Market Analysis


Ah it’s that time of the year again. Everybody is piling into stocks. Valuations who cares. It’s the end of year seasonality when stocks always go up, the Fed has our back, multiple vaccines are just around the corner, Wall Street paints a rosy picture into next year (as Wall Street always does) so what’s to worry.  Let’s go all in stocks.

Everyone has to decide for themselves of course what is a good risk versus reward proposition and as markets are drowning in optimism here in the middle of November I thought it might be worth pointing out a few data sets that may give some pause here.

First off perhaps the most obvious: Since the end of the October these markets have been running from one open gap to the next never filling any price action. We see this in a lot of index charts, but just highlighting the action here on $DIA the ETF that track the $DJIA:

I’ve spoken about open gaps before filling and seeing 6 open gaps in 2 weeks is not something I recall seeing. Not all gaps fill, but most do and chasing 6 open gaps up seems a proposition of poor risk/reward in the short term at least, especially in context of the broader picture.

Firstly note that 86% of S&P 500 components are above the 200MA. A rare reading, the last reading of such magnitude was in January. Markets then dipped a little, proceeded to make new highs on a lower reading and the rest is history:

Not suggesting a similar drop here of course but note high optimistic readings of the sort have led to pullbacks and corrections many of which have hit the 200MA eventually.

In context it is notable that $SPX is currently trading over 15% above its 200MA at the moment:

$SPX last connected with its 200MA in June so the extension is getting long in the tooth. Note also, despite the Moderna news today echoing the Pfizer vaccine news from last Monday $SPX has so far not managed to invalidate the rejection candle of last week.

And don’t kid yourself, this market has bullish sentiment.

AAII bull/bear sentiment has not been this ecstatic since the beginning of the year:

And asset managers also all back in long:

And when I say they are piling all in, they are piling all in with the largest weekly inflows into equities ever:

With markets at some of the highest valuations ever:

Whatever metric you want to use these markets are not cheap, not at all, but of course I don’t see Wall Street mention valuations when outlining lofty price targets for 2021 and 2022.

No, this market is back to euphoria:

with shorts disappearing:

The only people not really buying into the euphoria appear to be insiders. They are selling into the euphoria:

Go figure.

Six open gaps in November, some of the highest global valuations ever, the largest equity inflows ever, vastly bullish sentiment readings and equity positioning, with markets again vastly extended in time and price above key moving averages and shorts having left the building.

If you think that’s a good risk/reward proposition to the long side be my guest.

My view remains markets have work to do to the downside and that includes some gap filling. I’m not saying markets can’t keep drifting higher into OPEX week and $VIX futures expiration, but extreme strength can be a selling opportunity just as extreme weakness can be a buying opportunity.

As it stands the bull targets outlined previously were reached last Monday and today’s gap up has not managed to produce new highs. Perhaps that will change, but if it doesn’t that in itself may be a consideration worth pondering. Especially if one is all in stocks.

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Categories: Market Analysis

17 replies »

  1. On something you said earlier on twitter re wage slaves. “Freedom, ah freedom, that’s just some people talking” (Eagles, “Desperado”). They may have a point, to what extent we actually have freedom is very debatable. One’s genetics, socialisation and environment / circumstances probably determine the vast majority of our choices / actions. If you consider this freedom then it is really just the freedom to enact your programming. I’ve done the employed versus entrepreneur games, I would probably have been better off financially staying employed, but probably less happy.

    Some argue that capitalism, as presently enacted, is just a disguised form of slavery or serfdom – see the excellent Zeitgeist movies which are widely available free online.

    In summary: personal freedom is almost certainly an illusion, but for most people the illusion is preferable to admitting to that reality – as 70-ish million US citizens have just testified 😉

  2. Its a shame that the US needs a explosive printing press to push up their economy to keep it as a first world country, with tactics of a third world country.
    Just a fake leader, as a corporate socialist country rewarding failures, and using the covid virus as an excuse to win more $ without working

    • Americans are embarrassed, and in both shock and denial. As such, Brexit has further increased Texas secession talk in America. Therefore if a multi-trillion New Green Deal does pass in America in the next few years, and squashes the use of oil and natural gas, Texas will be somewhat forced to consider sucession more seriously due to economic reasons. Texas happens to be the only state in America with a completely independant electrical grid, and produces enough goods and economic GDP to thrive without the need of a federal government. Once states see that the U.K. can thrive without being bullied and controlled by a centrally planned union of un-elected officials , it will lure other states across the globe to follow similar paths as the central bank Feds control American states via printing fiat trillions to buy off voters, and the Feds are not elected by state voters. To be honest, America would most likely thrive if it was 4-5 different nations instead of one nation divided in half socially, as the 2020 election showed 78 million to 73 million votes. At some point, sucession will be a very serious topic in America so best of luck U.K., the rest of the world is watching with eyes wide open.

