Market Analysis

All Things Being Equal

All things being equal…this rally has been terrible. Yea, the headline numbers have been great due to the disproportional market cap weight of a few key stocks such as $AAPL, $AMZN, $MSFT, etc, the usual suspects.

But one of my key complaints has been the narrowing of the rally and the inability for other key indices to make new highs, such as transports, the banking sector and small caps.

And now the bill has come due as $NDX has flushed over 8% in a matter of days:

And with that flush comes the revelation that the index headline numbers were simply bogus.

Greatest bull market ever? With the banking index down nearly 10% on the year?

Hardly. A bull market that can be taken out this quickly in just a few days is reeking of weakness beneath. Not only in 2020, but even throughout 2019.

And we can see this structural weakness in $XVG the equal weight index:

I maintain that the Fed’s liquidity injections have distorted everything and caused a massive FOMO melt-up.

But what this chart shows is that despite all this liquidity the broader market simple hasn’t played rally. Yes we have had bigger and better prices overall and new records on the main indices, but look how weak the relative picture is versus 2018 on an equal weight basis.

Didn’t even get close.

And now we saw new highs on $XVG for January, but then a negative divergent lower reading in February before it’s now flushed lower.

At the same time we saw $SPX break a trend in January, retesting that trend from beneath with new highs in February and now falling to the way side making new lows versus  January.

Oh we’ll get rallies again, but what $XVG shows clearly is that there has been something profoundly wrong with this rally since 2019 and into 2020 and hence it’s been a selling opportunity on strength.

Why is this important? Because we’ve seen $XVG being a major warning signal before. Guess when?

It was in 1998 when $XVG made a massive new high. As markets corrected in 1998 new rallies following produced ever weaker readings, not only on $XVG but also on the RSI. A big negative divergence as markets made new highs. That worked until it didn’t and then the bubble burst in 2000, not even 2 years later.

This time we had a big correction 2018 and now made new highs in 2020 on an eerily similar structure.

For rallies to be structurally sustainable we need to see a dramatic improvement in equal weight.

We haven’t see this. All things being equal, this market has major issues that the Fed’s actions have been masking, but these issues are now well reflected in the charts.

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Categories: Market Analysis

4 replies »

  1. Anyone remember the good ole “Green Sprouts” Kudlow comments right before the 2008 market crash. Today it is “Virus Contained”!!! Do you think Kudlow is buying the dip today?

    CNBC 2:55 pm: Kudlow says investors should ‘very seriously’ consider buying the dip
    National Economic Council Director Larry Kudlow said the coronavirus-triggered selloff has created a buying opportunity for long-term investors. “The virus story is not going to last forever,” Kudlow said on CNBC’s “The Exchange” on Tuesday. “To me, if you are an investor out there and you have a long-term point of view I would suggest very seriously taking a look at the market, the stock market, that is a lot cheaper than it was a week or two ago.” He also reassured investors that the U.S. has “contained” the coronavirus and it will likely not be an “economic tragedy.” —Li

  2. Perhaps this ‘virus story’ could last longer than Larry?

    Well that was a fun day. Looks like there was some pretty heavy defense of SPX 3120 happening, since all levels above got busted. There has to be a bounce coming soon else we’re for a long drop imminently, and may well be bound that way even with a good bounce. Another day like today will, IMO, bring an emergency half point Fed cut; they can’t tolerate 10% down in 3 days with the promise of worse to come without acting. My prediction of SPX 3000 as the rate cut rubicon stands.

    I think even the algos are wise to the jawboning now – perhaps they always were, just watching and waiting for the stupid humans to cotton on. We’re at the point where reality does matter (again, after a long absence), and that leads nowhere good for these stock ‘markets’.

    You’ve been right all along, Sven, it’s just whatever makes these markets has stayed in cloud cuckoo land far too long.


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