Market Analysis

Destruction

I sense there is a tendency right now to say that this correction is just similar to the Q4 2018 correction. And it’s true on the surface you can make that argument. 20% decline on $SPX, oversold readings similar on several indicators and all that could make the case for business as usual.

After all the Fed has cut and will cut some more and stimulus bazookas will get launched all over the place. I get it.

But I want to add some nuance to all this and that is to state clearly: This is not anything like the Q4 2018 correction. It’s worse, much worse and it’s left utter destruction in its wake and I want to highlight some of this so everyone can get get an appreciation for what just happened and why we may not expect a magic recovery similar following December 2018.

For one, back then we went from a tightening environment (brief as it was) to an easing one. The jawboning force was strong. The liquidity multiple expansion was as awe-inspiring as it was foolhardy.

But it has turned into an utter disaster for investors. Index chart after index chart containing stocks of the broader market highlight that the entire 2019 rally was in essence the biggest bull trap in many years.

Here, stand in awe at the utter capital destruction that has just taken place.

$DJIA back to January 2019 levels:

What a chart like this basically says is that every buyer in the past 13 months (who didn’t sell) is under water. That’s a lot of buying.

Anybody that has bought stocks in the past year has been taken to the cleaners. ETFs, pension funds, institutions, hedge funds, buybacks, retail, you name it.

This is mass destruction. And ALL are praying right now for a big rally to break even or recover some of these losses. Heck any buyers over the past 2 weeks just got hammered.

And the destruction is even worse in many other indices.

Small caps:

Financials:

The banking index:

Transports:

It’s a complete horror show.

Now, this is not anything like Q4 2018. This is deeper, steeper, and it happened so fast most didn’t get out. They’re trapped and hence any rallies in the future are subject to major resistance.

Perhaps the broader picture can be best highlighted with a chart of the broader $NYSE index:

Just 3 weeks ago people were celebrating the greatest bull market ever. This here is a shock, full blown shock to the entire asset spectrum.

A shock like this does not magically “V” shape itself out of trouble.

Sure, the charts are massively oversold and the printing bazookas will come. The problem is of course, they’ve already done all that:

All for naught and now their stimulus efficacy is greatly diminished. I was highly critical of last year’s Fed induced liquidity driven multiple expansion rally.

Frankly I thought it was stupid, but participants embraced it and now people paid the price and are hoping for the Fed to bail them out again.

The entire spectacle is quite unseemly to me. Again they’re talking tax cuts and bailouts and I’ve made my views clear on this:

So let’s be clear: This was not a garden variety 20% market correction. This was a crash in multiple and widely held asset classes.

And as Dan Nathan mentioned today, these type of events come with a very specific risk:

So indeed it’ll all come down to efficacy. Can they bail the construct one more time or is this all destined for failure, a global recession unavoidable now this long in the tooth and highly indebted business cycle?

It’s the biggest question with far reaching consequences. The up trend is busted. Big time. Price needs to get back above the megaphone trend line or the technical picture suggests a much more dire conclusion if a global recession unfolds:

We have ECB, FED and BOJ meetings coming up. None can afford to disappoint markets. Their job is now to restore confidence into badly damaged markets and hurt investors. If rally attempts fail then what we’ve seen here in Q1 2020 is not the end. It’s the beginning.

I repeat: This is not like Q4 2018. The damage is much more pervasive. Last year’s central bank interventions trapped investors in some of the highest market valuations in history, but produced little growth. In fact they’ve produced no growth. None. And now growth is slowing anyways implying this was a policy disaster that has hurt people as it encouraged investors to chase stocks.

What’s the old saw? Fool me once shame on you, fool me twice shame on me.

Or the George Bush version if you prefer 😉


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Categories: Market Analysis

25 replies »

  1. I was thinking to subscribe until I saw the video you posted of President Bush. Nothing like pissing off your customers to get more subscribers. Head shaker.

      • It’s both a joke and political. If you’re thinking of subscribing, pay attention to the technical and economic analysis, which is really good. And take the politics with a grain of salt. Or even dispute it – Sven can handle contrary notions that are well-reasoned.

        But just to prove it’s not political, I’m thinking Sven will be showing a Biden semantic fumble soon! Right? 😉

    • If you ever think of subscribing to a pro trader … this guy Sven is the only guy you will ever need…so I wouldn’t piss him off … IMHO 😎

  2. Standing ovation! “If they can’t manage through a crisis because they didn’t plan and just squandered cash on buybacks I say let them fail. It’s called capitalism. Right?” Capitalism is survival of the fittest, stop with the hangers on companies that shouldn’t exist. The wall street pacifier needs to be taken away and grow up. Thanks, Sven, can’t remember a better comment.

  3. Just after midnight today ProShares sent me email about new proposed federal regulations making it much more difficult to invest in their inverse and leveraged funds.
    https://www.proshares.com/important_notice.pdf
    I have been using ProShares inverse funds as a hedge recently as I am less comfortable with buying puts. I suppose this is another attempt to limit short selling.

