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:
“The positive hope is that a better economy will validate the asset prices. But in the short-term, even if that doesn’t happen, people are willing to ride that wave, which makes the disconnect even bigger,” says @elerianm on equity prices versus the health of the economy. pic.twitter.com/sf7oCQEh8b
— Squawk Box (@SquawkCNBC) October 5, 2020
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:
Quick market update pic.twitter.com/UVXRRMzEOr
— Sven Henrich (@NorthmanTrader) September 25, 2020
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