A confluence of factors led to this week’s sell-off in markets. In the lead up to this week’s market top we saw all the classic signs: Weakening participation, highly overbought readings, vast technical extensions, historic valuations accompanied by extreme complacency and bear capitulations.
And make no mistake: This sell off was intense. $NDX dropped 10% within 2 days off of all time highs, one of the fastest and steepest drops from all time highs in history if not the most in history. High flying tech stocks such as $AAPL and $TSLA dropped 20% and 26% in 2 days as well.
A mere flesh wound in what was an unstoppable rally or signs of the end or the beginning of the end?
I’m discussing these issues and more of the macro context in a new edition of Straight Talk. As announced this week I’ve moved Straight Talk to a podcast format and in the next few days/weeks I’ll make sure it gets listed in your favorite podcast directories such as Apple Poscats, Spotify and Google Podcasts and perhaps others as well so you can follow new episodes from there as well.
For now here’s the newest edition of Straight Talk (click on image for link):
As I discuss some charts in the episode I post some here for reference.
The $VIX. In August I published $VIX 46 when $VIX was trading at 22 calling for a breakout to come with a target for 46. While the target has not been reached as of this writing we did get a major breakout and the $VIX hit 38 on Friday an over 70% move from the original post:
Also in August I mentioned the $DJIA having potential of its February gap and this gap was filled this week and it produced a rejection from here:
Also in August I kept talking about the weakening signals underneath and a warning sign on tech specifically the $NASI pointing to a coming correction in tech:
And I kept talking about the lack of confirmation in the value line geometric index $XVG with its message:
I repeat: New highs in select indices have been highly deceiving. They were driven by a few mega cap stocks.
The $XVG index suggests a border market still in a bear market.
Based on that measure $SPX would be trading at 2,600 were it not for mega cap expansions in 6/7 stocks. pic.twitter.com/UFSi7HchgD
— Sven Henrich (@NorthmanTrader) September 4, 2020
While indices kept driving to new highs in ever more extended patterns, similar to rallies we’ve seen before with this being the most extended since the year 2000. $SPX traded the highest above its 200MA and $NDX reached prices 33% above its 200MA:
All this as put/call ratios hit historic lows:
How well prepared were participants for today's sell off?
Judging from historic low put/call ratio readings at yesterday's close: Not very much pic.twitter.com/tRJgwpICMl
— Sven Henrich (@NorthmanTrader) September 3, 2020
While markets levitated to the highest disconnect from the underlying size of the economy ever:
Maybe, just maybe, 187.8% market cap to GDP was just a little bit too much. pic.twitter.com/wfENglvVaA
— Sven Henrich (@NorthmanTrader) September 3, 2020
And finally as outlined in Bear Capitulation and Panic Buying $SPX was reaching historic resistance as evidence by 2 key trend lines, both were hit this week and $SPX rejected from there:
In the context of history is this a coincidence that this all happened to come together at the beginning of September?
After all, following the market top in March of 2000 the subsequent counter rally peaked on September 1 and the top in 1929 ended on September 3rd, as did now this rally. This rally topping on September 2nd and in pre-market on September 3rd could all be a coincidence of course, but only time will tell.
The similarity in structure though between the historic run leading to the top in 1929 and the last 13 years is striking:
Pretty wild actually. Not sure if it means anything, but the structural similarity, despite all the differences in time and global technology is pretty impressive. pic.twitter.com/GHs15JDT81
— Sven Henrich (@NorthmanTrader) September 3, 2020
I’ll be publishing a detailed analysis of the technicals and implications tomorrow Sunday September 5th in the latest edition of Market Videos (if not signed up yet you can do so via the link)
For now I hope you enjoy the discussion in Straight Talk: Bear Raid.
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Categories: Market Analysis, Straight Talk
Firstly I want to thank you Sven for sticking to your guns over the last year and persisting in telling the truth as you see it, I’m sure it’s not been so easy lately. Integrity and honesty are important, humanity and humour help too, you are blessed with these and more.
Back to the trivia. Correct, this was but a raid, reality has barely impinged on the markets. I hope a few brave bears acted on my 31st Aug tips in response to”Panic Buying” here. I don’t know what happens next, yet. I know what should logically happen, and so do you (reader) if you’re honest.
Next week is probably pivital in deciding the direction of US markets into yearend: range trade, smack down or liquidity grind up. All are possible, though I think many will be sacrificed to avert the smack down.
