Market Analysis

The Last Hurrah

Are markets setting up for a last hurrah?

Look, I’ve made my latest technical views very clear (2020 Crash & Perfect Alignment) so you know were I stand and if course I’m continuing to monitor technical and macro development.

Yesterday’s violent rally was not a surprise. We were vastly oversold and of course participants are chasing every possible intervention headline on the planet.
The G7 is worked, the BOJ is already intervening, Australia has cut rates and pressure is on the ECB and Fed to follow suit. Indeed today the Fed already went all in on repo conducting a full $120B repo operation oversubscribed at $180B.

And now they’ve gone full pathetic panic mode by doing an emergency rate cut of 50bp.

Please don’t act surprised. I told you right at the market top they would do this:

And yes I even had a emergency rate cut countdown clock starting last week:

So again, it’s the same script, markets tank, Momma Fed comes to the rescue. How markets will handle this remains to be seen.

As I’m writing this markets are locked in a battle for control:

What’s interesting to me here is the how, when and where. It all reeks of a historic script we’ve seen before.

Check this out, this is what happened when markets dropped hard in 2007 and the Fed was forced to do a sudden 50b rate cut:

$SPX had dropped hard from the highs to a quick correction to far below the weekly Bollinger band and problems were crumbling below the growth narrative as subprime was brewing. So the Fed was under pressure to act as the yield curve has been inverting on and off and the Fed did act with a 50bp cut.

And markets responded with a fast and furious rally to new highs. The final hurrah.

And then it didn’t matter what the Fed did. The recession began in December and markets didn’t bottom until March 2009.

Does any of this sound familiar to you? It should.

$SPX just corrected to below the weekly Bollinger band off all time highs and pressure is on the Fed to cut rates by 50bp.

Well, here we are:

And the Fed has just cut by 50bp. It’s almost a complete replay here.

Could we see another fast and furious rally on the heels of a 50bp rate cut? Certainly not out of the question. After all the reaction yesterday was a very aggressive central bank stimulus chase.

So markets want reassurance, but the Fed’s move today reeks of desperation and panic, but they are throwing the kitchen sink at it and liquidity may just overwhelm everything for now.

But, as in 2007, if the business cycle is turning in earnest it doesn’t matter how much they throw at this. The cycle would turn and the Fed would have to get ever more aggressive.

There’s a problem with all this though and that is this (chart not including today’s rate cut):

Over 500bp in rate cuts in 2000 and 2007 were required to stop the bleeding. Well, here we are, now only 4 rate cuts from zero.

So best of luck getting the same amount of stimulus effect out of much less available stimulus, especially considering we’re here now following 9 months of stimulus already having flown into markets and more as we speak.

So if a vicious rally is to emerge a la 2007 with every central bank on the planet throwing the kitchen sink at the virus know that they are combating a similar setup with one arm tied behind their backs:

This situation here is so unprecedented and concerning for this very reason: Never before have we faced a global recession with to much debt and so little stimulus ammunition. And what is stimulus but more debt?

And so all this stimulus again thrown at markets may just turn out to be the last hurrah. That is the risk here.

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Categories: Market Analysis, Opinion

8 replies »

  1. “Over 500bp in rate cuts in 2000 and 2007 were required to stop the bleeding. Well, here we are, now only 4 rate cuts from zero.”
    From 0 yes, but unlimited into negative.

  2. US markets are back to exactly where they were prior to the rate cut. I think the Fed were foolish, if they hadn’t wasted those two rounds it wouldn’t have been so obvious that they were blanks. Still, I’m not surprised and if they thought it worth doing ’twas better done early rather than late. With both luck and judgement I’ve had several good trades today, thankyou Mr Powell.

  3. After last week and seeing yesterday, I have three ways to go. When considering I’m not a trading pro (and probably knowing too much for my own good), I could’ve gone long, short, or watched. Today I watched……

    • Watching is the key. Getting to know when changes of direction are likely, when your perceptions are right and wrong, how to place stops dependent on markets’ general behavior, how to minimise losses yet maximise likelihood of good gains. Watching is good; and when you act do it fast with minimal prevarication – so think what you MIGHT be intending to do in advance, but overthinking is a hindrance when your feeling is accurate. The last 30 minutes’ ramp has moved earlier in the recent turmoil (to as much as 100 minutes, today), but it’s not guaranteed to work. I’m certainly not a pro but do OK by my wisely modest ambition.

      • Today was a case in point of ramp not guaranteed, the last hour was wild I can’t remember a day when SPX choppily bounced around in a 50 point range like that before the close. I scraped a profit but it could easily have gone otherwise.

        Methinks it doesn’t bode well for tomorrow and days to come. My inclination is to expect a further substantial down until proven otherwise.

        Today I’d expected an upwards mood so was fortuitously positioned for the rate cut, luck is half the battle.

  4. Why don’t they just come out and say what they want. Increase the deficit to $2TN/yr and have the Fed monetize most of it. All other nations, with central banks worth paying attention to, do the same thing. It’s a straightforward policy/political decision. Why do they pretend this isn’t the idea? If instead of the wankin fuckin bankers and their customers taking most of it spend that money on nice things for people. The alternative, deflation and poverty, isn’t exactly an attractive option.

  5. As always, the biggest danger is getting too bearish. For me, I have several ways to get too bearish. One: read all manner of articles detailing the bear case. I like Sven, I confine myself to reading Sven. Two: Start talking to other people trying to make the bear case. Repeat it, over and over, restating it in different ways. When you hear this story, spoken in your own voice, and deeply researched, you will come to believe it. I know I will.

    If I read 1.5 articles about the bear case (by that I mean ‘short to zero’) but do not finish the second article, I’m probably OK. If I go on to finish that second article and try to convince 2-3 other people of the bearish case, I will be cooked. I will buy puts on everything and leave multiple layers of skin on the floor next RYFO rally.

    Just sayin’. I have resolved, this time, NOT to try to convince anyone of anything. Least of all, me.

  6. Imagime if the fed had dropped from 2% to 1% on Tuesday, had they not foolishly expanded the market put throughout 2019. Sad they only cut rates for the stock market, and not enough will be left for a possible pandemic. And what will they do if we get an inflation shock from the coronavirus? Yikes…good luck with all your investments! Of course only one matters, your health…


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