2007 call of the last recession start in my madcap laughs box. More probably you can laugh at me and BTFD tomorrow.

  4. These REPOs and QE can go on forever without any negative repercussions. Noone can stop them and no one wants to stop them because America is living the Good Life. Counterfeiting by the trillions, the U.S. Cabal steals cheap labor and goods made in all other countries. Why? Because when you are Top Dog and control everything in every way, you can take advantage and do what you want. And no one can stop you. Not saying that is right, just saying that’s the way it is and it’s not going to change. The stock market death wish crash is only in your dreams.

  5. Remember the Fed should not lower rates in an election year or it will be seen as political. Good luck holding the markets together in 2020 with no more rate cuts, after a 10-15% melt up by January 2020. I get the feeling the fed is trying to hold the ship together for a few more months at best, else they will own the blame for the next market crash, and will have little to no ability to control it. I fail to see what would be accomplished by driving the S&P 500 to a 4000 level by year end 2020, unless the goal is a global reset. We are near the point where the (M)onetary (M)eth (T)rain is going to jump the tracks and take out not only the wealthy elites (much more CNBC tears), but change the rules of capitalism with the feds as politcal puppets for election votes. I believe 2020 is the point of no return myself. What a marvelously delirius and dangerous game for another 30% of momentary monetary transient wealth…

  6. It’s QE so the market will keep going up until January maybe? Using options with negative gamma will use hedging with positive gamma. So all this incremental new highs with low volume is mainly people hedging with indexes…therefore really sharp downturns but really painful crawling rises like now.


This site uses Akismet to reduce spam. Learn how your comment data is processed.