Complacency came before the fall. All of 2019 market participants ignored the non existent earnings growth. Too strong was the now pavlovian reflex to chase easy central bank money. Too trusting in central banks to again produce a reflation scenario that would make all the troubles go away.
Everything was ignored and markets and stocks were relentless chased higher into some of the highest market valuations ever. Even the coronavirus was ignored. A dip to buy in January they said. AAPL warning? Let’s ignore it and buy AAPL to new all time highs again.
Nothing mattered until it did.
Then markets crashed last week. Perhaps not in percentage terms, but in terms of vertical velocity to the downside it was unmatched in history. The fastest 15% correction off of all time highs ever and by far.
Worse, months of buyers of stocks and markets at high valuations suddenly found themselves trapped as the bottom fell out inside of a few days:
$NYSE, the broader index dropping below the January 2018 highs and closing below the summer 2019 lows now showing an index that has gone nowhere in 2 years and the recent highs being a complete mirage.
The big message: It was not different this time. Bears were right. Full stop.
$DJIA fell all the way to the June 2019 low taking out 9 months of buying:
Don’t anybody tell me everybody sold the top. No, lots of buyers are trapped at much higher prices and are now again dependent on central banks coming to the rescue.
The very central banks that have led them into another liquidity trap. By printing, cutting rates, adding to the balance sheet at a record clip and even producing new record holdings of treasury bills the Fed has created a stock buying frenzy. In denial of its actions and the historic valuations that were created in the process the Fed caused a massive melt up in stocks and markets and now investors have paid the price as the Fed lost control:
Loss of control in print. pic.twitter.com/cQBitPTepG
— Sven Henrich (@NorthmanTrader) February 28, 2020
And now everybody is in hopes that the Fed can print even more to rescue markets once again.
Sure enough on Friday Jay Powell came out and tried to “sooth” markets.
It was oh so predictable:
I KNEW IT!!!!!!!!!https://t.co/HyPicKSCiS
— Sven Henrich (@NorthmanTrader) February 28, 2020
And I called it the week before:
Prediction: If markets drop 10%+ before April the Fed will not end repo or its treasury bills buying program as indicated.
If anything they will increase it and cut rates.Why? Because markets will demand it & this Fed has no backbone whatsoever & his beholden to markets.
— Sven Henrich (@NorthmanTrader) February 20, 2020
And here we are, the market now pricing in a 100% probability of a rate cut by March and Powell sending the signal it will come. Indeed markets are now pricing in nearly 4 rate cuts by early 2021 and there’s chatter about an emergency rate cut coming or global coordinated central bank intervention.
They will react for certain and this reaction may well drive an aggressive counter rally in coming weeks from now extreme oversold conditions in markets.
But the bigger issue now is that central banks are very much at risk of losing final control here, having left themselves vulnerable, intervening always at the first sign of trouble, and now they have precious little ammunition to deal with a real emergency if coronavirus is turning into something much more serious.
Money printing does not start production chains or cause airlines to fly. So the risk of a global recession unfolding is a clear and present danger and then futures rallies would continue to get sold and markets may embark on a multi year bear market. That’s the risk they tried to avoid in 2019.
We can’t know how any of this plays out of course and hopes are the virus will calm down in the next month or two and then this current shock to the system can recover and pent up demand can rescue the economy and markets into the second half. It’s possible, but it may also not be possible depending on the severity. Because frankly, we are watching a historic experiment unfold:
Historic experiment:
Let’s take the longest and slowest recovery business cycle & the most indebted global economy, use cheap money to jam markets to the highest market cap to GDP valuations ever and then shut down the global supply chain and then let’s see what happens. pic.twitter.com/ubXzSeYdox— Sven Henrich (@NorthmanTrader) February 28, 2020
I repeat: Nobody can know how this will play out. However we can let the technicals guide us, the very technicals that told us this rally was unsustainable, that it had massive issues, and that a reversion was coming.
In this week’s video I’m focusing on what just happened and why, the damage that has been inflicted, the orchestra of support we witnessed on Friday, and what we may expect going forward including potential for an aggressive counter rally, but also resistance on any moves up given the technical damage that has occurred.
Please be sure to watch it in HD for clarity.
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Categories: Market Analysis, Weekly Market Brief
I think Sven is one of the rare wise voices out there….but he admitted that he never thought it would get so extreme….
Who is able to trade those kind of insane market conditions profitably? I have been in this business for 24 years…and I never saw this kind of insanity before…tsla? AApl? Amzn? MSFT? I mean seriously…
Sure, tech in 2000 was extreme….but in 2019/2020 it’s mature businesses that have totally disconnected from reality….
