Market Analysis

Triple Trouble

Markets have run into trouble in September and 3 major problems have emerged and unless these problems are solved markets may have to contend with the distinct possibility of having topped for now.

Now to the extent these problems get solved favorably major rally opportunities can also avail themselves in the weeks ahead, especially as markets are also reaching sizable oversold levels.

Let me give you my most balanced but realistic view here, but as most of my readers know I’ve approached this market since the March lows with a view that all of this may be an awe inspiring bear market rally (1929 Redux) and in Key Charts I highlighted the issue of equal weight among other charts all of which point to a bubble in tech that formed as a result of historic liquidity injections and a new retail momentum chase phenomenon not seen since the year 2000 with traders ignoring all the warning signs (See Panic Buying).

That initial bubble has now cracked and we’ve seen very sizable corrections in stocks such as $AAPL, $TSLA and others as a sudden realization is sinking in: Much of the recovery that had everyone so optimistic this summer was indeed bought with Fed and fiscal money.

And given the historic context of major market peaks in early September during recession events one would want to keep this question in mind that I asked right at the current market top:

So to the extent that this game is about incremental liquidity this poses problem number 1: Stimulus.

There still isn’t any new stimulus package on the horizon and the economy is again slowing as claims remain stubbornly high 8 months after the initial crisis. Again over 860,000 new claims this week. And while we see some companies announcing seasonal hiring ahead of the holidays the larger message remains the same: Permanent layoffs keep making the rounds. And even Goldman Sachs appears to have capitulated on the stimulus front:

And this has been the message of the barrage of Fed speakers this week: We need fiscal stimulus. Or else?

The Fed has held off on announcing new expanded asset purchases. While it keeps running at an ungodly clip of $120B per month it nevertheless represents incrementally less liquidity than what they injected in the first few months of the crisis.
Clearly the Fed wants Congress to step up to the plate and hence market weakness may actually part of a welcome agenda to exert pressure on Congress to step up to plate.

But that’s a dangerous gambit for tumbling stock prices dampen sentiment and ultimately economic growth. So call it a game of chicken.

The next opportunity for the Fed would be in November right after the US elections which ironically brings us to problem #2: The democratic process. Markets hate uncertainty and the prospect of major election uncertainty is dampening sentiment. Not so much about the outcome but rather the lack thereof.

Yesterday President Trump refused to commit to a peaceful transition should he lose. I won’t bother with the politics of it all, but clearly Americans are dropping their expectations for a clear election result, rather one that is close enough that either side may contest it and the US may be dragged through an extended legal process before a winner is determined.

None of this would be confidence inspiring not only in the short term, but possibly in the longer term if the eventual winner’s legitimacy is not accepted by half the country.

Trust me, that’s not a scenario anyone really should want. It has chaos written all over it and in this context perhaps the $VIX Rising chart continues to rear its ugly head as it still hasn’t invalidated the potential patten, but rather keeps building it:

Another problem related perhaps to the previous two is the US dollar, problem #3.

As you may recall I had pointed out a bullish pattern forming at the beginning of September suggesting pressuring equities:

We’ve now gotten that breakout in the US Dollar and note it has reached a key pivot point:

Following the positive divergence and breakout out of the pattern it has defended the pattern during the OPEX week rally and this pattern defense has led to the confirmed breakout further pressuring equities.

Now to the extent that this resistance here holds and the dollar reverses market can rally again and with it recently battered metals.

What would reverse the dollar? Sudden progress on a stimulus package could do it for example. And there is correlating potential for a rally in the charts.

Take $ES for example:

It’s showing a falling wedge that has formed during the recent correction. The wedge is not confirmed as it has not broken out, but it’s there. Should it fail and prices break lower the next larger obvious support zone would be in the 3000-3150 zone.

And note the Nasdaq is showing a similar pattern which I’ve been highlighting in tweet thread below:

So we may note that these next few days may be critical for this market.

For markets to make new highs it needs more liquidity which may come in the form of a stimulus package still, and/or the Fed stepping up expanding their purchases again. Failure on either front continues risking this furious rally off the lows to have been a bear market rally exacerbated by historic liquidity and deceiving highs in select indices due to the valuation bubble in a few tech stocks.

Then finally of course: If the election shows a clear winner (one way or the other) and there is no contested outcome then a major relief rally may be in the cards following the election, but this uncertainty remains hence any future rally (even confirming the bullish wedge for example) may prove short lived.

