Market Analysis

Crash #2?

President Trump is mocking Warren Buffett for having sold his airline stocks, Druckenmiller crying on TV about having been humbled by the market while every Robinhood retail trader piling into ever more into calls is laughing all the way to the bank. The professionals gobsmacked at the complete upside down events in markets compared to any other time in recorded history given the economic backdrop while retail is giddy jumping into any ticker symbol that’s moving valuations be damned, hey let’s even chase bankrupt companies, why not?

Anything goes in the market.

I myself, have been surprised by the recent vertical strength that keeps running from gap to gap to gap.

Sometimes you just have to laugh:

On the day of the lows I talked about an awe-inspiring rally coming. Consider me sufficiently awe inspired.

And now the same folks that told people to buy stocks in January and February right before the crash are back out and telling people to buy stocks again except this time at much higher multiples and valuations.

My variant take here which may well turn out to be very wrong: The Fed is setting markets up for another crash. Why? Because they’ve set in motion a stock market mania we have not seen since the 2000 tech bubble. But this time while we’re still in a recession.

And it is a mania and it’s important to recognize this. And like all manias it’ll end badly. The amount of “ever’s” keep building up.

We have the highest market valuations ever (market cap to GDP) 151% on Friday’s close with old GDP data hence the real figure is higher. This chart from the beginning of June:

We are seeing the highest amount of speculative call buying ever:

We have the lowest put call ratios ever, meaning everything is one sided and complacent:

We also have the highest unemployment ever, at least since the post WWII period. The highest unemployment in the post WWII period was 10.8% in 1982.

Friday’s jobs report was as accurate as the Fed’s inflation model. Totally misrepresentative of the real economy as 4.9M unemployed people were counted as employed. 13.3% reported in reality north of 16% and perhaps much higher.

Fact is we are in a historically disastrous environment:

And of course we are witnessing the largest deficit (approx. $4 trillion) and monetary intervention ever:

The largest disconnect from corporate profits ever, even worse than during the 2000 bubble:

$SPX is now farther disconnected from its 50MA than pretty much ever before:

The only precedence for this was in 2009. Then markets retraced to the 50MA and then rallied on from there to new highs. Back then it took years, perhaps this time it will take weeks. Who is to say in this environment.

My point here: The combination of all of these factors has contributed to the largest dislocation we’ve ever seen only perhaps rivaled by the Nasdaq bubble of 2000:

Except now we have trillion dollar market cap companies that trade at massive forward multiples and are experiencing unseen multiple expansion during a time when there is little revenue or earnings growth. And it’s just not this year. It all started in 2019 and has now extended into 2020.

And that’s the definition of a mania. Exuberant embracing of a vertical stock market rally by a majority of people of stock market valuations that are entirely unrealistic and untethered from the economic reality on the ground. A complete disregard for risk and markets that move vertically in one direction.

And of course the cheerleading. “We’re back” Jim Cramer celebrated a miscalculated jobs report on Friday. Trump celebrated the biggest jobs gain ever, when the real unemployment rate actually went north of 16% and reality is a bounce is to be expected off of a disastrous historic shut down, it’s not an accomplishment.

But the cheerleading trophy goes to, who else, Larry Kudlow, celebrating a soaring stock market and declaring himself a winner:

The same person that declared the cornonavirus contained before it killed over a 100,000 people. That same person the said “we’re killing it on the economy” only a few months before it collapsed.

I know it’s an election year and they have to cheerlead. The polls are looking terrible for Trump and I think he starts recognizing it as he complained on twitter last night. More and more traditional Republicans are getting vocal in not supporting him. Last week it was James Mattis and other generals that rebuked him, including his former chief of staff John Kelly, and this weekend it was George Bush, Romney, and Colin Powell.

It all reeks of desperation and I keep coming back to this point: What happens when markets suddenly price in a Democratic win in November? The tax landscape would change drastically. Stocks already massively stretched would have to contend with further reductions in after tax earnings outlooks.

