Market Analysis

Binary

Markets are faced with a multitude of binary events in the next few weeks all of which could have a positive or negative impact on markets.

Examples abound: Either there is a stimulus package or there is not. Either the election is contested or it’s not, either Trump wins or loses, either he stays in or he pulls out, either the Fed will add more liquidity or they will not, either Biden wins or not, either Democrats win the Senate or not, etc. I could go on, but there are simply tons of binary events ahead of us which we don’t control and yet they all could have major impacts on markets.

For now the immediate new carrot dangled in front of markets is the now long discussed stimulus package. Every day, in some cases every hour, we’re getting headlines that increasingly suggest a stimulus package will get done. The White House wants it, the Democrats want it, the Fed wants it, Wall Street wants it and perhaps that’s the ultimate arbiter, for what Wall Street wants Wall Street tends to get and a stimulus package is clearly on the minds of many that want more liquidity.

The danger of course remains the ever widening disconnect between fundamentals and markets as Mohammed El-Erian once again reminded of this morning:

But nobody seems to care about the disconnects as too conditioned markets and participants are in the pursuit of the next liquidity carrot and the firm belief that all outcomes are positive.

If earnings and the economy improve then market valuations are justified, if the economy continues to slow then someone, be it the Fed or Congress or both will simply fork over more money an contain any downside. That may all be true as this intervention game has remained the market’s primary price discovery mechanism since the March 2009 lows and certainly again since the March 2020 lows.

Nothing matters but intervention.

The next 4-5 weeks will tell us whether this complacent attitude toward market pricing will have been justified.

From a technical perspective let me offer some follow up thoughts to the recent charts I posted.

Recall on September 25th I outlined a bullish falling wedge on $ES as well as a key technical pivot on the US dollar:

Let me observe that the bullish falling wedge on $ES had indeed triggered and that the technical pivot on the US dollar has also reacted perfectly from a technical perspective Let’s update these charts.

First the $ES:

You see the clear bullish breakout out of the falling wedge which has culminated in the move toward near 3400 today. But note also that a new potential pattern is emerging, that of a bearish rising wedge. This wedge was at risk of breaking on Friday but has held today. The pattern itself has risk higher i.e. into the .618 fib or even .786 fib, but a break of the wedge to the downside suggests risk back to the recent lows or, on a larger event, toward the original lower risk zone (pink) outlined in the September 25th assessment.

In context then an updated view of the US dollar:

The dollar indeed rejected from the technical pivot and is now forming a potential cup and handle pattern. This patten is far from confirmed but the potential is there and a break back above the .236 fib would confirm it in which case recent lows in indices were not “the” lows.

Which brings us back to the $VIX patten I outlined in $VIX uprising. It’s still here, unconfirmed but not invalidated either:

For a market that seemingly wants to price in a stimulus pattern as a given the $VIX remains stubbornly high.

I’m not here to predict how these binary events will turn out. But I’m pointing to the reality that binary means they can go either way and as such bear a lot of risk.

I’ll leave the political punter to others, but it appears to me that a stimulus package is an absolute must for bulls to re-ignite the next rally and for that to happen market favorable political conditions must emerge in short order or immediately following the election.

As these markets continue to suck at the fountain of liquidity while ignoring everything else failure appears to be not an option for my now old mantra holds as true as ever: There is no bull market without intervention. The time that markets have been able to stand on their own is long past and gone. And with rates held at zero until at least 2023 that mantra will continue to hold true for years to come.

Market returns remain a liquidity subsidy whether driven by the fiscal or the monetary side.

Participants continue to bet on a favorable outcome of the upcoming binary events. While that may be true, keep in mind that the charts in their current configuration leave room open the possibility for a different outcome. From my perch both the binary events as well as the charts have to be watched and evaluated very carefully.


