Market Analysis

The Big Picture

We’re in the midst of the most volatile market environment in our lifetimes. Even more so than 2008. The daily noise is incredible, with headlines nonstop and wild price movements every hour and deep into the night as futures markets cover a wide terrain of price action amongst liquidations.

A dangerous market for any participant.

Amid the noise it is important to step back and look at the big picture and I’ll do this here because I think it’s important for everyone interested to understand.

The bull market has been officially declared dead now that $DJIA has dropped over 10,000 points in a matter of 5 weeks $SPX down nearly 30% off its highs and other indices such $IWM, $BKX and $NYSE actually reverting all the way back to their 2016 lows. 4 years of buying taken out in 5 weeks.

It really is stunning, the most epic crash in our time:

But I will make perhaps a controversial statement. The structural bull market did not end in 2020. No Sir, it ended in the fall of 2018 and I can prove it.

See there is this structural chart I’ve been tracking and posting for the better part of a year, most recently I posted it in December 2019:

Here’s the original chart for easier viewing:

From my perch the structural bull market ended when $TNX hit is long term trend line in October of 2018. It was also the time that the yield curve started inverting.

$SPX soon followed the historic message and broke its 2009 up trend in December 2018. For all intents and purposes it was over then. Just like it was over in all the previous occasions, especially 2000 and 2007.

The missing link though: Unemployment didn’t budge, it stayed historically low.

But the Fed reacted nevertheless and flipped policy and started cutting rates and expanded its balance sheet and added repo to the mix. This lead not only to a massive multiple expansion rally in 2019, but it also produced the greatest bull trap of all time. Why? Because the structural bull market was already over, but people refused to see it. Too great was the attraction of easy money.

In process buyers pushed $SPX higher and higher into confluence of 3 major trend lines. 2007, 2009 and 1987. Notable: $SPX never, ever recaptured its broken trend line that broke in December of 2018, it just kept kissing it from the underside, never confirming the resumption of the bull trend.

The yield curve history suggested the yield curve would steepen, yields would keep dropping and markets would sell off and unemployment would rise.

And here we are:

All of these things have come to fruition. And unemployment will now jump dramatically as coronavirus has served as the trigger.

And be sure, the coronavirus will continue to be blamed.

But you know better. The structural bull market ended in 2018. The macro picture already told us. It was already set in motion. But central banks brought about a final hurrah in equity prices and trapped everybody long.

And what is this macro picture telling us now? That it’s not over, we’re just at the beginning of a long journey.

Yes rallies will come and I made the case for one yesterday (Month End Rally), but these cycle turns can last a year, two or even three. But we can’t know.

For one the macro economy is more vulnerable than ever. Why? Because:

Central banks are throwing the kitchen sink at this as we speak and so far to no avail. Hope is now that big fiscal stimulus packages will end up doing the trick.
And perhaps they  will and produce a short term big reflation event especially if the coronavirus situation can be brought under control.

But then what are we left with? The greatest debt expansion ever will be saddled with even more debt:

Already on schedule for a $1 trillion deficit in 2020 before the crisis the US could easily get hit with $2-$3 trillion deficits in the next couple of years. In recent months both Jay Powell and Janet Yellen had been warning about the unsustainable expansion of US debt. That was before this crisis.

Yes they all need to intervene again now and more debt will be added but how will any of this makes the global economy stronger in the long term? None of the leaders of the world, be it fiscal or monetary have addressed any structural solutions in the past 20 years.

The sins of these past failures are now paid in spades with the worst market crash in our lifetimes. And the solution here is now to do the same all over again. I understand why we are doing it, and I hope they succeed while this crisis is ongoing as so many people are hurting. but we can’t keep doing the same thing over and over and expect different results. This is the definition of insanity. And so the structural charts demand penance. And this penance will be paid for dearly in the long run.

So enjoy any recovery rally when it comes, but beware it likely will not last. That’s what the big picture is telling you.

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Categories: Market Analysis, Opinion

15 replies »

  1. Sven – This paragraph was confusing:

    “Yes rallies will come and I made the case for one yesterday (Month End Rally), but these cycle turns can last a year, two or even three. But we can’t know.”

    You’re looking for a Month End Rally lasting 2-3 years? (Or 2-3 days, weeks, or months?)

    Thanks for any clarification, if possible

    • I think Sven was saying that interim rallies can happen during a bear cycle (the bear cycle could last 1, 2, or 3 years..). So rallies to come, but still within overall bear market.
      Correct me if I’m wrong.