And Goldman Sachs is crunching the numbers on the impact:

Also: Reopening everywhere, but tell me, where is the evidence of a drastic reduction in Covid cases? Yes a slow down in key states following lockdowns, but also a massive increase in many others. Newsflash: The virus hasn’t gone away, it’s migrating. Fact is the number of new infections worldwide continues to increase. While deaths have been decreasing in aggregate I also will have to point out that this is what you would expect due to the lockdowns and social distancing measures. B eclear: Cases are rising in many states, take Arizona as an example:

But Covid is largely ignored now as a risk factor despite the fact that this Sunday saw the highest new infections globally yet.

While infections have slowed down dramatically in many states we can thank shutdown measures and social distancing. Well, those measures are out the door now:



So you tell me.
The virus is not gone, the numbers are bigger than ever and now we’re entering a new phase. I seriously doubt there is any political will to shut down the economy again. I don’t know what will happen with reinfection rates, but if this virus (which has shown itself to be active in warm climates as well, think Arizona) is reasserting itself we will know in the next few weeks.

Also in the next few weeks: Earnings reports, you know, reality checks.

As it stands markets and individual stocks are stretched to the hilt:

100 $NYMO again on Friday:

$NYSI continuing to scream overbought:

And massively stretched charts reflecting no economic reality with tech taking the cake with new all time highs far above the upper monthly Bollinger band again:



Manias are reason defying by definition and they can go farther than anyone expects.

Too strong is the draw and chase of the Fed put is which advertised as delivering $SPX turning green for the year this week:

“Look for the S&P 500 to turn positive for the year with a boost from the Fed in the week ahead”

That’s sentiment at the moment and probably the most frustrating aspect of a mania. The most reckless look the most right and the most reasonable the fools for not chasing or trying to fade.

FOMO thanks to POMO.

Will they go straight for that 3300+ gap from February? I can’t say, I suppose in an environment where nothing fundamental matters anything can happen.

This week Powell will add more programs and perhaps yield curve control. Every aspect of these markets is manipulated at the moment and every tiny dip is relentlessly bought as it is in any mania.

Yet the size of the dislocations continue to strengthen the sell case and indeed the number of open gaps are increasingly looking to be the achilles heel of this market, never mind historic valuations.

Remember the non stop gaps in Q4 of last year leading to the top in February 2020? They all look like child’s play compared to the ones we have now:

And guess what? All those gaps last year when the market seemed invincible? All of them filled. This market has some gap filling to do, especially in context of a $VIX that looks to want to party again at some stage:

Look, I’ve always said in recent months that this is all about control, can the Fed control the market equation? For now it clearly has, but it’s created a bloated pig of a market as a result.

And this pig is now big and fat and any sizable reversion can in itself shake the very confidence and optimism the Fed has sought to propagate. The Fed is peddling a fantasy, a fantasy that says money and wealth can be created out of thin air with nothing of substance needed to back it up, no growth, no earnings, none of that.

My premise: Markets and the economy can’t live on multiple expansion alone, but this is what the market ran on in 2019 and it is what it is running on again.

Like Druckenmiller I’ve been surprised at the vertical nature of this move, but unlike him I don’t attribute it to the reopening optimism, I attribute it only to one thing: A stock mania created by an overzealous Fed that is trying to save the economy, but in process has created the largest asset bubble of our time, and with that they put in the conditions in place that markets could be faced with another crash. I may well be wrong on this, but the circus like atmosphere in context of historic valuations, optimism and giddiness along with bears crying are exactly the type of conditions that have ended bear market rallies in previous periods of history. To think it’s different this time is to count on it being different this time. Well, in one aspect it already is different this time: The first stock mania inside of a recession. Not discounted far below at all time highs, but rather sitting on top of the largest disconnect between the economy and the stock market ever. Inside of a recession no less.

All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

Categories: Market Analysis

48 replies »

  1. “The first wave of euphoria was from the 10th of January to the 14th of February were the DAX marked a record high. Only five days later the DAX dropped 5300 points till mid March. In these weeks investors were in a mood of doom as never before.”
    Source: Sentiment Analysts from Animusx

    Now we have euphoria again. And… hey… we saw and see so many shit and extremes going on in these markets, so we can drop below the year lows and it still would be just another insane part of the current market mayhem.

