Market Analysis

Market of the Gaps

The bubble keeps on bubbling, the never ending rally keeps on rallying and the charts keep getting ever more dangerously stretched.
Intra-day price discovery is virtually absent as volatility remains woefully compressed and $SPX barely moves.

It’s become quite the scene to watch an index representing 500 stocks with a combined market cap of $27 trillion “trade” in a 0.1% price range for hours on end:

Worse, the price advance action is mostly driven by up gaps that rarely if ever fill and market open ramps that settle into tight price ranges during the day.

While Fed critics are dismissed as QE conspiracists, we can either choose to be believe the Fed or our own lying eyes as the repo machine continues to execute relentlessly:

Open gaps in markets are not unusual, some stay open for weeks, months, even years. Some may never fill.

But it is when you get gap after gap after gap that the action becomes incredulous and challenges conventional market wisdom. I’ve seen 3 or 4 unfilled gaps in a short time frame, I’ve even seen 5, but I can’t recall seeing anything like this:

That’s the $SPY since not QE which is now widely acknowledged to be quasi QE. Count the unfilled gaps.

And here, for granularity, here’s the $SPX since just December:

Resistance is futile if you can just gap above it and never actually have any price discovery in between. It is impressive to say that this market finds support on top of each gap each time, but I suppose extraordinary liquidity measures produce extraordinary results.

But don’t take my criticisms seriously. I’m just a “swashbuckling pirate QE conspiracist” according to Neel Kaskari president of the Federal Reserve Bank of Minneapolis:

My skin is plenty thick, thank you very much, but evading answers and accountability by those in power is a pet peeve and when they think it’s all worth a giggle on twitter I find myself unimpressed by the institutional arrogance on display.

Fun and giggles over substance apparently:

It’s a shame and a sham really. The Fed deserves to be criticized. If it wants to claim the banner of transparency it needs to earn it, and denying reality while labeling critics as “conspiracy theorists” is just not credibility building:

Especially as parts of the Fed have already admitted it:

And the bubble blowing recognition has also now extended to the Financial Times:

Maybe they too are now pirates sailing the stormy sea of QE conspiracies. Looks like the number of pirates is increasing outside the sound proof walls of cushy Fed offices.

No, keep denying the bubble and claiming to not to see the relationships in policy and price action as you wish. But the gaps are there. And they demand filling. Not only the gaps in the charts, but also the gaps in credibility.

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Categories: Market Analysis, Opinion

10 replies »

  1. My instinct is that the presumed exchange between Neil and Sven is beside the point. The point is that the market is at the start of the biggest blow off top trajectory ever. Ever is a very long time. Neil is dancing while Rome burns. Sven is the apostle preaching at the city gates. In the end, none of the voices matter. The fractal pattern will play itself out. Invest accordingly.

  2. This display of contempt for those that are financially injured by the Fed’s insane actions is an insult to all taxpaying Americans and also to the citizens of many other nations that must endure this reckless insanity from their central banks. I would respond to Neel that his arrogance is exceeded only by his ignorance. The costs of the damage being done by central banks will fall on the 90% to pay.

  3. Markets have no ojective reality. They are products of the human imagination. The Fed has decided that financial assets are underpriced, and therefore they have stepped in to make their view of reality something we must all live with.

    So, the markets are NOT dangerous as long as the Fed keeps shoveling liquidy into the market furnace.

    Those technical squiggles I keep hearing everyone scream about being overbought are not part of a physical system. They have no mass, momentum or energy. They do not limit stocks from ascending ten fold this year if the Fed so deems it. My guess is the Fed steps back if Berine Sanders is elected president.

    I see no reason under the current paradimg that the markets should ever correct again. As bond yields march to zero stocks are being made to be the only game in town.

  4. I am amazed how a fed can’t understand how both repo and “not QE” are enabling us gamblers on Wall Street to melt up the markets (crushing volatility, fed put mentality, etc). First, one must realize that hedge funds are part of the repo buyers, not direct, but indirect. The fed is working on a scheme to make hedge funds direct repo purchasers, so I guess 1.55% 30 day (max) repo loans to gamblers is much more important to the feds than say giving credit card users a 5% rate via a “repo for real people”, instead of the 17% they currently pay? I assume that 1.55% rates are only for those truly in need, say billionaire hedge funds? This will not end well, no matter today or 10 years from now. The fed is going to cause a complete social revolt globally, as the following is FED documented data that is published in the main stream media weekly:

    The top 2% of Americans (in terms of wealth) receive 85% of ALL capital gains.

    So drop another Trillion this year feds, perhaps two Trillion next year. Tell yourselves it is to increase the minimum wage, for the poor, etc. Yet you know deep down that the top 1% receive almost all the benefits from your scheme. My question is what the hell are the top 1%ers going to spend our money on when the bottom 99% are destroyed financially and in constant social and financial revolt? Underground bunkers? Media companies so we can fight the truth with media spin? Constant military grade security forces 24/7? How can you not understand that reducing volatility, and thus risk, and backstopping any market corrections with “whatever it takes”, is likely to end in blood and tears? Even if you get Trump elected in 2020 (vs Biden) by blowing this market bubble another 20% by election day, a “Sanders” versus a “Biden” is going to win in 2024 due to the even greater inequality by 2024. And also note that both candidates want to remove things such as “step up basis”, “remove the social security tax exemption for pass through S-corp income”, 45% to 73% top capital gains rate, $3.5million estate tax inheritance limit, corporate income tax rate from 21% to 28/35%, elimination of like-kind exchanges, 1% to 8% yearly wealth tax that will take hundreds of hours of yearly audits, etc. Yet a “Sanders” will increase the deficits $30 Trillion over 10 years, versus Bidens $3.5 trillion, so pick your poison wisely. And do realize that all this fake money you are feeding the top 1% will be nearly impossible to keep, and transfer, to future generations. So what exactly is the point of this lunacy, really what is the point? We can’t keep our fed induced paper gains long term, and we will become the enemy of 99 percent of the population who have gained little to nothing in the last 10 years from the fed managed market ponzi scheme. And when it breaks, say two days or two years from now, the fed entity is at great risk as too many “regular” citizens and too many media outlets are letting the entire world know that the fed has created this EVERYTHING bubble. Any anyone not paying attention will most likely listen to Trump, who will be blaming the fed every day, indefinitely. Good luck keeping the EVERYTHING BUBBLE inflated, you will be owning your own demise. I personally hope you fail sooner than later as I do not envision a world better off in two years with this market Ponzi continuing into 2022. I would rather a 35% “Great Recession” correction in 2020 versus an 85% “Great Depression in 2022. “Japan-ification” of the US is the disease, not the cure.

  5. That was a beautiful post and you are the best and most honest friend we have in the investing world. Thanks so much for what you do.

  6. As an aside, Kashkari is leaving out an important detail. The Fed is not just “swapping t-bills for reserves”, it is buying the t-bills from a non-bank (a primary dealer), sends a check to their account, which then is credited by the bank where it is held, which sends back the check to the Fed which in turn credits the bank’s reserves account. It is important to realize that at the end of this chain of transactions, not only bank reserves have increased, but the money supply as well, since now there is additional deposit money in the economy that did not exist before. It was literally created from thin air. This money is going somewhere… and that somewhere are financial assets.


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