  3. Gap #7. That would be the down gap – they saved all their bazookas till the last 10 minutes Monday, that will be reversed with some on Tuesday, as is the way with these things. No sign that the reality of out of control pandemic in USA has had any effect on US stocks as yet, while the promise of effective vaccines keeps juicing them. I won’t spoil the movie but things are gonna get a LOT more critical before ANY vaccine effects start to kick in (starting about 3 to 6 months hence).

    So, folks everywhere, be wise and wear your mask and do all the other sensible things you’ve been advised – that’s the only way we have to limit damage through the next 6 months.

    To be honest the markets have been seriously disconnected from reality by a wash of liquidity for over a year now. Whenever reconnection occurs it will be epic.

  4. Great article – valuations are full but interest rates are zero and the dollar seems to be on a downtrend. It’s good to be a stockholder in today’s world with the Fed doing herculean tasks to push people into equities…

  5. pure insanity….with many thanks to all central banks. Who would have thought 6 months ago we would have spx above 3600………..??????????????????????????

  6. Sven – I seen your twitter comment today concerning the $50,000 student loan forgiveness plan. I can tell you Americans are freaked out. I have one friend who set up a 429 college savings plan and spend 18 years savings for his kids, and now feels like a complete idiot for being responsible. I have another friend who just paid off his two kids college loans to give them a head start, and really upset that he missed out on $100,000 of “free money”. Since most American families have at least two kids, we are talking $100,000 per family. This is going to cause huge social issues, as it is one thing to hear that your neighbor got $4,000 “Cash for Clunkers” stimulus to buy a new car by turning in a junk car, it is a whole new level to hear he got $250,000 of college debt forgiven for his five kids. So if you thought America was divided now, just wait until one executive order signature can magically create $2.2 trillion dollars (44 million student loans currently), and then magically eliminate $2.2 trillion of student debt to buy useles degrees, Apple products, and vape pens (Long APPL???). Such fantasy removes all time value of money, so labor and responsible savings do not apply, only luck and a single signature on a piece of paper will get you $50,000 ahead of the responsible smucks. Faith in fiat USD currency will suffer, as money is not real anymore when one person can create $2.2 trillion with a blob of ink scribbled on paper. The moral hazzard and unintended consequences for all types of loans are known knowns, yet who can stop the madness before the madness becomes normal?

    Awoke Concerned American living in third world political system (run by mafia-like central banking cartel)

  7. Tuesday. By the open stocks were below their levels pre the Monday vaccine juice (gap #7, down). So they ramped, and ramped and ramped, all day long. Still a down day. I was half anticipating a plunge in the last 10 minutes, didn’t come. Expecting about -2% by the weekend, it will probably come in one day, take your pick. I pick Thursday.

    • Seems I got that one wrong. Would be unusual for OPEX friday to be a biggish down day – and would bode ill for near term future – but it looks to me like that’s how the cards are stacked.

      The most reliable ramps in recent weeks seem to be in the couple of hours prior to european open, from about 06:00 GMT (=ET+5) sometimes persisting through european open (though you need to watch that, the first 10 minutes from 08:00 GMT are often a fake move) and often on to US open. Regularly the 06:00 levels are revisited during the US trading day, it’s a winning bet.

      The US pandemic data is acceleratingly worse, there are very faint signs of some concern in markets but if current progression persists much of USA could shut down in a couple of weeks making further recession inevitable – especially given lack of stimulus bill.