    • Hosea’s wife Gomer really is an End of the Age prophetic symbol. After she weans the child “Not My People” which can be symbolized as those adopted in to God’s family in the Church Age, she chases after other lovers and gets herself into debt to the point that she loses everything. Hosea finds her in the slave market being sold for her debts and redeems her.
      In Revelations we find another Harlot at the End of the Church Age who thinks she can ride the Beast(tame him). She is drunk and gaudy and full of herself when her world falls apart economically in a single day. This is the same imagery and our world is increasingly ripe for this outcome.

    • I can’t recall when I last saw such a spot on prophetic post! Titled “Crash#?” You can remove the “?” 🙂 SPX down 188 pts today. A bit of reality has found its way to the markets. Robinhood traders in shock. Love your posts and spread them around.

  2. LOL, of course, yes, unless we have stumbled into a different universe. But unwise to call a top or short yet, there are too many chasing it up still. I guess the smart money has unloaded their risks and is keeping tight stops, but maybe I’m being too generous. Seems the sentiment is: it’s still going up so keep piling in. VIX is holding up surprisingly well, maybe due to hedging the gains.

    The bough will break – the fundamentals are overwhelming, and the drop will be shocking. I doubt we’ll see a 10% drop in one day initially so there should be enough warning to place down bets once things start to roll over. Till then ride the bull.

    BTW US covid19 cases are increasing again and that rate of increase is likely to accelerate near term, at least. Unlikely that there will be a return to lockdowns in many places so there will be further virus pain, human and economic, over the summer. Could be Trump is removed (amendment 25) before the election.

      • Au contraire, there were 3 days left (in retrospect) to trade up as well as down, I still made money on the ups and had a long VIX to boot. I was all short (except VIX) after JP’s presser, worked out nicely.

        On today’s action (15/6/2020 15:46 ET) the Fed must be disappointed that their corporate bond buy announcement had minimal effect, virtually all evaporated within a couple of hours. We are reaching (have reached?) the point where more liquidity has near zero effect, that was always going to happen at some time.

        Things go down from here, pauses may be SPX 2880, 2720, I expect a bounce from around 2500. But 1800 may not hold before this is done. But there will still be brief up trades to make (like today) as it plays out.

        15:55 ET nice to see the predictability of the last 30 minute ramp return, I much prefer it to the overnight gap up.

  3. During crash #1 we hit the 7% circuit breaker several times. If this is a stock market of ‘records’ and ‘evers’ then we will hit the 13% and 20% circuit breakers during Crash #2.

  4. Fantastic article Sven. The case is open and shut, but “Bulls market won’t die until every bear is dead.”

  5. Brilliant analysis Sven.

    It’s rather amusing that your Hertz price tweet from this morning is less than 1/2 of its high for the day.

  6. It is just beginning. USA is going socialist soon. Caracas’ IBVC went from 1000 points in 2013 to about 330000 today. Let that sink in. The people usually double down on socialism, and after Chavez died, a busdriver followed with even more insanity. Get ready for your bartender-turned-president, or something similar, with S&P hitting 1.000.000 by 2030. Don’t say nobody warned you.

    • “Bartender-turned-president” is a slight at AOC. Full disclosure – I am politically to the left. But I find it funny that the ‘socialist’ economic practices you are complaining about are not from a socialist system, but rather are being produced by the slowly dying neoliberal capitalist system. Trump and Powell are not even close to being socialists, and neither is Lagarde or any other major central banker, the people driving this massive accumulation of debt. What happened to fiscal conservatism? What they are however is friends with a number of rich people and CEOs, and they are bailing out all of their friends at the same time as claiming it is about protecting the economy, jobs and people. It is interesting how the CB printing presses are always turned on when there is a market crash, but never when healthcare is underfunded/ inaccessible, student fees double/ triple, or inequality rises and more people turn to food banks. Just ruminate on that for a while.

      • Alex Martin, even some cursory research on CBs would show you that they are Socialist institutions designed to do one thing – siphon the vast majority of real wealth created by working people into the coffers of an elite, thereby rendering a two-tier society: the resulting wealthy elite and everyone else. Your comment says this but you don’t realize what you wrote!