Yes, these market problems are also opportunities, but be clear: If none of them are solved into November that $VIX chart defines risk going forward quite clearly.

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Categories: Market Analysis, Opinion

18 replies »

  1. CNBC analysts trying to pick the bottom today anytime markets show any green. BTFD mentality deeply ingrained.
    Not the bottom.

  2. Fed Bank of St. Louis President James Bullard said the economy may be close to a “full recovery” by year-end. Nothing to see here, move along folks…LOL!

    • It held, though not impressively, ending at 3246. Tomorrow could be quite important in where things go next. Bulls want to get back to 3300, bears would like to break 3190, nicely poised. Either is about equally possible, could be some juicy short term trades if you’re nimble.

    • Agric – I would like to see futures get us to 3260 (confluence area) and then 3280 would be a quick 20 pts. 3307 would be my next stop in 24 hrs. Could easily see 3230/3220 first, before a move higher. All we need is some positive stimulus news, oositive vaccine news, and/or president silence for a day to see some over-sold conditions get resolved. Sven is right though, huge risk both ways until election results “confirmed” and second/third wave fears “eased”, etc, which could be early January at best. Currently a great time to momentum trade, and cost average daily into a few value stocks that one plans to hold for 10 or more years.

      Good luck in all your investments!

      • Thx, Anon, I just spread bet for fun and to buy better wines for drinking etc, do OK for that with small stakes. It’s also a (distorted) window on what’s going on, keeps my mind active, is a fun game at times like this if one doesn’t take it too seriously. I concur with your thoughts on today’s movements. Slightly longer term (few weeks) I expect to see lower rather than higher, possibly dramatically so.

      • Sven – Hit my marks today from my post last night (Sept 24, 5:01pm). SP500 low was 3,228.44 today (3220/3230 Full Postion Buy), 3,306.88 (3307 Last Position Sell) was the high. Crazy the machines are so predictable…

        Good luck in all your investments!

  3. I am weening off trading and looking to add to long term positions. No one knows the future but metals, utilities, Intl/eem and selected REITS will be added to my bond ladder that I can no longer afford to add to.

  4. Clear winner or not with the U.S. election outcome these markets are still broken. A relief rally will be short lived. After that down we go slowly into the abyss. There is no way even half of companies still barely surviving make it through this winter. Lets be crystal clear here…………major damage has been done to our economies with this virus nonsense. The consequences will still be unfolding for the next decade. We are still in the first inning 3rd batter up with the reality of the wealth destruction still to come. Keep your money out of these markets……….it’s over!

    • I agree. Today’s dead cat bounce was based on Fed speak, $2.7T stimulus and buybacks starting again. All hot air and won’t work. Not the bottom.
      Down we go.

  5. Cramer pumping stocks today when the market turns green like Colgate penn Norwegian nvidia.
    All will be shocked when this bounce fails.

  6. Geez Sven, any time you talk politics, you sound like CNN… Trump refuse a peaceful transition? lol

    It was Hillary Clinton who fired the first salvo, for eff’s sake, saying that “under no circumstance should Biden concede.”

    How’s life inside the leftist media bubble, Sven?

  7. Sven, can you kindly explain why you conclude that Fed asset purchases increase market liquidity? It’s a popular narrative to cite ‘money printing’ and ‘increased liquidity’ as driving the market bubble, but the reality is that if the banks from whom the Fed purchases assets do not lend against the reserves created by these purchases (and generally they aren’t), no new money (liquidity) enters the financial system. Any positive market reaction is purely psychological…

  8. Sven – Mitch says stimulus “far apart” and futures drop from 3384 to 3343 in 26 minutes. The last two minutes of day session seen 177k contracts move the market down 25 points in 2 minutes, with numerous indicators predicting that risk with high probability at close. Analyst on Bloomberg stated “Mnuchin got the Algorithms all Excited today”, I was LMAO on that one, YES HE DID, Cha CHing! The HFTers are making a fortune in this volatility, and I simply ride the waves, especially the gigantic instantaneous drops, to hedge my long portfolios. Wish I could be part of your “LiveAlerts”, yet I do not twitter and never had social media, and I wish there was a trial as although I’ve paid more than $189 for certain forum access, it is a mental block without seeing how it works first. Perhaps someday…

  9. Sven – 40 point drop in futures in 8 minutes! Made my years income, got lucky as I thought it was weird the Pres did not do a 15 minute test (was waiting for secondary test I guessed). Hope you made some great $$$. Hope the Pres recovers quickly.

    Good Luck in All your Investments.


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