Market Analysis

Collapse

We just witnessed a global collapse in asset prices the likes we haven’t seen before. Not even in 2008 or 2000. All these prior beginnings of bear markets happened over time, relatively slowly at first, then accelerating to the downside.

This collapse here has come from some of the historically most stretched valuations ever setting the stage for the biggest bull trap ever. The coronavirus that no one could have predicted is brutally punishing investors that complacently bought into the multiple expansion story that was sold to them by Wall Street. Technical signals that outlined trouble way in advance were ignored while the Big Short 2 was already calling for a massive explosion in $VIX way before anybody ever heard of corona virus.

Worse, there is zero visibility going forward as nobody knows how to price in collapsing revenues and earnings amid entire countries shutting down virtually all public gatherings and activities. Denmark just shut down all of its borders on Friday, flight cancellations everywhere, the planet is literally shutting down in unprecedented fashion.

The message is clear:

The question is not if, but how long and deep:

The damage is not theoretical, it’s real as we just saw the fasted collapse in asset prices in history:

And it’s global, deep and pervasive.

$FTSE collapse to lows from 8 years ago:

$DAX collapsed from all time highs to the lows from 2016:

The US broader $NYSE dropped to below the US election lows of 2016:

Absolute carnage to investor portfolios who can only be assumed to have caught by total surprise by the severity of the 2020 market crash. The buy the dip mentality so pervasive over the last 11 years have come to a sudden end: Death by impact.

The damage is pervasive and structurally impacting. Trapped longs looking for rescue and salvation with confidence taking a major hit. And the only hope now are technically massive oversold readings, a Fed desperate trying to regain control and a desperate search for signs that the coronavirus situation can be brought under control.

Central bank efforts over the past 2 weeks have been a miserable failure and emergency rate cuts have not been able to stem the tide of system selling and liquidations. Until Friday that is perhaps. The Fed resorted to unprecedented and some may say pathetically desperate efforts to stem the bleeding by announcing $500B repos including a $1 trillion repo on Friday.

To put these numbers in perspective:

There is no precedence for the situation we are facing now. An epic battle of humanity trying to combat a new virus for which there is no cure and still no all clear signal, a global asset price collapse at the end of an aging and highly indebted business cycle and central banks with limited ammunition desperately trying to regain and maintain control.

And this week the Fed is on tap to prove it can still reassert control. Already now expected to cut rates to zero large scale asset purchases and a relaunch of full QE is perhaps only a question of when and not if. Given the current state of markets perhaps the Fed can’t afford to wait. So this coming week is key for markets and a Fed whose credibility is already on the ropes.

It’s a very difficult environment for investors and traders as the action is whipsawing more intensely than we’ve ever seen before.

But technicals help us to guide us through the challenge. Even Friday’s record bounce rally was in the technical picture.

What are the risks of a major bear market yet to come and what are the rally opportunities?

For our analysis please see this weekend’s market review video:

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14 replies »

  1. We’re just crossing the topping megaphone, Sven.

    Support @2100 on the S&P at EOM.

    The real collapse comes after the June FOMC when they are shown to be helpless in the face of deflation.

  2. the Fed will prove to be woefully impotent in the face of global deflationary pressures that will rapidly mount.

  3. Awesome video…last few minutes are most instructive (if Coronavirus magically goes away)..David Settle, another very good chartist says, surprisingly, his charts very clearly say that we’re actually coming out of multi-year recession. And if we get another bazooka+ on Wednesday, plus fiscal stimulus that matches the described scale of crisis, ie helicopter money (which Nouriel Roubini is predicting is coming), then we could EASILY be on our way to Dow 35K by October, just in time for you know what………the crisis would’ve allowed the fed and government to take care of plumbing in the system (boring shit that the American people don’t care about and leave to the nerds to debate), and the psychological momentum of consumers, who were shown to the abyss, but instead were given their jobs back plus $1000 will really give momentum to the markets…….as you said, March is the down month in election year…it was uncomfortable but necessary. Bottom line, it’s a 50/50 that it goes to 18000 or 35000, with the former assuming that Coronavirus, which has killed fewer people than the flu, cannot be contained in the headlines vs. the full and absolute emergency powers of the Fed, Treasury, President, and Congress.