  7. Tremendous analysis Sven. Reality of what the FED has done to markets is inevitable….maybe after this “Tulip Mania” bursts!

  8. I know this might be a simple question obvious to most, but I’m a beginner to all this. Why/how can the stock market go down or crash if the fed perpetually funds it? Wondering if someone could answer that for me. Thanks.

    • 1) 330 Trillion dollars of very poor credit market debt that needs to be
      deleveraged and the Fed’s 1 Trillion farts can’t do anything to stop this.
      Japan has been doing for 30 years what the Fed is trying to do now. Guess what: it won’t work when the world has 330 Trillion dollars to deleverage by at least 50%. We’re in a deflationary trap and spiral.
      2) Corporate share buyback Ponzi model has come to an end as public
      pension funds (states, municipalities, cities, etc.) have no tax revenues
      presently to buy corporate bond issuances to fund corporations who use that very money to buy and drive up their own stock to stuff management’s pockets with bonuses.
      3) 90 cents of every dollar S&P 500 companies earned in the last 5 years
      also went towards corporate buybacks combined with an unprecedented issuance of corporate debt and equity dilution helping this endless Ponzi scheme.
      4) Economy for over a decade barely growing at 1% average despite all the
      above Endless rounds of QE for 12 years now, interest rates pushed to zero punishing savers and tax cuts that were really not necessary.
      5) Consumer debt to income ratio at unsustainable all time high levels
      (175 debt to income ratio and climbing higher as well as 12 times debt to savings ratio and climbing higher) with real unemployment (unemployed, underemployed and not counted in workforce) at 50% plus and the remaining workforce seeing their hours and salaries cut.
      6) All stock market indicators at all time high levels. P/E over 30,
      Price to Sales Ratio over 2.5, Enterprise Value to EBITDA over 25, Buffet Indicator (Market Cap / GDP) over 135%, Shiller P/E over 27, Q factor (the market value divided by its assets’ replacement cost) at 1.76.
      7) Bond market has been screaming major recession/depression and
      deflation for almost a year with yield curve inverting three times and the
      30-year T trading almost at 1% (totally crazy).
      8) M3 essentially at zero with consumer (70% of economy traditionally and 90% in 2019) tapped out on debt and 50% unemployed/underemployed.
      9) Corporations (30% of economy) already in recession since the start of
      10) The corporate bond/debt market in the mother of all bubbles with 90% of bonds trading at one notch above junk status.
      11) The IMF has stated that this year, the global economy will experience
      the worst recession since the great depression. It has also stated that for
      the first time since the great depression, both advanced economies and emerging markets are in recession with growth in advanced economies at -6.1% with income per capita projected to shrink for over 170 countries.
      12) Debt to GDP of all developed countries in the 150-300% range…who would have thought.
      13) The stock markets now are comprised of 5 companies representing 25% of the S&P and 40% of the Nasdaq. These percentages are beyond alarming and this never ends well.
      14) Healthy stock markets don’t go down 35% and swing back up 30% in a
      matter of a month. This type of volatility always signals lower prices
      ahead. We’re in fact in horrible company…this is the fastest 35% downward move in the stock market. And only two other times the stock markets have gone up 30% this fast: the first leg up of the Great Depression and the first leg up of the Great Recession. We all know what happened afterwards…lower lows over the next year to two years.
      15) Bear markets last on average 15 months, this one is just starting.

  9. Everything here sounds about right except the Covid assessment. The increase in cases is mainly a function of testing. Fatality rates are declining because the most vulnerable have already been killed off and hospitals are getting better at treatment. Also, the infection in the US has already reached critical mass in major urban centers and is now in retreat. Also, what would stop the Fed from printing another $5 trillion. Nothing.

  10. Sven, deep down, I know you went long recently but afraid to admit it publicly. Heck, you may have gone long 2 months ago while still publishing your bearish thesis articles day in and day out! Create panic results in cheaper prices….I get it, next reader gets it and even my momma gets it. Why don’t you just tell the world your honest truth and that you have now finally put on that gold coloured bull cap. That’s right….party with The Trump and the Fed as we say hello to SPX 4,000!