I have come to the conclusion that due to the endless central bank interventions these markets are impossible to trade profitably on a long term basis. Sure, one can be right for a while…until he gets whipsawed…
Think about this: it looks like helicopter money and/or outright buying of stocks by central banks is just the next step in all this madness….how reliable will TA then be?
Or does someone here truly believe that you can trade this kind of “central bank” market profitably in the long run?
Hi, right now FED can not buy stocks directly, as it is against current law. Also FED can not buy treasuries straight from country(well tresury department), have to buy them of the second hand. Also another thing is FED can not intervene directly into repo, currently it can only lend to prime dealers and what prime dealers do with the money is not up to FED so actually FED have quite small room to move.
ok…but helicopter money is an option, no?
and I think by now, we all know rules can change very rapidly…..
Agreed. Totally distorted markets.. liquidity is just too much.
Minimize your technical analysis. Trade price action only. Trade into momentum. That’s what I do. I take a piddly 4pts per day on the ES, making 4% monthly.
Sven, consider: Why else would they take trading fees away and have the president tweet that you should buy buy buy, along with great headlines of why you should by. It was so obvious, especially for you of course. And then you may get an insight as to how it’s going to end. “This is just the beginning” .. I believe this is the case. Can they milk a little more with a counter rally,..? Not sure.. just imagine, how would you manipulate a market so as to extract as much as possible and that will be the case I think.. Another few elevators down I believe in the coming weeks, with unprecedented speed again.. it will reveal the true state of the economy.. the numbers were manipulated. I’m open to your idea that this may calm down too, it’s just your airplane piece that got me… this seems to be going down like the 737 max and once it stalls , if it grabs some lift again, it can stall again any time especially if it noses up again too fast. I wouldn’t be calling any longs at this time whatsoever, and hopefully your vix gaps fill next week, but who knows, maybe Vix 90 is coming.. It will be unbelievable, but that’s what will happen if this is done on purpose.. I wonder what date Ray Dalio got his puts for in March, could be significant.
It seemed strange that Donald Trump – known to throw fits at any sign of market weakness – was strangely quiet during this whole cliff dive. And then the enormous $30+ billion surge in the final minutes of Friday’s session (and on into AH trading). Shortly thereafter Trump’s son Eric tweets that “now is a good time to be buying and that he’s 100% in?”.
In hindsight the pieces look like they fit for a huge rally and that some interested insider parties are profiting handsomely.
Uggh, I hate catching the conspiracy disease that infects so much of our thinking, but that jack looked illegitimate. It was not a Powell put. It was something else. End of month rollover? Maybe. Maybe not.
Great video. SPX retrace to 1700 looks like the worst case scenario, but probably the most probable now that recession is imminent. I too am curious to what global central banks are going to come up with. QE5 is a ‘when’ not ‘if’ and also ‘how much’.
It’s not so much about rates, it’s about central bank balance sheet expansion. That means money ‘printed’ and mainlined into the giant banks and their customers and don’t forget the hedge funds. Who will take the money and buy more financial assets ,so they inflate, usually. Don’t discount what $1TN could do before election day.
Great work Sven. Awesome charts. Hope you made a bundle!
I don’t see much commentary in MMM on the role ETF’s have played . As you know, the number of ETF’s outnumbers the number of individual stocks. I think there is big ETF selling. So if the NYMO is -136 it doesn’t really surprise me too much – considering we are used to this market being all about bull. Sure it’s huge and oversold, relative to recent history, but if I am right about possible ETF selling, maybe in the future we may see even more negative readings. For instance, one bit of panic news anecdotally I heard is people selling for retirement and don’t want to get stuck ala 2008 – i imagine they all bought big in ETF’s for the last 10 years. So maybe the extreme reading on the NYMO is a consequence of ETF selling like we haven’t seen yet. I am also interested in market similarities with 1920’s mutual funds which helped fuel the bubble then, as did share buybacks – not to mention the underlying economy falling apart well before the stock peak. Like a lot of people who have read Galbraiths chronicle I’m sure would agree (I’m no expert I’ll admit). The strength in US stocks back then was due to buyers from everywhere, including retail at the end. It’s no surprise to see the Euro strengthen on some recent sell-offs – panic out globally. I really liked the write up on the 30s as well ( a few weeks ago ). I really like your suggestion/warning of possible inflation due to a possible future relative supply shock should the virus shutdown continue and warning on bonds being at a technical extreme – something I am keeping an eye on that in some circles seems contrarian as consensus seems to be a recency bias of deflation. I’ve only been a subscriber for about a month but have been following for some time. Great work, great humour, thanks to Mella as well (does Mella do a lot more than we know about and Sven is the frontman of the team?). I’m not saying it’s over yet either. The craziness we have all seen makes me think, should the virus clear or contained better/anything positive, this could still be pumped to the election but I look forward to following more of your work to help guide.
