Market Analysis

Straight Talk #6

And then it happened. A vicious sell off seemingly out of the blue putting a sudden end to the steepest rally ever with many indices and individual stocks getting hammered seeing sizable declines just as Nasdaq was making new all time highs and $SPX was going green for the year setting up markets for an epic battle of control in the days and weeks to come.

Markets were clearly extended on many fronts and a correction was due. But nothing is normal about these liquidity soaked markets. The rally was historic with a 47.5% nearly vertical ascent following the March lows and the disconnect of valuations behind the size of the real economy has taken on historic levels. Markets reached nearly 152% market cap to GDP before the snapback as valuations suddenly dropped to 141.8% by Thursday’s market close. And it happened fast as little support was built in a market that so heavily reliant on open overnight gap ups on the way up.

On Monday I made the case for Crash 2 highlighting narrowing patterns in the $VIX and $SPX that suggested another volatility event was shaping up and just 3 days later the $VIX wasted no time spiking to the 44 level filling its open gap in that area:

In short: A breakout in volatility and a violent breakdown in the rally trend. And suddenly some of the open gaps I highlighted on Monday started seeing some filling:

In process markets produced what in technical terms is called an island reversal with price left hanging isolated, even on the almighty tech sector:

Setting up for a key battle zone for control and I gave a quick snapshot readout on the levels last night:

In episode 6 of Straight Talk Guy Adami, Dan Nathan and I discuss this week’s market action, its implications, we discuss $AAPL, the banks, the Fed, the disconnect between the political cheerleading and the economic and social reality on the ground, keeping it real:

The Fed now having set the expectations that rates will remain at least at zero (while still publicly denying negative rates are coming) has inadvertently revealed a major gap in narrative: That of a V shaped recovery presumed by markets and a Fed signaling with zero rates through 2022 that there is no V shaped recovery in the offing, rather a protracted high unemployment environment that is entirely inconsistent with market valuations north of 150% market cap to GDP.

Somewhere in between these narrative is a truth and that’s a truth markets have to negotiate.

As this rally has been driven by record artificial liquidity and has been again entirely dependent on multiple expansion alone it should also be noted that this rally stopped during the same week that the Fed’s incremental expansion of its balance sheet shriveled to nearly zero with its slowest expansion since the March 23rd lows:

My phrase, no bull market without central bank intervention, again appears to ring true.

This week’s aggressive flush lower has created short term oversold conditions and next week is OPEX week which traditionally has a bullish slant, but be aware, unless markets can repair the island reversal gaps and resume the rally toward the open 3300 gap on $SPX, these reversals stand and they, along with a bearish engulfing weekly candle and trend breaks on the charts has bearish connotations suggesting that rallies may end up getting sold and lower prices are to come.

I am reminded of what I wrote on March 23rd, the day of the lows: “The 1929 redux tells us a big rally will come and this rally will be awe inspiring, it’ll produce technical reconnects in a market that is now widely disconnected to the downside and it will bring back optimism. But then the historical script suggests lower highs to come as the world is then confronted with the consequences of the costs of extinguishing this fire. The bill comes due as the world will be settled with even more debt, but now a much higher unemployment rate, poorer consumers, and companies focused on margin efficiencies.”

The consequences are already staring us in the face:

Lay off announcements are continuing, corporate debt is higher than ever approaching 50% of GDP:

..while earnings have done nothing for years and are now declining:

With the share of zombie companies, now increasingly held afloat by the Fed, is ever increasing:

Want to take this all to be the recipe for a new structural bull market be my guest. From my perch this historic market cap to GDP extension fueled by nothing but artificial liquidity and now accompanied by speculative retail FOMO behavior still bears the historical footprint of an epic bear market rally. And if that is so the forces of intervention and cheerleading with find themselves greatly challenged by the forces of reality in the months to come.

And this is what our Straight Talk series is all about: Keeping taps on reality in a world keen on wanting to avoid it.


