Market Analysis

Super Bull

You know where I stand: Markets have been bloated to high heaven via unlimited and unprecedented liquidity injections creating the illusion of a bull market when there is none. Yes indices such as $SPX and $NDX show incredible strength driven by a few single stocks, but as we discussed the rest of the market is far from bullish.

Equal weight keeps lagging:

while virtually all market gains are driven by a handful of stocks:

In fact the broader markets has gone nowhere since mid April:

But still the few stocks are running overall market valuations to never before seen highs:

pushing P/E levels into ever higher extremes:

Who needs earnings growth when all you need is multiple expansion?

Hard to justify valuations with traditional metrics in this environment. You know metrics such as earnings, growth, etc. So best not do it according to none other than Fed hired Blackrock:

‘BlackRock Inc.’s senior quant has bad news for the likes of Bill Gross and Cliff Asness wagering on a comeback for value stocks. In the worldview of Jeff Shen, money managers need new investing methods because there’s no way to tell if betting on ostensibly cheap companies will work again. In fact, comparing share prices to fundamentals like corporate profits or book value is essentially futile in complex markets.

To fix misfiring quant strategies, the co-chief of the $106 billion systematic active equity group has a newfangled suggestion: Investors should scour alternative data for trading signals and end their obsession with valuation metrics.”

Yea, it’s hard to justify valuations in a bubble so best just make things up. It’s different this time. Don’t you know?

Besides, too strong is the draw towards the next stimulus carrot which awaits in the wings of a well advertised new fiscal stimulus package that both Democrats and Republicans pretend to fight over before eventually agreeing to it anyways. It’s an election year and nobody will risk standing in the way of throwing about some more free money. So that stimulus package is coming, unless someone is willing to create a big drama over it, perhaps as a way to create an election narrative? We’ll soon find out who is willing to risk what.

But don’t play too hard to get for this market has yet to prove it can rally other than on chasing stimulus and vaccine optimism headlines.. It just can’t make new highs without.

And in context of the entire rally it is perhaps nothing something very important: The US Dollar. In fact it may be argued that entire unlimited QE and M1 money supply expansion game has had one key net effect: Kill the dollar. The correlation since the March lows seems pretty self evident:

Dollar rises, stocks go down, dollar drops, stock rise. Magic. Currency destruction may make a bull market on paper, but in terms of purchasing power it creates nothing. Have you looked at yields lately? The 10 year now trading below 60bp. Quite the V recovery.

So dollar destruction, the key to keep equities and the bubble floating higher? Good luck with that as the US Dollar has just approached a key level. See, it’s not only stocks that are in trend charts, but also currencies.

And this here suggests the potential for a super bullish move to come in the Dollar:

Sharp rallies in the dollar have generally not been kind to equities in recent years. Think 2008, 2010, even 2015/2016 and then of course in early 2020. The Fed has managed to bring about this big recovery rally as a result of their programs, and with it they weakened the dollar. But now the dollar has hit its key rising trend, a trend in place since 2011.

The unthinkable: The dollar rises from here against all expectations defending its trend and if that happens, then this rally driven by liquidity and currency destruction will find itself subject to a very different environment, perhaps one of rebalancing. The good news for bulls in the short term may be that the US dollar tends to flirt with that lower trend line for a while before kicking off, remember it’s a weekly chart, but it just tagged its trend line so notice has been served which suggests it may reverse trend at any time. And if it does, then this super bullish chart may find itself at serious odds with a market that advertises itself to be super bullish on paper, but underneath is not.


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Categories: Market Analysis

15 replies »

  1. Disagree on the dollar rising being bearish for stocks. One of the main drivers of this relentless distortion has been foreign banks and investors buying US dollar denominated securities. The Swiss National Bank prints Swiss Francs, buys the US stock market and gets a gain on the dollar and the increase in stock prices. Rinse and repeat. Same applies to all foreign central banks and foreign investors.

    • I disagree with Sven as well. The chart appears to be showing rising trends in both stocks and the dollar since 2011.

  2. “And in context of the entire rally it is perhaps nothing something very important: The US Dollar.”

    About time this was mentioned. Dollar dived due to the ECB finally voting on stimulus. DXY is mostly Euro/USD. Got to look at the trade weighted dollar index for the complete picture. If commodites rally, then that’s good for all the commodity currencies, ie.e USD/CAD, AUD/USD.

    What we are seeing is people losing confidence in the US govt as a source of relative fiscal restraint. Charts don’t capture this, it’s a sentiment thing that doesn’t look at technical charts. It could push the dollar to 90 on the dxy in a snap. Watch gold if you want to know what people really think of the USD.

  3. “Dollar rises, stocks go down, dollar drops, stock rise. Magic.”

    WRONG!

    Is there really an inverse correlation when stocks have been in a rising trend since 2011 and so has the dollar… “But now the dollar has hit its key rising trend, a trend in place since 2011”

    Stocks will decline because of the Fed not raising rates fast enough to counter rising inflation expectations. The Fed will drag their feet which will cause the dollar to continue to decline.

    Gold, silver, copper, aluminum, oil…all input costs, will keep rising and pressuring the dollar and stocks downward until the Fed could raise rates enough to match inflation.

  4. To try and keep it brief, I usually agree with most of your analysis Sven, and never feel the need to comment, but this…bullish case for the USD? Perhaps an oversold short-term bounce, then a hard roll over.
    Pull up a DXY monthly chart; start your trendline from the 2008 low of $70.698 and see the trendline end at about $78!
    Does it go there overnight? No…but we’ve already taken out the March lows (slow but steadily), after the bounce it could go QUICK! I see a bit of support at $90 and $85….
    Long-dated UUP Puts and patience!

  5. Hmm…looks to me as if Sven needed a whole day searching to show up with a bullish chart. 😉

    IMO the USD is definitely only ST oversold. LT it seems commodities are much more interesting. Sven, please take a look at soft commodities. Precious metals and energy already started to rise/to retreat. A super cycle in commodities could be in the beginning if the USDX falls sharply below the trend line and then doesn’t immediately retest the trendline.

    Wouldn’t such a scenario fit much better with your macro view?

  6. I caution everyone on this board last on July 11 watch for the intraday reversal close on Nasdaq 100 on Monday it did precisely that and filled the successive Unfilled gaps …Notice Monday certain Nasdaq stocks gapped open and reverse and filled gaps . The Nasdaq is now shifting into weak hands . I told everyone the earnings are factored in just look at how stocks react and look at the Nasdaq gap down today retrace and fade-away “ what wiseman do early fools do late “ easy money has been made and “ Brilliant money has been liquidating to stupid money 💰 hahahahaha

    • Good call.
      Dave Portnoy also called a correction this week.
      what if Sven post another bearish headline article like ‘Super Bear’
      will that be the end of the correction?

  7. Sven Henrich@NorthmanTrader59m
    ‘If QE and negative/zero rates worked we wouldn’t need QE and negative/zero rates.’

    QE and lower rates worked to fight deflation. The market is now moving on to an inflationary period. The Fed will lose that battle.

  8. Under what conditions will the dollar rise? The Fed is absolutely trapped .. the only scenario where the dollar rises is if the Fed raises interest rates ( which is never going to happen)
    People are still yet to realise that the Fed is out of options. Their last stand is the stock market and they will sacrifice the dollar to keep the party going.
    You think Amazon is high now? Wait till it’s $4000, or when Apple is $700. I do agree these gains will be worth less since the dollar is weakening

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