Market Analysis

Imbalances

A brief follow up to Reality Check:

As indices, but not the market, keep crawling higher on the unprecedented market expansion in select stocks imbalances are building that suggest reversion risk is building. Whether this reversion risk sets up for a buyable dip or a change in market character remains to be seen, but the more disconnected charts get the larger the reversion risk in my view. Call me old fashioned but I still subscribe to an apparently forgotten scientific theory known as gravity.

And be clear, the market cap expansions we’re witnessing in 2020 off of the March lows are without precedence:

Nearly $8 trillion market cap concentrated in just a few stocks. If you want to think these 7 stocks have added $4 trillion worth of future earnings potential since 2018 be my guest, but not this analyst here. No Sir.

And amid this explosive market cap expansion we are also witnessing a total collapse in the velocity of money:

Which means all this liquidity is not making it into the real economy. The Fed with its insane liquidity injections has brought about massive asset price inflation, but it’s not lead to banks lending. The temporary goosing of reserves has led to a bloating of balance sheets that have contributed to the depression of the dollar:

But without lending this will invariably prove to be a short term sugar high and a reversal in the dollar would lead to an aggressive repricing of asset prices.

And be clear: This 5 month long rally has largely remained uncorrected and what were extremes at the lows (1929 Redux) has now led to extremes at these new index highs here.

Case in point: $NDX:

The monthly chart now pushed far outside the monthly Bollinger band. It did so at the tops in 2007, 2011, 2012, 2018, 2020. In 2014 we saw several months in a row poking above but always reverting at some point inside the monthly Bollinger band. Here in August price is entirely outside the Bollinger band increasing reversion risk.

Furthermore note the price oscillator versus the monthly 20MA is now over 32%, by far the most extreme extension in 15 years.

The monthly $SPX chart shows a similar stretch, yet not quite as extreme as fewer components are tech driven versus $NDX of course:

Still, $SPX is over 225 handles above its monthly 5 EMA, a moving average that is very frequently tagged, and price is also outside the monthly Bollinger band. The oscillator is also stretched at 14.39, but has seen slightly more extremes in recent years, all of which have led to reversion.

Furthermore it should be noted that a major trend line is approaching just ahead offering formidable resistance should price get there.

Bottomline: All of history suggests reversion risk is building as imbalances are building.


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Categories: Market Analysis

37 replies »

  1. I found brilliant your research and your way objective to explain the facts. Reality is the FED is buying directly via their friends any asset and indirectly via the Robinood spammers that buy anything. One day the reality check will come and like everyone was buying silver like there is no tomorrow they will realise that a company thst sells mobile cant be at at valuation of over 2 trillion!!!
    Meanwhile I accumulate very small the VIX and ETF inverse REAL Estate. Good luck to the rest of the eorld that believe still that gold is safe heaven.

    • why do you think the stock market will ever go down in a meaningful way again? surely the FED supports these mkts to the extent where every small sell off is supported not just by price anymore but by behavioural change to investors psyche. the stock market is essentially undervalued because traditional metrics used to measure value, profitability etc are on a ‘break’. if there was such a bubble as you suggest why not get long ? there will be hardly any down days for the rest of this year more than 1%. asset prices under these conditions are cheap and charts dont matter anymore or at least as much as you could say tesla is cheap compared with revs!

      • This kind of thinking is exactly why I think stocks will not only go down but more likely halve in value within the next year or so, and you’ll be lucky if it’s not worse than that.

        I’m all for riding this bull (shit) while it lasts but you’ve got to be watching it at least daily else you may suddenly find 10%+ losses if you’re long. Make sure you have stops that preserve your profit.

        • This whole whiltshire/total cap to GDP measure Sven points out (daily) serves to me as a constant reminder that no rules apply anymore. We are in a suspension of rational boundaries ( yes for the moment) there is too much money to be made in this mania.
          Agreed stops are essential!
          Peak silly season 🙂

  2. why do you think the stock market will ever go down in a meaningful way again? surely the FED supports these mkts to the extent where every small sell off is supported not just by price anymore but by behavioural change to investors psyche. the stock market is essentially undervalued because traditional metrics used to measure value, profitability etc are on a ‘break’. if there was such a bubble as you suggest why not get long ? there will be hardly any down days for the rest of this year more than 1%. asset prices under these conditions are cheap and charts dont matter anymore or at least as much as you could say tesla is cheap compared with revs!

    • Agreed ! DIPS ARE THERE TO BE POUNDED (not bought anymore) we are in a pounding of the dip environment now a newer school evolution of the tame old buying! Stock splits anyone ? Basically BOGOFs. Yeehaaww #PTFD

  3. Is everyone still making the maximum contribution to their 401K’s and still mostly in equities (big cap, small cap, stock portfolio)?

    I’ve reduced my contribution % and moved mostly to treasuries.

  4. Sven, I agree with you, the next dip will be a change in character.

    Dips in inverse ETF’s are buyable and for a long term hold.

  5. fact is: by NOT having the FANMG+ names in your portfolio in any meaningful way means significant tracking error. the correlations for this bunch also works against port sharpe performance upside the narrowing of the major indicies is purely a testament to these companies success in the ever complex way humas organise themselves and difficult to bet against for any long term investors.

