Market Analysis

Something’s Rotten


As $SPX is entering the February gap zone into 3300 (an area we’ve been mentioning for weeks in Straight Talk) and Nasdaq is again making new all time highs as investors keep relentless chasing into high cap tech, it may be worth pointing out that something’s rotten in the state of markets.

And no it’s not valuations although that’s a discussion on its own. Rather it relates to a specific component of equal weight namely the banks.

The price action is an absolute horror show. Just look at the year today performance versus the Nasdaq:

Which is odd considering all that is supposedly positive. Banks exceeded expectations in recent earnings. The Fed has been supporting the banks intensely including propping up the entire distressed debt sector by buying high yield debt and pushing $JNK prices back to near highs:

Not only that, but the Fed has managed to completely reverse the stress in financial conditions:

And now the Atlanta Fed is talking about nearly 20%+ GDP growth for Q3.

So why is there no sign of life in the banking index?

I’ll tell you why. Because things are much worse than they are advertised to be and investors better pay attention.

Indeed let me pull up a big picture chart to highlight how completely off this sector’s performance is:

First to note: The yield curve inversion of 2019. It, like many others before, precipitated a recession in the US. As did the weakening in equal weight ($XVG). None of this is unusual and it highlights how the broader business cycle (with Covid the historic trigger exacerbating everything) is actually performing no different than it has before. The only thing that’s different here is the historic asset bubble we have in some key stocks and the records amount of liquidity thrown at these markets.

Now you can argue the banks are hurting because of low yields, but we had low yields in 2016 and banks rallied just fine along with the rest of the market.

What you see in the big chart above though is that the market highs in 1998-2000 an 2006-2007 an even 2014/2015 all had the banking sector participate with either new all time highs or new cycle highs at the time.

Not this time. Not even close. $BKX can’t ever get to the June highs and remains far below all time highs. Rather $BKX is trading at the 2015 levels from 5 years ago. Maybe the price action will change with another stimulus package coming in the next few days.

But as it stands, the weakness in banks signals larger structural issues brewing that the market is currently ignoring. Indeed perhaps the bank stocks are signaling that the Fed’s interventions are not anywhere near as effective as record highs in $NDX and near record highs in $SPX suggest.

The previous, and smaller recessions in comparison, have had price consequences that lasted years. The current main index price action has you believe that price consequences only mattered for 4 weeks.

In my opinion this is a fantasy:

We’ll likely find out more following a decision on the next stimulus package. But if markets are supposedly forward looking then perhaps everybody should ask themselves: What are the bank stocks seeing that the rest of the liquidity drenched market is currently ignoring?

Something is rotten.


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Categories: Market Analysis

16 replies »

  1. Prawns, most likely. And they’ve been rotting for a looong while now. There were clear signs 15 years and more ago:
    http://theslide.blogspot.com/2006/02/fiscal-aside-rotting-prawns-in-curtain.html

    It is utterly impressive how long this delusion has been maintained by governments, central banks, their cohorts and the less witting parts of the markets. What is rotting is the entire financial, economic and market system. It has, however, been rotting for perhaps close to two decades yet the illusion of ‘normality’ persists. A total reset of some kind is necessary for reality to return, it could happen tomorrow or not for another decade or more, but it won’t be fun when it does.

    Till then I suppose you might as well party on, folks.

  2. Oh c’mon Sven. Give them a couple of weeks, they’ll “fix” the banks stocks for you. Just to take another argument off the table. What’s the problem. JayP, stop playing with your smartphone and start the printers!!! The big ones!

  3. Fed’s printing unlimited money. Trump and his buddies are tweeting weird stimulus stuff, to push the markets. Retail traders buying for free expensive or bankrupt stocks with their smartphones over a new broker named Robinhood. That’s Wall Street 2020. It’s like time traveling into the late 90s.

  4. The turn downward in the stock market is complete. Stocks are bad! Money going into the 401k is dead money for years.

  5. Dear Sven. You are really trying but the more the markets charge ahead, you are becoming more desperate for ideas.
    Your last idea of just last week was that a reversal (upward) of the USD will cause the markets to drop. Well? – Strong rally in the US Dollar today, but no effect on the market.
    You might want to take a break and re-group.

  6. Read the book entitled “From Free Markets to Fed Markets” by Talis Putnins (data in link below), and you will see that for every 10% increase in the balance sheet by the fed, the markets rise 7.4%. The data also shows the Fed is as(s)ymmetric by nature, hitting only the gas and not the brakes in the pumping of the stock markets. How this ends, nobody knows and we are only guessing. I will say that I sold all my bank stocks after the initial bump up in May as at some point all the loans come due, no matter how far into the future the fed and government delays the process. And when the payments finally come due, the fed does not have the ability to print money for every commercial real estate loan, every residential mortgage, every residential rent, every car payment, every credit card, every late payment loan on planet Earth that will be defaulting after all the moratoriums expire in 3, 6, 9, 12, and 18 months. At some point, there will be winners and losers economically, as the fed has only delayed that day of reckoning…

    https://www.bloomberg.com/opinion/articles/2020-08-04/fed-props-up-falling-stocks-doesn-t-try-to-prick-bubbles?srnd=premium

  7. Not quite sure if the banks are underperforming…at least their credit cards are still at 16% while they get money for nothing from the Fed…? No one knows for sure when this ends and based upon the action of the Fed no one knows if they will get hurt or not? Soon there will be writings of “soft landings” and such…but for now try telling someone who bought apple stock in 2012 that the stock market is not a good place to be…

  8. “Something Is Rotten”
    I strongly agree Sven. All is NOT what it seems or what “they” are telling us. “They” talk a lot and “They” are lying to everybody. This market is broken and the Fed will lose control very soon. Progression of this virus will unfortunately continue to spread, sicken and kill people. Nature will have it’s way on this one not the will of man. The next 7 years of famine have begun. Our investments are mostly out of this market and will be staying out for good this time. We’ve made our money. There have been too many what are supposed to be “once in a persons lifetime” market crashes in rapid succession to one another, 1987, dot-com bubble, 911, 08/09 and now 2020, to ever trust investing into these markets again. My key takeaway here is that my trust and confidence in our markets has been broken. We are out! And we’re not coming back!

      • 80% allocation in money market cash accounts for supplementary retirement capital. 20% stocks, ETF’s & REIT’s for continuing to producing monthly dividend income. Preserving the majority of capital grown over a lifetime is the goal right now because all is not right with the investment world. The price of silver and gold, which I also own with actual physical delivery, is flashing a huge warning sign to get more of your invested assets out to safety. I’m quite comfortable with my asset allocation mix right now while I wait out the coming market tsunami wave heading our way. What I see is an investment world looking at a tsunami coming in………………..while nobody is leaving the beach.

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