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Categories: Market Analysis

10 replies »

  1. curious your long term tech analysis of US dollar, as the monthly charts I review with data back to 1980’s show 2 prior peaks and then the current one we’re into with signs we might be heading to the sort of 75-80 DXY levels. short term, pain meter could easily stall this with further rebound upside over the next few months, but hence once the election is past would be quite curious what the multi year view on dollar looks like to you given folks like Stephen Roach suggesting dollar dominance is likely ending by next year. thank you in advance.

  2. The fed has engineered a “FU-Recovery” for the bottom 90%, soooo add that to your binary list of screwed or not screwed.

    Per federal reserve research data in link below, the top 1% own 53% of stock market, top 99% to 90% own 25%, and bottom 90% own only 12%. Seems kind of cruel to keep asking America how their 401(k) are doing when only the top 10% get virtually all the gains.

    The fed has single handily engineered the next peasant versus robber baron era…congrats???

    https://realinvestmentadvice.com/wp-content/uploads/2020/05/Stock-Market-Ownership-BCA-050520-large.png

  3. Off topic. After a surprisingly quiet 3 weeks at what is normally the peak of Atlantic hurricane season we have a hurricane Gamma spinning up in the Carribean and forecast to hit near NOLA friday night. It is the fourth to aim at NOLA this season, which largely managed to dodge the first three. The forecast is very uncertain just yet, should become clearer once it hits / passes north end of Yucatan tonight, all north coast of Gulf should keep a close eye on this one.
    https://www.nhc.noaa.gov/

  4. Or the markets will continue to blithely ignore all the outcomes the reality binary events throw at them. To whit: they are currently up on where they were before POTUS was diagnosed with COVID-19. The markets are in La La land and will remain there for as long as they possibly can, rationalising anything negative as positive. You can happily keep BTFD until they check out of Hotel California, just be sure to protect your gains with appropriate stops because one day reality will matter.

  5. Covid can create brain inflammation. Brain inflammation can create difficulty thinking, focusing, having a high emotional intelligence level, etc. Pres was breathing heavily on the balcony. He has/had covid, with inflammation being a fact due to dexamethasone taken to decrease inflammation. I am not a doctor, yet I have slept in a Holiday Inn Express once. Thus I suspect we get a lot of weird things said over the next few weeks to months, beyond “normal”. What I do find shocking is “IF” stimulus negotions are not passed until after elections, “AND” we get a blue sweep….yes we get $2-$3 trillion stimulus “AFTER” Jan 20th inaguration, which means it won’t hit the economy until February 10th (3 weeks) at earliest. That is a long time from today, Oct 6th! That would be over 4 months away…

  6. “it appears to me that a stimulus package is an absolute must for bulls to re-ignite the next rally”
    And Trump has just killed that. Bulls are left with two remaining potential positives prior to Nov 3rd: vaccine optimism, earnings optimism. The former is highly unlikely, Pfizer is the only US company with a very remote chance of filing for vaccine approval before election. Earnings? Well they ain’t going to be generally good, though some, like AAPL in Q2, may surprise above the very low bar that will be set.

    Perhaps the wildcard for bulls could be markets embracing a blowout Biden victory but, even if they do, they are likely to remain jittery until that’s a proven and accepted fact.

    So, the odds of a rally twixt now and Nov 4th are even less good than Trump winning in 2020.

  7. Dow rallies more than 500 points for its best day since July

    “In figures released Wednesday, the Census Bureau found that nearly a quarter of Americans expect that they or someone in their household will lose their job or take a pay cut before Election Day; nearly one-third expect to face foreclosure or eviction within the next two months; and more than 10 percent are facing food shortages.”

  8. When politicians are more concerned about citizens getting subsidies for healthcare premiums, versus passing a stimulus to keep people from starving, you know that this is not going to be a fast process that Wall Street has already banked. Due note that politicians get free premium healthcare for life, but they are “better than” you and me, right? Vote in 2020…

    Per CNBC:

    Senate Republicans expressed opposition to the bill under negotiation in a Saturday morning call with Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows, sources told NBC News. One source said Republicans took issue with what they described as an effort by Democrats to provide maximum health insurance subsidies to any new Obamacare enrollee as part of an agreement.

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