  4. Morningstar says this correction is a gross overreaction a they “Only” predict 200,000 US deaths. Morningstar “gross” comments below per CNBC:

    “Although we project a grim set of scenarios in terms of fatalities in our analysis, our view on the economic impact is much more sanguine,” the report said. Anderson and Caldwell added that “equity valuations on average should be unscathed if our long-term projections on GDP are correct. Therefore, we think a 10%+ fall in global equities since the outbreak began is a gross overreaction.”

    Still, the firm sees a substantial human toll — 8 million deaths globally, including some 200,000 in the U.S., well above high-end forecast for the flu of 61,000.

  5. Sven,

    ARE YOU NOT ENTERTAINED!?!?!?

    =)

    Thanks for keeping everyone grounded in some truth over the last few months. Oil panic, virus panic, election panic….no problem, yet the real risk if people panic. I’d recommend Congress send a bottle of Valium instead of a payroll tax at this point…

  6. I agree with your Article Sven. This is an ongoing slow-motion train wreck crash. You can bet that there will be stimulus & liquidity. By hook or by crook they will do all that they can to push the markets back up to kick the can down the road a little further. Interesting that in March of 2009 when the bottom was put in during that financial crisis many people to this day still don’t know why that happened. It was the FASB that allowed accounting rule changes that enabled companies to be able to hide their troubled assets on their books as “level 3 assets” or “off balance sheet assets” which put a bottom in the markets and has since brought us to where we are today…………..11 years later as of yesterday! We still have not recovered from the 08/09 crisis. I do think many people are still in shock as to what has just happened. Human nature will not let them really look into where we are at right now because it’s too frightening. We are all flying through the air from a crash and no one knows where we are going to land. I think that if you peel away the strips of panic, fear and desperation from people deep down they know we are all in great deal of economic trouble…………..but the thought of the dire consequences that awaits us keeps us into a state of denial. Self preservation first and foremost…………….the real life reality of what just happened will have to wait for now. Calling Central Bankers and Mr. Fed…….please, just one more stimulus package?………….please!

  7. The readers here should not dismiss the awesome power of the Fed. Twenty years ago this market would be a slam dunk for the bears, but today I could easily see the Fed coming in and straight out buying equities.

    I don’t like it either, but I somehow don’t think the Donald will just roll over and eat red tape.

    Yet the implacable foe called covid-19 disrupts the Wall Street narrative machine to such an extent that maybe no one will buy into the Fed’s moves. It will be hard to paint of picture of global reflation when the whole world is one big quarantine zone.

  8. Bloomberg article today (listed below) about getting rid of cash due to pandemic risks. Yes, pushing buttons on a debt card kiosk or credit card kiosk that 1,000 other people have touched that day, sooo much better than the cash that has been in your pocket for a week. Note the virus can stay alive on glass, plastic, or other smooth surface for 2-3 days…

    https://www.bloomberg.com/news/articles/2020-03-11/fear-of-virus-tainted-dollars-opens-new-front-in-war-on-cash?srnd=premium

    Sven, just imagine the chaos the fed could inflict on Americans if they get Congress to ban cash. Feds could make bank savings -10% on Tuesday to get people to spend their savings. God powers indeed! Nothing like a panic to get people to do something destructive to their future.

  9. The prices of the FANGish type stocks are near where they were in early Oct 2019, the same time when the Fed began goosing the market with its REPO machinations.

    The twenty percent down we’ve seen thus far may just be the appetizer. I think we may heading a down another twenty percent (eventually), so if things continue to deteriorate then I’m looking for 2200-2300 on the S&P. Having traded several bear markets, you have to realize time is the most important factor. Declines go one for weeks and months, until longs are in deep psychological pain. But you can fully expect a bounce with whatever the Fed cooks up next week, so we may have a short term bottom here.

    You have to wait. Sven’s charts certainly suggest further down to go.

  10. SBA loans of $50B, deferred taxes for effected companies of $200B, low probability of payroll tax break (can not be done though exec order)….futures down around 3.5%, oil down around 6%…president policy “bazooka” was more like a marshmellow slingshot.

    What was needed was an executive order of $1,000 per adult, and say $500 per child mailed directly to each consumer immediately. What we are experiencing is human panic, and it is only going to get worse as people like Tom Hanks and famous NBA players get the virus like we seen tonight. God help us if one of “the famous” people die from this virus as a majority of people will freak out. At this point, a few trillion sent directly to every citizen is what it is going to take to slow the herd from freaking out further.

    I could see this circus going on until July, as by July the virus should burn itself out like has happened with previous “SARS” virus outbreaks in the past. Going to be a rough ride from now until July, and possibly again next Fall if the virus returns. The human OVER-reactions will be much worse than the virus itself…

    Good luck with all your investments!

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