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Categories: Market Analysis, Opinion

19 replies »

  1. Great stuff this week…thank you for all your insights. Thanks for touching on the $VIX. It seemed like Powell’s “were on auto-pilot” with zero-interest rates countered the market’s V shaped recovery aspirations and was contributing factor to VIX spike. Didn’t hear much about the corona virus as perhaps that was also a contributing factor in the VIX spike. It seems as if everyone has forgotten and/or is discounting the effect of this lingering virus. We are seeing increasing numbers(hospitalizations) in our state, North Carolina, and other states (AZ, TX, FL). I am also noticing very lax social distancing & enforcement of masks-wearing of which is being amplified by large numbers of people gathering due to protesting. It’s like a slow moving avalanche coming down a mountain…and when it reaches critical mass/momentum I’m afraid this will be the time when we will have not 1 or 2 hotspots but a problem many times greater than we had back in March in multiple states.
    Two weeks ago China trade news had more impact on market that the terrible economic reports(jobs). Also wondering what your collective thoughts are in regards to how this is going and possible implications in regards to VIX ?

  2. Thanks so much for sharing. Your analysis is “must read” now, along with Wolf Richter. Thanks again!

  3. Great video again, guys…keep it up. Oh, and I’m really trying to figure out which side of the aisle that Dan leans LOL…

  4. Excellent take Sven. Yet, that one day drop on Thursday was not confirmed on the next day. Also, Friday’s bounce came on just as high volume as on Thursday’s drop. Then, it may be a mistake to expect this to be the start of another led down. Central Banks and FED will do whatever it takes to get the markets back into uptrend this coming week. Occasional pullbacks are expected but this still is a Bull market for a long while to come.

  5. Sven, paradoxically, everything you write only says “Extreme readings can just become even more extreme and this bull market can go on.” – Shorting it is a fools game, because Central Banks and the FED will not let it crash. Only limited pullbacks will be allowed on the way higher.

  6. Sven speaking from “Reversal Island” = Brilliant!!

    I am going to go out on a limb here, but I will state that well over half the folks who call you “permabears” are simply using a one-word description for the sake of brevity and are not slinging dirt.

  7. Excellent analysis– and commendable steadiness of opinion!
    Two comments:

    The last three times (1991, 2001, and 2009) that debt securities spiked and began to decline, were terrific buying opportunities. The same holds for the spike in the rate of Unemployment beginning to come down. None of these two declines is here yet. But the moment it would come, I suspect, would be in the midst of the final down leg– which hopefully you and Mella will catch again.
    Re all the nasty tweets you get from the twits, I suggest you plot them. When they reach a peak, I bet that this would also signal a market peak. When they stop completely, and turn into compliments, it may signify a market bottom…

    Keep on the good work!
    TSI

  8. “ Monseiur Sven, my profound eternal gratitude !!!for your superb meticulous, microscopic, objective analysis.

  9. You and the professionals (Dan, Guy, etc.) have the best awe inspiring grip on reality I have ever witnessed. I’m so very glad I joined this group and look forward to every video and information exchange you folks will offer. In my limited knowledge of markets, I do not see why this market is still floating and if the Fed’s keep infusing this market with $$$$$ it may hold for a while but when it crashes, get the hell out of the way

    Thank you so much for your commentary.

  10. Charts & commentary very useful and appreciated. As I former journalism major let me suggest instead of saying the world is “settled” with debt say, say it is “saddled” with debt, as in saddle bags piled onto the back of a horse or mule that the animal will now struggle to carry.

  11. Zzzzzz…..the more Sven spouts his bearish non-sense, the more likelihood markets will continue their uptrend (contrarian indicator). As it stands at 2PM EST June 15, SPX up another 1%….continuing its climb from Friday. Oh wait….some of his followers will quickly comment “It’s the FED-effect”. LMFAO! Why would anybody go against the strong tide? Suicide mission to say the least.

    • Monsieur Sven, it’s preposterously hysterical Jerome “jaw boning ) Powell is an ardent admirer of your impartial perceptive observations and decided to “ pump & dump “ corporate ( unsecured ) toilet 🚽 paper 🧻… hahahahaha your a scrupulously , indomitably , infallible intact …your analytical skills is proficient …

    • “ brilliant money makes money 💴 from smart money 💴 and smart money makes money from stupid money 💴 “

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