  4. Thanks Sven, I find your potential head and shoulders persuasive but that may just be my bias, not sure yet. I’m sure the coronavirus downside is not fully priced in, for it to be USA will have to show a steady reduction in new cases and deaths, just now I think we are in the early foothills of the exponential explosion. The clampdown has almost certainly barely started, and it will have severe economic effects.

    We’ll be lucky to stop at the poop pants levels, will be interesting to see what the charts are hinting in a couple of weeks time as the patterns play out. If I were Fed head I would be very happy for the president to sack me right now, no viable options or ammo left.

    Looking further ahead. There seem to be two forks: systemic collapse or, secondly, extreme measures save the financial system. In latter case what longer term repercussions will the extreme measures have and might they too collapse the system?

    My advice: gain the skills to grow / produce your own food and be in a place to do it.

  5. Sven – Excellent analysis and explanation of the factors that play into support and rallies, even in the midst of an unprecedented crash. Though the 1987 crash was steep, the vertical crash occurred in one day. The current downturn is playing out steeply over a few weeks. The combination you’ve outlined of long-term weakening fundamentals during an extreme liquidity bubble in a few huge stocks and in one sector (tech) is compounded by a global virus quarantine black swan event, and the bottom blows out. Thanks for the very cogent video!

  6. I don’t know why, but I’m just a professional, in man on fire, sort of has a analogy to portfolio managers.

  7. Thanks Sven, wonderful work! I think lower is coming. We may bounce to ~2900, 3000, 3100, but the market will flush down again. The reason I believe lower is that there are too many people, investors, who are not rattled yet and are thinking this area may be a good entry point for long term investments. This not “blood on the streets” where investors are too scared to invest for fear the market will go lower. In a crash, the “blood in the streets” moment signals a potential market bottom, but with investors thinking this is a good long entry point is more of the buy the dip mentality. I think the 2016 lows are possible, maybe that will be the “blood in the streets” moment.

  8. I’m in Australia and we have essentially just closed our borders – everybody has to self isolate if coming in for 14 days… we are getting ahead of the curve i hope luckily, but will be huge impact on the economy. The Government is probably doing the right thing here and hopefully we can open again soon, but I think they’ve essentially made tourism businesses here insolvent overnight…. Yes long term earnings will be there, but short term I don’t know how the global markets don’t crash harder and further…

  9. I am from Belgium and here the country is basically gradually shutting down (school, restaurants and bars are all closed for 3 weeks). The borders between European countries are closing as well and people are generally advised not to travel. While we have one of the best healthcare systems of Europe and one of the highest intensive care beds per capita, the actions are likely not sufficient to prevent a colapse of the system. Without action, we would max-out our capacity by the end of March, now expectations are that we might make it to late april if all goes well but expets warn that we may not have a peak before mid may. I think we will go in full lock-down within one week and it may last more than a month. The reason why this is all necessary no matter the economic cost is simple: a breakdown of the healthcare system will cost us 5x to 10x more casualties. In that case, decissions will need to be made who will be helped and who not (including people suffering from other critical diseases or injuries). It is the choices northern Italy has to make at the moment. It is

    All of this will happen in the US as well and it is going very, very fast. I cannot imagine that against this tsunami of fear there will be any support from financial engineering. We may go much, much lower first, probably in a few algo-trading supported bumps as seen last week, clearing some of the gaps.

  10. So, and so, and so. Fed cuts to zero and pumps yet more paper into the fire. JP can feel safe playing russian roulette with all the Fed toys now, they are out of ammo. Will it work? Very doubtful, market more likely to respond ‘why is the Fed so spooked? and should we be?’. Glad I bought gold on Friday.

  11. Green close Monday? Well, looks like we’ll get it in VIX and GLD. Pity about stocks (SPX futures -125 @2215 GMT). Nice one Fed, nice one son, nice one Fed, let’s have another one! Oh, we can’t, all out of toys. I wonder what Trumpchild will demand now? I’m sure he has a perfect plan.

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