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:

September 1 2000: Top of counter rally
September 3 1929: Market top
September 2 2020: Top of counter rally?

— Sven Henrich (@NorthmanTrader) September 4, 2020

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:

Goldman drops the optimism https://t.co/hDlRLfQm4E

— Sven Henrich (@NorthmanTrader) September 24, 2020

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:

fwiw: I did say the dollar was forming a bullish pattern https://t.co/kJRD8xm4l1 pic.twitter.com/OfqhF5yM0y

— Sven Henrich (@NorthmanTrader) September 23, 2020

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:

Incidentally in the furious run up to the March 2000 top Nasdaq had an initial 14% correction off of all time highs which was bought for a new high & then the bottom fell out.
Just observing as $NDX has just dropped nearly 14% in Sept. following a furious rally to all time highs

— Sven Henrich (@NorthmanTrader) September 21, 2020

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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