Market Analysis

Smackdown

A violent rejection in markets following a furious rally that began on March 23. Small caps rallied 10% in 3 days only to give it all away in just 2 days.
A coincidence? Hardly. Firstly the risk levels of this rally were well advertised in advance including on March 28 in “Answers”. Technical patterns forming then were already suggesting that the price levels just reached were a distinct possibility. And a furious rally to come that would be awe-inspiring was also suggested in the 1929 redux posted on the day of the lows. No rallies are more aggressive than bear market rallies and seeing April producing one of the most aggressive rallies in decades surely fits that script.

Markets, it could be argued, just followed a historic script that was advertised well in advance despite historic interventions on the monetary and fiscal fronts.

And despite all these interventions markets showed a notable technical rejection at precisely at the same end zone as during prior bear market rallies, the monthly 15MA:

The implications could be profound for these previous bear market rallies set the stage for new market lows to come.

None of this is confirmed of course for the battle between liquidity, fundamentals and technicals will continue and the market path in May and June will likely tell us a lot more.

But note  what happened this week coinciding with the technical tag and subsequent rejections.

Markets galloped to a massively overvalued 138% market cap to GDP valuation:

Valuations entirely inconsistent with the economic reality and earnings picture and outlook on the ground.

One person to seemingly agree is Warran Buffett whose name has been associated in the past with the very market cap to GDP measure, hence coined the Buffett indicator.

This weekend Buffett indicated to shareholders that he’s not finding places of value to invest and has announced the selling of all airline shares with the view that the impacts of the recent crisis will not magically disappear but will take time to filter through the system:

Of further note: Investors suddenly appeared to get cold feet on Thursday realizing that the Fed suddenly had drastically reduced the pace of its balance sheet expansion:

While the interventions are still historically gigantic a drastic reduction in incremental liquidity amounts to a relative tightening. Markets that have been entirely dependent on artificial liquidity have yet to prove they can do without. In fact all evidence points to the contrary, for the liquidity reduction in 2018 resulted in a massive market correction and the 2019 rally didn’t really take off until the Fed expanded its balance sheet by nearly half a trillion dollars into Q4 and Q1.

No, last week’s month end rally disappeared as quickly as it appeared leaving a massive weekly rejection candle:

A rejection that occurred ironically from the very same price and date as the the rejection in 2019 when unemployment was 3.5%. Now we have 30M newly unemployed and Q2 GDP looking to drop between 20%-30% following a 4.8% drop inQ1 GDP.

We live in a wolrd where some believe the Fed can just magically create GDP out of thin air:

Just make it up. We will soon find whether his proposition will hold true. May and June may well turn out to be pivotal months for markets. The historic script suggests some more market volatility ahead, the liquidity script, should it remain in control, will continue to elevate asset prices above their fundamental worth.

For the latest technical review including risk and support levels please see the market video below:

Please be sure to watch it in HD for clarity.


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15 replies »

  1. Spot on. Many thanks for all your work to inform, educate, and share your insights. Subscribing to your service has helped me greatly. #1 Patience, #2 When nothing matters, technicals do and #3 Patience. Cheers

    • Yes, patience for sure….as the Russell and NDX are showing a bit of a different story than the broader SPX….

  2. Hello. Thank you for your in-depth explanations.
    Can you explain where you got the FRED chart from? I went to https://fred.stlouisfed.org/series/WALCL#0
    but couldn’t find the same chart as yours.
    Also the red line and the blue line have the same annotations (same legend).
    Please explain more on this chart. Thank you.

    • Hi, the way I read it, the two vertical axes refer to different things. The red line refers to the right vertical axis (fed total asset purchases in $). The blue line corresponds to the left vertical axis (I think the relative rate of change of Fed asset purchases in $) – which are in the process of decreasing.
      Correct me if you think otherwise.

      • one shows change ( increase) in fed assets. the other shows total fed assets.. axis starts at 4 trillion

  3. Like many people the initial market crash caught us by surprise. We waited for the Bear market rally and went to cash at the 50% retracement levels to be safe. We didn’t want to go as far as the 61.8 retracement levels knowing that historically after severe market crashes Bear market rallies usually make it to the 61.8 levels. My second point to get out fast is the Fed. I just don’t trust how much longer they can keep the liquidity taps going to keep pushing this market up. And seriously, what kind of market is it that only goes up with massive intervention, liquidity injections and a narrow sliver of stocks responsible for major indices going up. Finally, our economies are a mess and this is no time to be invested anywhere right now. Danger ahead to all those who are still invested. Re-testing of the March lows and further down the rabbit hole is where I see the markets heading.

  4. You might want to consider still doing at least 1 free video a month, even if abbreviated. Your 10K subscriber base and 15K+ views are a great way to continue to promote your services.

  5. Excellent post and video, Sven. Good heads up at around 20 minutes about the danger of inflation, to be sure this is probably less likely than otherwise but if we do get inflation indebted economies will disappear down the tubes so damned fast. How asset markets react to that will be interesting and could set the tone for years.

    My hunch (and no more than that) is SPX will knife through the .382 fib and not pause till the .5 fib, we shall see within 2 weeks, then need to consider the action and what it portends. I note you are hinting at the possibility of SPX 1800 (in the mid future?), to repeat myself: we’ll be lucky if it stops there; there comes a point when liquidity transfusions cease to have significant effect; markets have barely started to price in the underlying reality.

