Market Analysis

Blow Off

Four vaccine announcements. Janet Yellen to the Treasury. Donald Trump opening the path to a transition. Fed and ECB signaling more stimulus to come and yet, no new highs on $SPX and $NDX. Rather the bull target identified in October and again discussed in All In still stands having been reached on November 9th.

I find it notable in context of all the bullish boxes being ticked off and the continuous sentiment of euphoria permeating markets. Now I’m not saying the top is in, but I’m noting a certain lack of of progress in the overall market.

At the same time we are witnessing blow off action in several other indices and I’d like to highlight to small caps here.

A ripping 21% up from the November lows and up nearly 29% since the September lows. “Smooth market functioning” the Fed calls the asset bubble they have unleashed. I call it asset price inflation run amok as people abandon all caution and are piling into stocks no matter valuations:

Capitulation in the face of overwhelming liquidity?

After all 21% of all US dollars have been created just this year:

With no end in sight it seems:

The printing will continue until morale improves.

Well congratulations, fin twit is as bullish as ever was, even the bears are throwing in the towel:

And small caps encapsulate this sentiment:

“He’s going vertical. So am l. – We’re going ballistic, man.” – Maverick Top Gun

Moves like this are momentum and short covering pure and they come with consequences. Namely reversion risk and sustainability.

Firstly note how completely incompatible with history this move in small caps is. Here is the monthly candle:

Not only is it the largest monthly upside candle in memory it is also poking far above the monthly Bollinger band. If anything this candle looks similar to the capitulation candle we saw to the downside in March during the crash. Small caps appear to be literally crashing upward.

So outsized is this move in small caps price is now entirely outside the weekly Bollinger band:

Not normal, let’s agree on that. Sustainable? Questionable. Especially in context of a rally ever more dependent on open overnight gaps:

Not normal smooth market functioning behavior. Open gaps have been the hallmark of this market and while the market is persisting on this unprecedented path it continues to inform the coming downside risk.

As does the $IWM’s disconnect from its 200MA reaching 27% this morning:

The oscillator reaching above 20 seen last following the rally off of the 2009 lows. But even that rally proved too much and resulted in an eventual reconnect with the 200MA and a move below.

With a daily RSI on $RUT now reaching into the 74 level small caps are setting up for reversion risk of size:

Note also the rising wedge. I’m not saying the $RUT will top here, what I am saying it could reverse at any moment for any reason and when it does it comes with reversion risk of size. Hence buying long here is dangerous in my view and some may argue shorting it is as well as these momentum moves can defy reason.

But abandoning reason and embracing recklessness is what central bankers in their self conceited wisdom have bestowed on these markets yet again while failing upwards:

Financial stability they call it. There’s nothing stable about the $RUT or the global distortions created in capital markets. I call it speculative excess in context of a historic liquidity bubble. And investors have embraced it hook, line and sinker. Watch out.

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Categories: Market Analysis

22 replies »

  1. When the blow-off/crash finally comes, it should be a spectacular event to watch. It will be interesting to see how the players exit this bloated, insanely overvalued casino.

    • Congrats to Larry Edelson for calling DOW 30,000 (blow-off top). He called it back in 2015 during his 2015-2020 forecast. May he RIP.
      “Between the flight capital from Europe and from Japan, you could see the Dow move all the way up to the 30,000-to-32,000 range”

      • He also called the market volatility during this period.
        “A five-year roller-coaster through hell — wild, euphoric rides up the hill … and devastating falls that could scare the living dickens out of you”

        • He predicted Silver will bottom out around $12 and by 2020 it could reach $125. (still waiting)
          “But on the upside silver also has much more potential because it can easily go to $100 or $125 by 2020.”

  2. Sven, it’s misleading to equate an increase in the MZM money supply with ‘printing dollars’ as Katusa’s chart does. We need to be honest about how QE works – unless banks loan the reserves they get from selling treasuries to the FED, which they are not doing, no new money enters the economy from QE. In any event, the velocity of MZM money, which if increasing tends to evidence both economic activity and upcoming inflation, has actually decreased by 25% since the pandemic began… So I’m sorry, but there is no liquidity or inflationary story in this chart, in fact it just confirms that we are in a very weak economy and deflationary environment. This does however, support your observation that we are witnessing the mother of all equity bubbles.

    • 15 Jan 2020, Federal Reserve Bank of Dallas President Robert Kaplan: “Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets.” “The Fed balance sheet is not free and growing the balance sheet has costs.” “All three of those actions are contributing to elevated risk-asset valuations,” “And I think we ought to be sensitive to that.” “It’s a derivative of QE when we buy bills and we inject more liquidity; it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it.”

      My comment: equity bubble is the same thing as “inflation of equity prices”. The exchange of debt (T-bills/bond) for dollars IS affecting equity asset pricing, as per Kaplan..