  2. I was one who truly believed the October 2018 TOP was THE TOP…..BTW, look at interest rates the 10 year….they could have bottomed….now with even more debt coming to the market, this is a recipee for total disaster.

  3. Right now everyone is still thinking in terms of the old rules.

    Charlie Mcelligot over at Nomura is proposing less volatility after quad witching on Friday (what you would normally expect) , and Sven is suggesting the possibility of a rally to 2800. But with all the money lost, and the potential for major human losses in the US I am going to take the contrarian position right now. I am flush with cash, but only tinkering on the edges with small lots. I realized I can’t press the buy button in a serious way until the extent of the human losses are known. Could all that QE make a big difference? – Yes, of course, – many traders are playing with other people’s money after all.

    But if the German’s were bombing cities across the US would you be buying stock? The virus may take the very same toll. This is not a financial crisis but the market is still treating it like one.

    • Dan, share the same thoughts. Understand the bounce concept as all past downturns bounce before hitting bottoms. Just debating in my head is this situation different being ignited by a disease. With 2001, it was one segment of the market that got killed. But the economy was still running. In 2008, we were on the edge of a banking failure, which would have been huge, but the guy on the street had no idea how close we were to the edge and kept about their business. Today, it is a dead stop for most businesses and we don’t know for how long. So listening to CNBC right now, one broker is saying all the bad news is all priced in. I am having a hard time seeing a 30% drop pricing in all the bad news as this will be with us for a while. Yes, we will get use to it, but business is not going to come roaring back and people will be hesitant to go out in in public and will want to hang on to their cash reserves.

  4. Per Bloomberg today:

    Italy surpassed China as the country with the most coronavirus deaths, as its number of fatalities reached 3,405 and the pandemic’s global spread accelerates. China has reported 3,245 deaths.


    So we know for a fact that China has 20x more citizens than Italy, so does anyone trust China when they state all is well with zero cases reported today? Something does not add up, so proceed with caution in this market frenzy as it would seem the death rate is much, much higher than China claimed, and we have a few more weeks until we know the truth…

    • Yes, it will be several weeks before we come close to glimpsing the truth of even the first phase of this virus, and there will almost certainly be at least a second next winter. UK still accelerating rapidly and not expecting peak for 2+ months, no signs of any slowdown anywhere in Europe, USA has hardly tested anyone so no clue there (I’d say USA’s data is the most suspect of all for now), Africa and most of Asia barely started / minimal data. Well done to China and SE Asia who seem to have passed their first peak. However sceptical one might be of chinese data there certainly has been a significant reduction of cases and deaths there.

      We are probably looking at 3+ months of seriously negative economic function just about everywhere getting through the initial peak. Far too soon to guess the longer term effect.

  5. Sven, you say

    None of the leaders of the world, be it fiscal or monetary have addressed any structural solutions in the past 20 years.

    What do you suggest as solutions?

  6. It has certainly felt that markets were on borrowed time since at least October 2018, probably longer, perhaps even January 2018. But as we know they can remain silly for far longer than is logical. Your October 2018 call seems a sound one, Sven.

    Today’s up day was very insipid, all given up in first couple of after hours futures. Could be a big down day again on quad witching Friday tomorrow but I wouldn’t sleep so easy if I placed that bet afore nod.

    USA COVID-19 data has started the rapid increase stage and, if they’re now doing remotely adequate testing, likely to increase extremely scarily over next 2+ weeks. I think the markets will be very spooked. I’d like a decent rally in US stocks tomorrow to sell into the weekend.

  7. Since 2008, the Fed’s QE and repo money printing has been out of control. Now it is beyond the pail. Let’s ask ourselves this question….where in history did this type of action have a positive effect for a country and its people? The Fed is pure evil. Insidious and destructive by nature. Its existence is unconstitutional. An Audit the Fed bill has been floating around Congress for years, but cannot garner enough support. We may be doomed…. As a now deceased American icon once wrote:

    The wheel is turning and you can’t slow down,
    You can’t let go and you can’t hold on,
    You can’t go back and you can’t stand still,
    If the thunder don’t get you then the lightning will.

    Profound indeed.

  8. Hi Sven,

    So far, this looks more like a 87 crash than 2000 or 2007. 87 seemed to recover much, much faster. Any bets which way this will go in 2020? Thank you sir!

  9. Sven,

    Thanks as always for you Spot On comments.

    What does the multi decade trend line show / tell you?

    If memory serves, the 667 SPX low in March 09 smacked support at the multi decade trend line.

    Where is that trend line now, extending from the early 30s and or early 80s lows?

    Many Thanks


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