    • He never said he wasn’t long. Of course he has invested on the way up. All bears have. He just has pointed out that he expects everything to crash and burn again. A true investor/trader makes money when the market goes up or down.

      • If Sven was still long, he would dare not to post this bearish article of an imminent “Crash #2”. If he had any brains, he would wait until he went short —- in this case, he likely flipped back to being short again.

  11. Thank you Sven for your analysis and the never ending occasional sarcasm. Usually the funniest tweets I read all day…

    I agree with you to almost 100%, but I often try to force myself to take the counter-view. Really challenging during the last weeks, though.
    So, what if the FED can soften the curbs in the market for years to come until reality meets the markets again somewhere?

    After all, the US$ is the currency of the world and who says that the FED cant do these shenanigans for another, lets say, 15-25 Trillion oder the next few years.

    I actually doubt that they will do it, but everything seems possible nowadays…

    What do you think?

  12. Excellent article Sven! Your regular input is invaluable because so many market pundits are high on euphoria.

  13. Per Bloomberg:

    On Monday, Portnoy slammed Berkshire Hathaway’s Warren Buffett for unloading airline stocks as the coronavirus epidemic took its toll. He also went off on how he made almost $300,000 on the day but missed out on an even bigger number by getting out too soon.

    “I’m just printing money,” Portnoy said. “Why take profits when every airline goes up 20% every day. Losers take profits. Winners push the chips to the middle… I should be up a billion dollars.”

    Also noticed Bloomberg had an article that the median stock account is only $40,000. So not even enough to buy a new truck if it goes up 100%? Thus very few people are making much money in this market, it seems to be only the top 10% at best. So why the FOMO?

  14. I found today’s action quite interesting. Couldn’t see any real trigger for the futures down sentiment starting around asian open so put that down to profit taking. Thought there was a fair chance of things breaking up or down during US hours but stocks mostly oscillated in a narrow range. Perhaps they’re waiting on JP tomorrow?

    OK. With NDX at a record high it’s hard to imagine additional liquidity transfusions, there might be some on FOMC who would rebel at that. So, they’ll stand pat in all material senses, thus it all comes down to tone. Is Jay going to promise more ‘as required’ or hint they’ve done enough for now? If I were a betting man ;)) my money would be on markets being disappointed.

  15. Sven,

    Only Michael McKee at Bloomberg was brave enough today to ask Jay if his Fed actions was creating wealth inequality. Of course Jay ignored a direct answer. How amazing was it that none of the other news agencies asked any tough quesions?

    Also, did you notice Jay admitted that “Compensation” went up greatly for the top 10%. Note he did not say “wages”, he said “Compensation”. Yes my own “Compensation” has skyrocketed, specifically my risk asset “compensation”. Jay is not dumb IMHO, he is instead immoral, with a lack of empathy. He fits well with President Tweety.

  16. Mr Market: Hey Jay, we weren’t too impressed today.
    JP: I don’t know what more I could do for you, heck, I promised liquidity to infinity and endless zero rates.
    MrM: You know, Jay, deep in your heart you know.
    JP: No I don’t, spit it out.
    MrM: You got to cross the rubicon. You gotta buy that shit.
    JP: What shit? I don’t do drugs.
    MrM: Aw, come on Jay, everyone does drugs, you wouldna been happy doing all this stuff the last couple of years if you didn’t have drugs to keep you happy.
    JP: So what shit you talking about?
    MrM: You got to buy ’em, Jay.
    JP: What? Dammit!
    MrM: You know Jay, stawks.
    JP: Oh. I dunno. I’ll need a good excuse. Maybe if you drop 40%.
    MrM: Jay, that’s cruel. How about 10%?
    JP: OK, drop 5% and the plebs can pay with higher taxes for the next century or so.
    MrM: LOL Jay, I like your sense of humour, you got a deal.