  6. look at the TEVA headline just now
    USA TO CHARGE TEVA IN GENERIC DRUGS PRICE FIXING PROBE. bad
    price before statement 9.72
    price after release low: 9.05
    3mins later price: 9.50
    DIP ARE THERE TO BE POUNDED!
    THERE IS NO BAD NEWS, ONLY PRICING DISCOUNTS, GET THERE BEFORE SOMEONE ELSE DOES

  7. Bottomline: This is the blow off top. We are headed back to the break out that took place in 1995 and retest the highs of 1994 around $SPX 500.

    Stocks will be a bad investment for the next couple of years and money contributed into your 401ks will be dead money.

  8. Agree. Fed is propping the markets through the election and after that my guess is that it is going down, down, down… At least as measured by Gold. Stock market is in a bear market now when measured in gold . Will get much worse.

  9. I’m only contributing into my 401K up to the company match.

    Even the tax deferral is not enough to entice me to contribute anything more than that to this stock market bubble.

    • For your 401K, look into the Stable Value offerings, which are ONLY available via 401K’s, not brokerage accounts or IRAs. I’ve used this for my effective bond holdings for many years. Rates are low right now in mine, but still at 2.4% with no risk. No stable value fund has ever “broken the buck”

  10. The last dip and run up in this stock market bubble is taking place right now.

    ‘BTFD’ strategy is about to pass. Pay your last respects.

  11. As always, Sven, I appreciate your brilliant Market Analysis. A sane voice amidst this madness. (I’ve been saying and feeling this since becoming acquainted with your work in 2018!)

  12. Gold and silver got hit. Bitcoin is getting hit (topped). Next is real estate and the stock market. Semiconductors (SMH) made new high today but completed a backtest of the bottom of the trend channel on negative divergence.

    1994 here we come. $SPX 500

  13. Hey Sir,

    It just went higher, 11742.5 in NQU0.
    I feel sorry for the shorts.
    Wonder where the money is coming from.
    Don’t think it is retail at these levels.
    It cannot be a short squeeze day after day also.
    Respect your thoough analysis always.
    I do see a 400 point decline by month-end.
    Thanks

  14. On thursday, jerome powell is set to announce that fed is willing to let inflation run higher. why is that not a bullish signal for the markets? I think markets will continue to grind higher.

    • Because the bond mkt may puke and drive long term rates higher. And the USD will rise in anticipation. Both markets are at cross-roads – does not mean a reversal, but a possibility.

  15. If true that should be a disappointment to the stock market. Yields will probably go up on the news and the market will decline.

  16. Speaking of imbalances, how many humans understand that the Fed printing to artificially expand GDP is actually expanding C02 levels artificially as it pulls future consumption forward, and thus more carbon is released into the environment. The fed is not only destroying human equality, capitalism, and democracy in the process of printing trillions, they are destroying the future of mankind living comfortably on planet Earth. Want proof, look at the global CO2 ppm (parts per million) levels chart. Except for WW2 between 1939 to 1945, C02 PPM levels have never went sideways or decreased since the 1950 exponential rise from the start of global capitalism. Yet in August 24, 2020 the 411.96 ppm reading has fallen back to April 2018 levels, decreasing 2.35 ppm, which would make sense as planes and auto use fell globally, along with carbon producing industry and global GDP in general. So once the Fed prints another 10-20 Trillion over the next few years, perhaps we can once again pull forward CO2 levels from the future, well before we are prepared technologically to deal with carbon sequester on a global scale…brilliant! Simply put, Jerome Powell is not only the most destructive human ON the Earth, he is also the most destructive human FOR the Earth…

    https://www.co2levels.org/

    • Congress needs to do their job and stop the Fed. We should all vote in new candidates. Vote against every sitting politician/incumbent

  17. Thanks for another succinct article on the state of play.
    Just a slight edit needed above: “but it’s not lead to banks lending“—should be “led”. The other lead should be administered to Jay Powell.

  18. The Treasury General Account with Trump’s re-election fund administered by Mnuchen and Blackrock will run out of money sooner or later, or make a mistake some clever hedge fund can take advantage of – like Soros did with Britain’s ERM debacle on Black Wednesday in 1992. This time I think Powell will have the last laugh and call their bluff.

  19. I agree with “JustTruth”, these markets are only being sustained until the U.S. November election is over. From there another trigger will be created and then down we all go again to re-test the March lows. At that re-test level the markets will continue to grind down lower and lower for years to come just like the period from 1929 to 1932. This time the markets will likely take about 7 years to bottom. My best advice is to get the majority of your money out to safety and start spending it. Just keep a little cash in the game for dividend income.

  20. I’m still holding UVXY, SOXS, TECS, SQQQ, SDOW, SPXS and DRV. Taking a loss but holding until next year. Opportunity for big gains has arrived.

  21. Capitulation taking place in SQQQ. Huge volume last several days. The sign of big money firms buying up SQQQ. Looks like the selling is over.

    Big opportunity in SQQQ right here. Don’t let it pass you by.

  22. Wall Street loves the “worst Storm in 160 Years: Hurricane”, as the super rich thrive on death and destruction because in the end, all that matters is GDP and paper wealth, right? The broken window falacy is alive and well on Wall Street, not so much for Main Street Americans in the path of hurricane Laura. Keep save out there!

    Laura Threatens to Be Worst Storm in 160 Years: Hurricane Update

    https://www.bloomberg.com/news/articles/2020-08-26/laura-threatens-unsurvivable-storm-surge-hurricane-update?srnd=premium

  23. amazon and microsoft making new highs on negative divergence. cup and handles on both about to fail and break down.

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