Market Analysis

Greed is Back

As $SPX is trying for a new high here and $ES futures are retesting the highs from November 9th I thought I may chime in with a few thoughts here. Firstly, in general the bull price target outlined in October has barely been penetrated, but it may well be in the days ahead as again optimism on all fronts is permeating the landscape, vaccine optimism stimulus optimism, more central bank intervention optimism and of course December seasonality optimism.

After all only the years 2000 and 2018 have seen sizable downside in December and generally December is up.

But above all: Greed is back. On every front at a time of the highest market valuations in history with not a sign of fear or concern in sight and to my eye this continues to breed vast danger for markets.

But eyes wide open. A bubble bursting will only be known in hindsight not in advance, but we can certainly assess risk versus reward.

So let me highlight some issues I see.

Firstly as aforementioned greed, it is here:

All joking aside the greed indicator is back to similar levels as it was at the beginning of the year:

This coinciding at a time when global stocks are apparently pursuing a similar vertical path as they did following the tax cuts in 2017 into the 2018 correction that ensued:

Except this time around greed, as additionally measured in positioning and sentiment, is reaching a uniformity of positioning and consensus either at rarely or at never before seen levels.

Everything is vertical and one way. Examples:

Call options volume:


Everything is a single crowded trade in one direction. The US dollar shorts:

Accompanied by record low levels in protection seeking and extreme bullish positioning of asset managers:

And then of course the vertical action in some individual stocks, namely the $TSLA saga:

Forced indexing by Dec 21st over $500B added in one swath, the stock has jumped 10 fold in 2020. A religion on its own. None of this has anything to do with fundamentals. A market trading at its highest price to sales ratio ever and of course the widest disconnect from the economy ever.

But keep buying stocks cause central banks keep printing is the Wall Street mantra:

And debt doesn’t matter:

So it might be fairly stated a lot of what we are currently seeing is entirely incompatible with history. The hype is tremendous as literally everybody is long, hyping for ever higher prices, protection doesn’t exist and charts are tremendously extended.

I’ve cited market cap to GDP before as key indicator and what we’re witnessing is an asset appreciation machine never seen or sustained before:

And it’s not only the US but it is a global phenomenon:

Value for nothing. Valuations not backed by an economic foundation. And we know the answer why, ungodly sums of liquidity brought about by the most extreme expansion in money supply and money printing and balance sheet expansion in history:

And all this has brought about not only unseen valuations but also chart structures we haven’t seen before, namely all these open gaps:

70%-80% of all open gaps fill, that’s just simple history. Now it’s either different this time or it’s not.

Take all the points above and recognize: We simply have no history for this. None. The apologists will keep telling you it’s all consequence free. The interventions, the valuations, the debt expansions. All of it. And they say it all justifies the valuation expansions. And implicitly they presume all this wealth going to the wealthiest of society alone is also consequence free:

I happen to disagree on all fronts, but my eyes are also wide open and so should everybody’s eyes be for insane bubbles can get even more insane and popped bubbles will only be recognized after the fact and one can be right on the basic premise but get killed in fading it as the bubble explodes higher before it bursts.

The craziest and dumbest bubble I know of (besides 1929) was the Nasdaq bubble of 2000:

I want to highlight the chart as a warning and as a potential guide.

Note the relentless ramp in November of 1999 following some corrective action in September and October. Every 5 EMA tag was bought. There was a 2 day dip into the end of November. All sound familiar so far?

Then anther brutal ramp in December which is the scenario that now everybody presumes to unfold into year end. Why? Year end seasonality and nothing but puts around us. The Fed put, the vaccine put, the stimulus put, the you name it put.

Then the chart shows a sizable decline in early January. Why? Tax loss selling. When people have a lot of gains in stocks they typically don’t want to sell until the next tax year. And that’s what happened there and the chart saw its 50MA reconnect and that produced another massive rally into the March top.

So be clear, that’s a script we could be facing here despite it all being nonsensical for the year 2000 then saw the biggest disconnect between stocks and and the economy then. 150% and it all fell apart:

My warning here then: One could’ve been totally right in December of 1999, but being right on the macro doesn’t mean the timing is correct, so I want to highlight all this from a risk perspective.