  3. Dear Sven
    For all your erudition and discipline, you continue to look for tops and reasons for stocks to collapse, rather than acknowledging that the CBs have “broken” these markets and have provided enough opium to kite valuations as high as they see fit.

    So much more money has been made on the bull side of this market.

    • Your comment ignores March. There’s another March dead ahead. If the Fed was as omnipotent as folks like you believe, there would never, ever be a March.

  4. Sven You are so on point the $ flow has distorted the markets so big and you add in this new herd on day traders buying calls along with HFT Teams pushing the herd we never seen such in are life’s as Market makers have to buy to cover the calls as HFT teams push them by buying calls & stock. This new game of flow has taking over the game. I would love to hear your thoughts on this? Thank you!

  5. IBVC is up 1150% this year, and xxxx-times higher than in 2013 when Maduro took over. If Biden, then Harris go on the same road to ruin, we will see a 6-figure S&P within this decade. You’ll need to seriously scale your charts. This year’s gains will look like anthills to Himalayas in 8 years.

  6. But, how will they make a case for more & more stimulus when everything is looking so bright and rosy???
    $INDU now >30,000
    The future never looked so bright!!
    Greatest (debt-dependent) economy EVER!!!

  7. Mark and Raymond, the Fed is buying treasuries from the big dealer banks and giving them excess reserve balances. It’s an asset swap as you have suggested. Here’s the thing: those $Trillions in excess reserves “leak” into asset markets as the TBTF banks are free to do what they want with this money since the repeal of Glass-Steagal. Hell, Goldman Sachs isn’t even a depository institution. It’s a hedge fund just like JPM and the others.

    It’s great to be in the top 0.001%!

  8. Market euphoria is now unprecedented…much higher than in Jan-Feb of this year….the only question is: how much higher does it get….before we see an unprecedented collapse?

  9. Yes……..the markets and this world are broken. They just haven’t broken down yet. The imbalances that have been created will revert to a balance again not when we would like it to happen but when mathematics, physics, natural laws and nature decide it’s time to re-balance everything. All this fake wealth created on paper will soon evaporate by the Trillions in a matter of weeks to months. Greed and the Fear Of Missing Out (FOMO) gets more people in. Hope, during a crash, will keep most people invested while their paper wealth vanishes. Smart and insider money is already out. Ask yourself investors, who is now left holding the bag at or near the pivot point on the way down………again?

  10. Donald joker bully Trump amde his job, to distract 4 years, so now on Obama can continue his third term, or George´s fifth term….And none have saw it… lets the party goes on for Israel

  11. Weiss Research, Bo Polny, Charles Nenner and Sven have all been wrong in trying to call tops in this bull market. Will you follow these guys on the way down when the actual top does arrive? For even a broken clock is right twice a day, unless it’s digital.

    • Add David Rosenberg to this list. All have been wrong trying to call a top and fighting the trend all the way up with a negative tone on the economy and stock market for years.

      If you’ve followed others that have been calling tops please add the name in a reply for future reference.

  12. The market is setting new highs while the US and much of the world is in a deep depression.
    The market should be down 30% to 50%…or more. But it is being falsely supported by this Fed flood of stimulus. None of that should be raising market prices though. It’s debt! It’s not productivity or growth by businesses.
    The market is set up for the next “Big Short”. Most people would be better off going to cash right now. But for those who know how to short the market in stocks or option puts…its going to be sweet.

  13. On the vaccines….I’m reading all kinds of analysts that are saying the market is turning because several vaccines are coming out. So they are advising and pushing clients to get back into stocks in a big way. If you’ve ever seen cattle get “pushed” into the corral and the line that heads to the slaughter…well it is exactly like that.
    There are no approved vaccines yet. Much of the trial data is incomplete…and even is being manipulated in order to get something…anything…out there.
    Then there is the issue of needing enough doses to vaccinate 7 Billion people. And some of these vaccines/treatments require 2 or more doses. So say half the people in the world take it…then they need to manufacture 5 to 10 Billion doses. That will take about 3 years if everything goes right. So people who are saying it will all be better by next Spring…they are lying. You can’t even call that an honest mistake.
    As they say – there are lies, damn lies, and statistics. These vaccine statistics mean the corona virus will be around for a while….and the governments of the world have no idea how to manage it…so this business depression will not be turning until 2022 or 2023 at the most optimistic. So which way do you think markets are going to go?

  14. The virus will have it’s way…………..not the will of man. Just wait a while and all the lies and hoodwinks will be exposed while the virus will still be here mutating, getting stronger and spreading faster. The world today has no idea what a truly massively deadly Pandemic is really like…………….Covid-19 is just warming up right now.

  15. Funny, Sven says he’s not selling until sentiment reading hits 105. He’s had a negative approach to the economy and stock market for years and been trying to call tops all along.

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