    • MrM: Hey Jay, my man, you got your 5% today, bet that was quicker than you expected.
      JP: Most impressive, MrM, I wish I had your power.
      MrM: You have Jay, you just need to feel it right, the dark side, you’re nearly there.
      JP: I’ll keep trying M. I want to please you.
      MrM: I know Jay, I know. Hey, we have this deal: 5% and you buy the stawks.
      JP: I will M, I will, but let’s not make it too obvious, peeps might get suspicious.
      MrM: OK. Then when?
      JP: Well, we’ll have to wait a couple of weeks, can’t do right after an FOMC.
      MrM: Just don’t keep me waiting too long, Jay, my orange golem might get twitchy.
      JP: OK, OK, M, as soon as I can.
      MrM: Nice Jay, see you soon, be bad now, LOL.

  17. Stick to what you know, Sven; US politics is clearly not your forte.

    Anybody who thinks guys like Powell, Bush, and Romney “traditional Republicans” knows not what they’re talking about.

    For God’s sake, Powell endorsed Obama twice.

  18. At the end did you mean to say ‘have ended bull market rallies’ because you put bear and that confused me. Nice article!

    • LOL, all numbers are rigged nowadays, haven’t you watched the markets into the close? Problem with the virus numbers is they’re rigged every which unpredictable way, just have to pay attention to the trends and try to account for underlying fundamentals and biases.

  19. VIX tells me there’s more down to come (nice call Mella, that’s a fruity turn of phrase you have, I don’t think I’ve ever hung onto my panties). Sven, you really must stop letting on about the time travelling thing, ’nuff said.

    Serious hat on. Markets have at long last glimpsed a little reality through a few cracks in their FOMO wall. Leading techs are still in LaLa land, I watch AAPL, MSFT, TSLA to see the current state of delusion and to guess when the serious drop will happen. Unless we get a reactive bounce tomorrow (30% probability?) then the first battle may be over SPX 2980, if that fails there’s not a lot of support before 2820. Probably strong support around 2500, and I’d expect a minor bounce from there. But be very clear, SPX 1800 was written in the stars a while back and will happen before the present charade plays out. And we’ll be lucky if it stops there.

  20. LoL, bears are already celebrating after a mere -6% decline after a +40% from March lows. Don’t pull that cork just yet judging how futures are looking….

    • Iffy to pay much credence to the overnight ramp, they’ve been doing it for months while the US session action has generally been flat. I’m not celebrating BTW, if what I see unfolds it will be bad for nearly all folks. Today they got the bazoukas out around 13:50 ET after SPX 3000 was breeched, we’ll see how it plays out. My guess is they’ll manage to close it around 3000 but if they fail we’ll be on the fast down elevator.

  21. Absolutely! Can’t wait for Sven’s next hit piece of writing with his fancy graphs calling for SPX to hit 1800. Much like the dilution of his followers and fans alike commenting bearishly on this thread….drinking the same kool aid I might add. And if things don’t pan out like they hope, they blame it on the FED, way too funny!!!!!

    • Retail Trader Alert:

      Retail is getting played right now, and hedge funds are not “loosing out to retail” like MSM is writing about daily. To be honest such MSM articles help get retail to take further undue risks (ego stroking) and feed the smart money “hunger games”, as the larger players need the smaller players thinking they are “smart money Robinhoods”. Retail is getting played in early morning pre-market trading, as explained nicely by Jim Cramer (who has been warning retail in 2020 about many of the games that smart money play):

      “I have spoken”…(Star Wars Kuill)

      “You have been warned”….(Dr. Seuss Lorax)

      “There are more important things that living”…(smart money, net worth $25 million, Die for the Dow Texas Lt. Gov. Dan Patrick)

      Good luck in all your investments…

  22. “I attribute it only to one thing: A stock mania created by an overzealous Fed that is trying to save the economy.” They are feathering their own nests, not ours, Sven. ReacAndrew Jackson’s comments on the Fed of his day, the Bank of the United States (and why he refused to renew their charter(and whose portrait does the big phoney Trump, who also promised to balance the budget hand in the Oval Office- Jackson.)

  23. Sven, I strongly disagree with your “2021: buy everything”, this will happen around August 30th 2020. Also, haven’t credit card debts been collateralized already? If not, why not, everything else has been. Goldman, Morgan Stanley, get on it, there’s money to be made and fools to fleece, (and it’s something else for the Fed to buy, they’re running out of shopping items).


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