One could also note the 2016 script following the election of Trump, that too saw a relentless ramp in November and then more follow through in December:

But then note the tag of the 200MA during the election.

This time here we’re not anywhere near the 200MA:

And of course we didn’t have any of the open gap action that we have now, nor the valuations we are seeing now. But we got greed, lots of it, and massive complacency.

So I maintain given how signals, chart extensions, gaps and pushes above the monthly Bollinger bands are aligning ( never mind valuations, complacency etc.) strength offers an opportunity to sell, but the momentum must be respected. Frankly it all looks to me that central banks are losing control over the bubble they have created and they are afraid of popping it for fear of the consequences. And I can understand why. The economy remains fragile and the population, largely not showered by free money stock market gains, is struggling with real life:

The big market bubbles of the past had several common characteristics and I submit we are seeing all of them now: A massive valuation disconnect between asset prices and the economy, relentless asset price appreciation, extreme high forward multiples and price to sales ratios, a fervent belief that prices will go ever higher, incessant FOMO chasing and greed, little desire for downside protection, and heavy retail participation willing to pay any price or valuation in the belief prices/valuations are either justified or don’t matter irrespective of fundamentals. And greed and confirmation of successful returns breeds a sense of invincibility.

I know, everybody was a genius during the 2000 bubble. Until they weren’t.

Momentum must be respected, but losing sight of the bigger context can be highly dangerous for bubbles can pop at any time for any reason, the trigger only to be attached after the fact. And this asset valuation bubble, driven by unprecedented liquidity injections and riding a wave of multiple expansion pure following 2 years of either zero earnings growth (2019) and negative earnings growth (2020) is the biggest bubble we have seen yet. Perhaps none of this matter this December, but know every new high pushes the disconnect equation to ever higher and unsustainable extremes. And for that reason I, as perhaps one of the only voices out there, suggest caution.

Greed comes before the fall.

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Categories: Market Analysis

31 replies »

  1. Tobias Levkovich, the CitiBank’s chief U.S. equity strategist, recently said:

    “Current euphoric readings signal a 100% probability of losing money in the coming 12 months if we study historical patterns – indeed, we saw such levels back in early September as well right before a selloff in stocks.” “Our sense is that the idea of no alternatives to buying broad-based equities has led to an overshoot…”

    I’m guessing investors go full-retard until SP500 hits 4,000 (note 14 day RSI at 80% at 3,989.96). Humans are attracted to rounded numbers with lots of infinity looped circles so I’m orderiing my SP500 “4,000” cap and glasses this weekend!

    • Try, actually TRY to set your blind bias aside and read ALL the points Mr. Henrich is making.
      Then maybe you’ll understand his complete message.
      Accusing Mr. Henrich of only calling market tops is oversimplified BS

  2. “Greed comes before the fall.” I’ve seen this script play out many times in the past and it’s no different this time. The trend of up, up and away will work………….until it doesn’t. Most people now have huge paper profits. A few have now monetized those profits into real cash including me. When it all falls apart again then most people will have huge paper losses. Smart and insider money is out. Dumb money is once again left holding the bag on the way down. Nothing changes in the markets because human nature never changes. Wash………rinse……….repeat.

  3. Agree, this is very likely a late stage bubble now. I don’t think a rational person should go long or short at this point, very easy to lose whatever you bet. If the market were sane then it would have topped over a year ago; ergo: market not sane. That being so one must wait till a sign of sanity appears. What might that be? I’d say at least a 3% drop in no more than 2 trading days, if it truly is a turn down there will likely be a further 20%+++. Probably the illusion of the Fed brrrr must be broken as a solution to everything before reconnection to reality recurs, as it will, eventually, one day. I’m getting bored waiting though, lol.

  4. Hello Sven, I’ve been following your work and reading your article for a while.
    I understand the “big picture”… but IMHO you are UTTERLY WRONG.

    For sure there are imbances, overstreched indexes, wealth inequality, insane money printing and call volume explosion… all true… BUT IT’S NOT THE BROAD MARKET !