If you did the TSLA and AAPL shorts, heheh, I would keep stops within 5%, I wouldn’t be shorting them at current prices unless cratering happens. Longer dated VIX (Dec, Mar) still look nice – ask yourself: do you think things are going to get less volatile in the next couple of months? Too soon to buy the metals.
A veil has peeled back the last couple of days, there are a good few more to go before realty can be truly glimpsed.
reality – typo in last line above.
Another negative 2 – 4% day today, Tues 8th Sept. Is that ‘cratering’? Pretty close I’d guess. The closing hour or so was fairly ugly for bulls, stops below SPX 3340 got taken out and it looked like trench warfare over the last hour to prevent further heavy decline. Indexes need to be up maybe 0.5% by 10am ET Wednesday to give them a cushion to avoid dropping a fair bit more, 3100 is coming into view next week unless we get a decent bounce very soon.
Brave bears would have made 30% and 15% on my TSLA and AAPL shorts suggestion of a week ago. Markets go down faster than they go up; the last few months have been silly fast up, I don’t think we’ve seen the silly faster down yet.
The markets often signal their short term direction when they restart after Labor Day. One day is not conclusive but unless serious repair is done this week I think that direction will be set.
Oh dear, just checked the after hours numbers, a further 1%+ down in last 30 minutes, we probably have our answer. Get out or get short.
Jay Powell: Hey, M, what was that tantrum all about?
Mr Market: ‘Lo, Jay, ’twas just a light dusting of reality, bro.
J: Well the timing doesn’t look good, you know.
M: Better a bit sooner than a lot later, Jay, if you want the orange golem kept fairly calm.
J: You threatening me again, M?
M: I don’t work that way Jay, I don’t have him on a leash any more than you do.
J: Hurmpff. It’s still not good, M.
M: And it’s gonna get worse, Jay, you know what you gotta do.
J: Can’t be done, M.
M: Oh yes it can Jay, would a 50% drop do the trick?
J: Not possible.
M: How about a 25% drop, would that convince you of a coming 50% drop?
J: You’re bluffing M.
M: Watch me, Jay, watch me. Be seeing you.
Excellent unmatched analysis !
There’s your ‘golden trumpet’ again, Sven. A fall below 2000 looks possible over the next few years. A slow, grinding, tooth-pulling fall that will destroy confidence in ‘the market’ for an entire generation.
Thank you for sharing your perspective with us.
What a world. U.S. Democrats in panic and rage mode realizing they will lose the election again! Trump will win with an even larger Electoral College votes this November. GO TRUMP! The markets on the cusp of round #2 of a major market crash to re-test the earlier March lows, which will happen, while strong hand insiders have been selling off for months to weak hands who will once again be left “holding the bag”. And finally the world still being hoodwinked into believing that the China Flu (Covid-19) is going to be the end of us all. To summarize, Trump will win in November…..Yea! The Democrats will rage/destroy and burn after this fact. There are plenty of prison cells ready for them when the crackdown against them starts after Trumps big November win! The markets will CRASH again this Fall……………and slowly grind down for about the next 7 years until they reach a bottom. Then they will slowly start recovering as our economies recover. Lastly, the China Flu will return again and again year after year in all it’s mutated forms just like the common flu does. There will be Covid shots with limited effectiveness just like when you get the annual flu shot………….but there will not be a reliable vaccine EVER for the Covid. The Chinese Flu just like all other viruses and bacteria all around the world will just be another pathogen that the world is just going to have to live with. Just live your life everybody and accept you mortality when it eventually comes to us all.
Life is Good!
Not sure if you are being sarcastic or just misinformed. Until you’ve contracted and survived COVID, don’t be so sure it’s just a flu of the Chinese variety. BTW, life is not good in general. A little bit of compassion and less of this winner takes all mentality will help society and humanity go a long way. What’s the point of having money if we are surrounded by civil unrest/divisiveness, inequalities of 2+ centuries that still exist and blatant corruption at the highest level? One can only live this “orange” bubble for so long until it pops.
Always enjoy your analysis, Sven! Regarding the “VIX 46” thoughts, was the pop to 38 likely to be all we get this time? These VIX/VXX pops seems to be pretty rare and fleeting, and once they happen they seem to go back to decay mode for a long time. Thx
I would give VIX > 38 a 90%+ probability over next 3 months but be aware different dates have considerably different values:
and your trading platform is unlikely to have many quoted, the next couple of months seems to be typical.
“Buy and hold. Do not trade” uvxy soxs tecs sqqq spxs sdow drv
For those that sold the rip yesterday…did you buy the dip today in uvxy soxs sdow sqqq drv spxs tecs?
“Own it. Don’t trade it”