  8. Wednesday. Did you enjoy today’s aperitif? You’ll love tomorrow’s hors d’oeuvres.

    MrMarket: Hey, Jay, you seem a mite twitchy.
    JayPowell: Could say same ’bout you, M.
    M: You ain’t seen nothing yet, bro, you out of stawks yet?
    J: LOL, no, plenty of gains to come once this virus is out the way.
    M: When might that be Jay?
    J: Early in the new year, soon enough.
    M: I’ll take a rain check on that one. You ain’t had it yet?
    J: No, and keeping safe as I can.
    M: You do that, I’ve lost a couple of good friends to it, not hit me yet.
    M: Anyhow, just called to say it’s over.
    J: What’s over, M?
    M: Why, the whole caboodle, Jay. The golem, your job, all your frigging money – unless you get it out fast.
    J: You’re just joshing me M, I don’t scare that easy.
    M: True you don’t. You do have a nerve.
    M: But there’s gonna be a lot of angry folks baying for your blood.
    J: I’ll be fine, nothing serious is gonna happen.
    M: OK Jay, just a heads up. You take care, be seeing you. Maybe.

    • Won’t be long now. A little bit at a time, State by State gets overturned and handed back to Trump. Biden see’s his stolen victory vanish in the wind. Trump remains for 4 more years. The Demoncrats rage and Civil War in America begins. During all this the virus mutates, gets stronger, spreads faster as vaccines everywhere fail since it was all a lie to begin with. There has never been a successful Corona virus vaccine ever created and now “they” say “they” have several ready to go? What a bunch of bull s–t.
      “They” talk a lot don’t “They”. Liars and Faithless souls all of them.

      • Is that what you want, Terry? Really? On coronovirus vaccines: science moves on, the first 3 candidates use novel technology not available for SARS etc, and the lure of 7+ billion customers is a strong financial incentive to get it done fast; there will be effective vaccines widely distributed in 3 to 6 months. How long the immunity then lasts and how fast 50%+ of humanity gets vaccinated are the big questions. On the US election: there is near zero chance that Trump will overturn sufficient legitimate votes (or illigitimate ones if you want to argue that toss) to remain in power. He is gone and will likely end up in prison. On the will of the american people: the GOP have won the plurality of votes in US presidential elections once in the last eight, and much more fiddling of votes and voter suppression has been done by the GOP than the Dems over that time.

        I dearly hope that Biden finds some way to mend the fractured USA and restore greater bipartisanship to its warring politics. Of all the people who might have become president at this time he is probably the best possible chance. If he fails badly then you might get your civil war wish Terry, but I promise you, you won’t like it.

        • On politics you are so misguided however, I recognize it’s not your fault since we have such a warped bias media reporting lies all the time. It is the un-recognised criminals and morally corrupt and faithless people like Biden who are the problem as well as the main stream media. On the virus front Corona viruses are similar to cold viruses as there will eventually be thousands of mutations of the Covid-19 virus in the years and decades to come. Covid-19 and all of its upcoming mutations will NEVER GO AWAY. There will also NEVER be a successful vaccine against a virus that will continually mutate and become stronger and more infectious over time. Just wait a while you will all see. Additionally, it is not my wish that we get a civil war. A civil war will be the eventual outcome with an America that has become so polarized and divided and hates the other side so passionately. BLM and Antifa have joined forces to destroy America from within and the MSM is stoking the flames. Lastly, those who hate and want to fight must stop themselves or it is not stopped.

          Good Luck!

  9. Sven – Notice all the MSM now blaming low interest rates for inequality? This could be a pivot point for infinite ZIRP, as the cat is out of the bag that interest rates near 4% are best conditions for both consumption and keeping inequality in check. Per Bloomberg below:

    A key driver of the widening wealth gap is low interest rates, the Deutsche Bank strategists say, which boost the value of stocks and other assets that older generations own. Rising home prices have also multiplied the wealth of the old while preventing young people from buying real estate — or even from moving out of their parents’ basements.

    Low interest rates should also be good news for debtors, but young people disproportionately hold unsecured debt, like student loans and credit card debt, that charges higher rates and is less sensitive to Fed rate cuts. Older Americans, meanwhile, are more likely to have secured debt, like home mortgages and auto loans, whose rates have fallen sharply.

    Reid and Templeman suggest lawmakers try to narrow the economic gulf between the generations with policies that boost homebuilding and subsidize higher education, while paying for it by raising taxes on capital gains rather than on work.

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