    It’s all CONCENTRATED into few hands, few stocks, few sectors.
    Does it make ANY sense to watch at indexes like the SP5+1 (formerly SP500) !?
    How are 495 companies reperesented in that index? They aren’t, they just contribute to dampen a probably even bigger performance, to limit some how what would be an even more overstreched picture.
    There is CALL volume peak.. true.. but where?
    There are overcrowded trades, and desert trade. In the hope to see somehow a “rotation” I follow “other names”… and I can assure you.. they keep getting HAMMERED DOWN on houlry basis.
    It’s not only frustrating, it’s nonsense!
    And when the overcrowded trades slow down, those “other names” get massacred by the “market”.
    And believe me, EVERY SINGLE COMPANY has sound fundamentals, better than many other overcrowded.
    I don’t know where you see “greed”. It’s supid money piling up into the same names… with differnt tools (passive investment, options, whatever). AND it’s a kind of financial-video-game limited to the upper 1%. The other people, what we call the ECONOMY show no “greed” whatsoever.

    The “market” is skewed !
    A correct analisys cannot ignore that.
    Greed?! NAW… just overcrowded places and herd-behavior…just like those “Walkers” in some famous TV-Show !

  5. As i say for years, since the central banks took over the control over everything: “We are safe! Risk is gone. Just buy!”

  6. If Biden is confirmed as the next President by the Electoral College on December 14th why would anyone wait until January to sell and risk higher taxes?

    I would suggest that this market is a bubble waiting for a pin. And that pin is the confirmation that Biden is the next Emperor.

    • Forget about the upcoming news events or even Sven’s charts. The market doesn’t care. All just distractions to keep you out of the market. The market has not cared about any news event for years but for a moment. It just keeps going up. The bull market of our lifetime.

  7. I’m seeing an ending diagonal in the $INDU, $SPX and $COMP. Volume is increasing the last several days just as you would expect in the climax stage. However the increases in volume are resulting in very little gains each day from the prior day. A sign of distribution. Today could actually be the top of the bull market.

  8. Could be those who sold or shorted US indices about 30 mins before the close today (3rd Dec) will be the happy ones in the days, weeks and months coming. Just my hunch. If tomorrow’s NFP and / or the Sunday night ramp are insipid I could be joining the sellers. Agree with Anonymous above, today might have been the top. There will be time to join the stampede down if so, unless Grump does something really stupid over the weekend.

    • The best way to end this bull market would be without a melt up or blow off top, which many are expecting. Prices have already extended beyond the bullish percent indexes ($bpndx, $bpspx, $bpinfo. Compare these to comp, spy and xlk. There’s also negative divergences). Instead of a melt up phase (which is too easy) we have a double M shape top dating back to early 2018. This type of end of the bull market will keep the dip buyers around longer than they should be hoping to catch the melt up phase which will not come.

  9. Increasing volume with very little percentage gains…a sign that distribution is taking place. We are in the climax stage. All about to end. A reversal today will mark the top.

  10. $nyse making new price highs yet the NYSE bullish percent index did not ($bpnya). Prices for all the indexes/sectors are making new highs but the respective bullish percent indexes are not. Divergences all around. Time to run for the door, jump ship, pass the hot potato.

  11. why haven’t the FANGMAN stocks participated in the last several days of this rally? When all the laggards during the bull run are rallying that’s a sign of a top. It’s not rotation like CNBC analysts are calling it.

  12. Could this kind soul please unblock me on Twitter. I was playing devils advocate on a comment and didn’t mean to come off disrespectful Sven ! Have followed your tweets for 6 months. @Cpickmtnsnbeach

  13. Most are on one side of the boat. Most buying everything with their available cash and now Apple (upping production) believes people will buy apple phones based on the next stimulus check.
    This boat is tipping. I’ve jumped already. Follow me or not into cash, TLT, gold and silver.

  14. why are all the FANGMAN stocks underperforming the bullish percent tech index ($bpinfo)?

    when the laggards begin outperforming those stocks that were the leaders during the bull run, that’s a sign of a top…

    don’t get fooled by analysts calling this ‘rotation’ or ‘market breadth’.


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