Only Pavlovian dogs have 2 emotions, fear and greed, after this come to Jesus moment there will be ” Change you can believe in “. To MAGA ,HAHA.
Quick washout was expected but I think none of the bears, even Sven, expected exactly this speed of move. It looked like waiting for Godot since beginning of February and it came only after Feb options expiry and new moon. So many bearish bets failed and bear bus was mostly empty. I closed my positions way prematurely on Monday cash open gap, speculating on quick gap fill and reentry. This strategy obviously failed. It shows you cannot reenter such waterfall events like last week easily. No gap fills, no fibo retracements, no technicals here.
But exactly this speed of move warns me that last week losses can be recovered in just few weeks.
This is not the way your old fashioned bear markets used to begin. They never do with the bang like last Monday’s gap. They are much more treacherous. And SPX 2950 gap fill (that was the gap fill to remember !!), Sven’s VIX 46, RSI, NYMO on oversold levels etc – it all says it is finished for now. Panic move in yields is also unsustainable. Friday afternoon with selling protection towards end of session and gold selloff says risk-off trade may be finished for now.
Turnaround Friday ? So I expect test of SPX 200 DMA resistance at 3050 next week, possibly even Tuesday or Wednesday. And possible retest of all time highs before “sell in May and go away”
But I also truly respect another possibility, that this is really 100 year flood event and 2008 crisis was like walk in the park. Yields, commodities and now gold (remember gold in autumn 2008 ?) seem to agree. Crashes always come from oversold levels, like 1987 and 2008.
If that indeed is the scenario and market crashes from now then nobody will make money on it. Both bulls and bears lose during such events. If carnage continues from now, the best is to stay away. There will always be markets and opportunities.
So let’s wait and see what Monday brings
Kris, can you explain why nobody makes money on it if it’s gonna be the 100 year event? Just put your puts for a few months timeframe, or short sell, wouldn’t that work?
I think the fact it’s lining up like 08 means it will be that scenario. We’re not in 08 any more. Everyone has the chance to panic instantly from their phone and hit the sell button. Algos are also way smarter/quicker, AI has improved.. it could be over in seconds?.. We really can’t compare to 08, because technology has changed massively. Sven’s vix 46 was amazing and let’s hope for next week’s recovery, but as you probably know the moon won’t be favorable starting the 10th, and you know what day is coming 3 days later. Coincidence?
I guess the key point is, if you’re a bear, you gotta be a real bear and support the fundamentals you believe in. Unless you’re scared of QE, FED, etc continuing the distortion. But, one day they will lose it.. probably long term shorts are the best possibility here. You may get lucky and it comes in a few weeks, or you may have to wait a year.. but if you jumped off so quick initially, what about when it goes -50% in possibly 1 or 2 weeks? Can’t jump off that quick due to technicals, if can come as chaos as you say.. it won’t come in an orderly fashion and allow you to predict it, because of the massive distortion that has taken place. So far so good with technicals, but it’s from here on that you may have to go on your gut. Algos use technicals so they’re reacting as expected, but people are also at he helm, they may just decide to override and unusual things can happen.. Another key issue is that too many were enticed in the market who couldn’t afford it, so unless they have bugged out already, there could be another wave.. I believe for now they’re still hoping for a rebound, but another down spiral could trigger them out. How often were millions enticed into the market like this?? I think only 1929 comes to mind.. and so far, the chart is looking a heck of a lot like 1929!.. And yeah 1929 had a bounce which we haven’t seen yet… I think now and 1929 fits pretty well.
Everyone was thinking your crazy and laughing at you. Sven because of you and your charts i am in CASH before crash. THANK YOU… I Know you were right. The Fed are a Bunch of crooks. NOT too many people laughing now… I know there will be another PUMP and then the REAL DUMP will take place later in the year. It’s OK—Markets will rise once more so Wall Street can take all of the DUMB MONEY away again. I am not fool at this game. SVEN thank you for teaching me the right way to read charts. Please people DO NOT LISTEN to that fool Creamer ( CNBC) Clowns.. Your the best SVEN
NASDAQ 100 & NASDAQ 100 Fut – BULL Contraction vs Fibonacci Retracements Last Wave Down…
https://atafinresearchblog.wordpress.com/2020/03/02/nasdaq-100-nasdaq-100-fut-bull-contraction-vs-fibonacci-retracements-last-wave-down/