Market Analysis

The Three Pillars

New bull market? No. Unproven. New lows to come or a retest? No. Unproven. Markets are engaged in a key battle between the worst evolving fundamental picture in our lifetimes on the one hand, and the largest set of liquidity injections in history. A looming $3.7 trillion deficit, a Fed balance sheets on a path to $10 trillion, zero rates as far as the eye can see and even calls for negative rates in the US with no plan or vision to ever extract ourselves from this future growth sapping venture. Record deficits, record debt, record unemployment are not a recipe for organic growth. Far from it. But let’s chase record liquidity injections.

The footprints of these liquidity injections can be found in the distortions in asset prices versus the fundamentals. And this is what this market right now is all about, the three pillars: Fundamentals, liquidity and technicals.

Last week we saw a correction off of the key monthly 2oMA pivot (Just One Chart), this rejection produced a 170 handle correction on $ES, then more liquidity announcements on the side of the Fed on Thursday evening, and a new stimulus package by Congress to the tune of nearly half a trillion dollars and the correction was again saved, but has so far produced lower highs.

This is what it takes. Ever more intervention. But hopes for a structural quick recovery are misplaced. Recovery yes, but back to where we were? Hardly.

For a run down on the macro picture I encourage you to watch these two interviews belie if you haven’t seen them:

Firstly, my own take on things on the macro view via ABC in Australia this week:

And second, this take from Mohammed El-Erian on the cognitive failure that is taking place in markets right now:

The liquidity injections can’t fix the economy, all they can do it goose asset prices above their fundamental worth.

Next week will be an important week in markets: A key new Fed meeting next week, what will they think of now? And of course we have month end with motivation to perhaps mark up stocks right in front of Sell in May? In addition, the big 5 mega cap tech stocks that have carried this entire market on the way up last year (and are again doing so now) will report earnings and speak to outlooks.

Be clear without these 5 stocks the entire index picture would look far worse than it now appears:

Be the massive divergence in equal weight vis a via $SPX:

Or be it relative index performance (since the January 2018 highs):

The largest liquidity injections in history and 5 stocks only are masking the extent of the damage inflicted on markets. The bull market remains unproven. Bulls need to prove their case by getting above key resistance levels and then defend these areas as support. Without capturing these levels this rally here looks to follow the historic script of a bear market counter rally.

For the levels and this week’s macro and technical assessment please see the video below:

Please be sure to watch it in HD for clarity.
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9 replies »

  1. yes Sven, it’s as if debt really doesn’t matter….I think at some point, as in Greece, interest rates will rise dramatically….

  2. Big thanks Sven for doing this summary despite the glorious spring morning that must have tempted you. Important week ahead, maybe. Some important earnings and guidance, will the Fed pull some strange rabbit from one of its hats?

    SPX 2800 is being defended hard, topping 2845 brings important resistance around 2900 into play – a confirmed break above that and it could be off to the moon again. I would be a cautious buyer above 2880. The more probable break below 2780 could see 2500 in few days. Perhaps sideways / up slightly into Fed, fakeout up then hard down? Or up, LOL. Recently markets have been ignoring the dire fundamental data, how long can that continue?

    For now the liquidity pump is just winning over fundamentals. TA could be the arbiter but it’s mostly on the sidelines until proven otherwise, albeit with a bearish inclination. Interesting.

  3. This marketplace is so done, distorted and broken. We are totally out with all of our investments now. A momentum reset crash is just around the corner. We have picked up our pail and shovel and have left the sandbox. These lock downs were a HUGE mistake and have destroyed economies, supply chains, businesses and consumers everywhere……………most people just can’t see it yet. My advice………….preserve what you have now………..and get out to safety…FAST! Time is very short now.

  4. I listened to several recent conference calls for big name tech.
    The companies made negative forecasts, yet the analysts gave them a complete pass on providing details. Very similar in tone to the last several quarters.

    Looking at the vix term structure it seems like we have more upside. The market is pricing in a v shaped recovery, although bonds are not going along with the game plan so far.

    My guess is, as with the covid crisis any drop will come without notice. Everything will seem fine until it isn’t.


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