    Last week was interesting and maybe pivotal, the coming week or two could confirm the pattern.

  6. I was going to say Pompeo was practising his Coco the clown impression, but Humpty Dumpty seems more apposite:

    ” ‘Don’t you think you’d be safer down on the ground?’ Alice went on, not with any idea of making another riddle, but simply in her good-natured anxiety for the queer creature. `That wall is so very narrow!’

    What tremendously easy riddles you ask!’ Humpty Dumpty growled out.Of course I don’t think so! Why, if ever I did fall off – – which there’s no chance of — but if I did — ‘ Here he pursed his lips and looked so solemn and grand that Alice could hardly help laughing. If I did fall,’ he went on,The King has promised me — ah, you may turn pale, if you like! You didn’t think I was going to say that, did you? The King has promised me — with his very own mouth — to — to — ‘

    `To send all his horses and all his men,’ Alice interrupted, rather unwisely.

    Now I declare that’s too bad!’ Humpty Dumpty cried, breaking into a sudden passion.You’ve been listening at doors — and behind trees — and down chimneys — or you couldn’t have known it!’

    I haven’t, indeed!’ Alice said very gently.It’s in a book.’ ”

    ” `I sent a message to the fish:
    I told them “This is what I wish.”

    The little fishes of the sea,
    They sent an answer back to me.

    The little fishes’ answer was
    “We cannot do it, Sir, because — “‘

    `I’m afraid I don’t quite understand,’ said Alice.

    `It gets easier further on,’ Humpty Dumpty replied.

    `I sent to them again to say
    “It will be better to obey.”

    The fishes answered with a grin,
    “Why, what a temper you are in!”

    I told them once, I told them twice:
    They would not listen to advice.

    I took a kettle large and new,
    Fit for the deed I had to do.

    My heart went hop, my heart went thump;
    I filled the kettle at the pump.

    Then some one came to me and said,
    “The little fishes are in bed.”

    I said to him, I said it plain,
    “Then you must wake them up again.”

    I said it very loud and clear;
    I went and shouted in his ear.’

    Humpty Dumpty raised his voice almost to a scream as he repeated this verse, and Alice thought with a shudder, `I wouldn’t have been the messenger for anything!’

    `But he was very stiff and proud;
    He said “You needn’t shout so loud!”

    And he was very proud and stiff;
    He said “I’d go and wake them, if — ”

    I took a corkscrew from the shelf:
    I went to wake them up myself.

    And when I found the door was locked,
    I pulled and pushed and pushed and knocked.

    And when I found the door was shut,
    I tried to turn the handle, but — ‘

    There was a long pause.

    `Is that all?’ Alice timidly asked.

    `That’s all,’ said Humpty Dumpty. Good-bye.’ “

  7. Hi Sven, will you have a lower subscription for your videos or do I need to pay 70 GBP a month?

  8. This site is full of bears, all “analysis” is bias severely on the short side and the FUD here is unbelievable! Does Sven ever talk anything bullish here? Good bye.

  9. Hey Anonymous, ever thought that’s because all the fundamentals and vast majority of the technicals are screaming “watch out below”? The only thing keeping the market up is unprecedented amounts of liquidity which, I contest, will have reducing effect and before long will fail to offset the downside risks.

    Been looking at FAANG / tech stocks today (Wed 6th May 2020) and the gist I get is when they go it will be an epic bloodbath. It could start in the next 5 minutes or not for a few months but it looks likely to happen. I know some have very good reasons for their strong performance but a 10% + decline in FAANGs will dispel the current illusion.

  10. Agric, I have been buying all day and markets don’t lie. It’s forward looking. I guess the bears on this forum are all watching in shock as the markets continue to roar back despite the GLOOM & DOOM headlines on both the economic & COVID-19 fronts. Investors, in a majority, are betting on a V-Shaped recovery as it seems so either shut up or get out of the bulls way……….

    • Thx for your (fairly) polite reply. Yes, I’m one of the bears who’ve been thinking markets are drinking the free Fed drugs and ignoring reality. If markets (and you?) are betting on a V-shaped recovery then I’m happy to take the other side of your bets. But I’ve been wrong before – like I never thought USA was stupid enough to elect Trump nor that UK was foolish enough to exit EU – and I’ll be wrong again. However, I think the ‘markets are forward looking’ myth was binned at least a couple of decades back. Liquidity is what’s been driving the markets lately and reality doesn’t matter – until it does, then it bites, HARD.

      Closing today, 12th May, was ugly and after hours SPX is trying to cling to 2850. Hope you got outta your longs before about 3pm ‘cos reality might just be dawning on the markets and, if so, we’ll be seeing 2500 before long. Strap in tight if you’re still on the roaring side and good luck whatever you do.

      • Agric, a 2% down today doesn’t signal anything significant….markets had easily moved +/- that % many times during the past 2 months! Nothing I see right now indicates a red flag in terms of market sentiment; in fact, these “down” days are treated like golden dips for anyone else still sitting on the sidelines. Don’t believe me? Look at how futures are behaving from an “ugly” close to -100+ when it first opened and looking bright green now of +40 as of 23:51 EST.

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