Market Analysis

To The Breaking Point

If you thought fundamentals, valuations and earnings growth matter the joke is on you.

In 2020 central banks have managed to do the unthinkable: Not only once again save investors from any damage in markets, but they intervened to such a degree that negative earnings growth is now the stuff of new record highs as well.

After all, never before have we seen indices vertically catapult to new record highs 2 years in a row on the cumulative reality of no earnings growth (2019) and negative earnings growth in 2020 with a multiple expansion of a near 50% in just 12 months with an unemployment rate of near 7% to boot.

As it’s all unprecedented it becomes a question of sustainability:

To get a visual appreciation of the vertical nature of the price action check a chart of small caps, up 17.5% on the year with negative earnings growth yet going vertical to new all time highs:

The chart apparently as vertical as the Citi Euphoria index:

If you are looking for precedence you will come up short as the vertical extension on some of these charts have no precedence.

Case in point, take a look at $RUT on a monthly basis:

The 10 MA oscillator has moved past the only to 2 previous all time extreme readings in the 15 range, now sitting above 21. Note the 2 previous occasions of extreme extensions above 15 resulted in an eventual reversal to and below the monthly 10MA.

Not only is the price action far extended, but price is entirely outside the monthly Bollinger band. As I outlined at the December 2018 bottom and again at the March 2020 bottom, markets don’t like technical imbalances, they lead to reversion and this market here is showing a historic imbalance as prices have been crashing to the upside.

And no, it’s not only small caps. Let me put this in a global context with the Dow Jones Global Index ($DJW) versus the monthly 20MA oscillator:

Not only is price entirely outside the monthly Bollinger band (which is unprecedented) but the monthly 20MA oscillator is at disconnect levels that has set up for reversions of size in the past.

While fundamentals, valuations and earnings growth haven’t mattered technicals are screaming for a coming reversion trade that will reconnect charts with basic moving averages. One of these will be the monthly 5 EMA. Here again the $RUT showing an over 13% disconnect from the monthly 5 EMA, a moving average that sees reconnects on a regular basis:

Something to keep in mind as markets are waiting for yet more stimulus into year end and the prospect of yet another Santa rally. Charts are stretched to the breaking point and reversion risk continues to build, hence from my perspective rallies remain selling opportunities for eventual technical reconnects. Ultimately these reconnects may offer long trade opportunities for new rallies or bounces, but for now these historic disconnects suggest the current trajectory to be unsustainable and a poor risk/reward proposition from the long side.

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Categories: Market Analysis

14 replies »

  1. All I Can say is Jerome Powell is a ” A Hole” wow fucks the working class and helping the rich. Good job asshole

  2. Despite the all time highs markets have been thinking about thinking about falling for the last 2+ weeks. We continue to see the european open ramp and the drop to pre-european open lows during regular trading hours. The pandemic is raging almost out of control in USA and Europe, we are seeing the first signs of that in recent economic numbers.

    Could the markets go higher? Yes, but not by much, +10% sometime in the next year looks improbable, I currently give that about the same probability as a 40% drop. But, should a significant drop (>5%) occur it will likely skew the odds heavily to a larger downside. The quiet week after xmas might see a slight grind higher or level but any serious signs of weakness could start a dramatic plunge – I think things really look primed for that.

  3. Central banks have fostered vertical jams in the charts… clap, clap… congratulations. What a great achievement. Print money & prices go up.
    So… what’s the final plan central bankers?
    Is this all according to plan?
    Keep blowing the balloon bigger and bigger until…..?

  4. I agree with you Sven but…………….it will keep going up…………..until it doesn’t. It seems that everybody in the stock markets and the real estate markets these days are all getting rich on paper. It doesn’t work that way for long. Wait for it…………a huge correction is coming. Of that I’m sure of.

    Merry Christmas Sven and a Happy New Year to you.

  5. Stock indexes are making new highs but the bullish percentage indexes are not confirming.
    $bpcompq is making new highs but the FANGMAN stocks are not. Another sign of a top when the nasdaq comp is making new highs based on the laggards.

  6. He is right again! Well done my friend! The Fed and HFT Teams have taking over as every day we just see Gaps to programed levels as Options builds are targets, add in are new herd of day traders that just chase post and news releases! To see this non stop can not lose as stocks only go higher? Just think a Min if you started trading this year at the lows LOL you think this is so easy as why would I ever work again as to just BTFD!Then SPY your rules buy the close sell the open and hero every day! The story Powell gave us YTD of markets are fairly priced and no Bubbles same on housing price? We see prices go up 100% in the last 2 years if not more but the story is no inflation as now are target is 3% LOL so we use a formal that will never show any and we stand by the game! Date is just made up based on what the story line is and holds true math at bay? To think 195%-200% to GDP and PE at nose bleed # why we see rev fall or be flat as stocks go up 500%-1000% then we hear just starting as up grades just keep coming and follow higher? Being a simple Man seeing this unfold knowing they can never stop Printing and pumping as then a reset would hit hard. So just BTFD and Follow the Options builds and live well! Let the others tell the story’s as to why or how but let the charts think and follow! Happy Christmas, be kind help some one that is in need, as there is much pain out there and you could change a life!

  7. Yet another spot-on analysis, Sven. As you have calmly and rationally pointed out in the past, the charts don’t lie. The day(s) of reckoning are ahead.

  8. Sven – Almost 100% of the SP500 gains have come during the over-night futures session, this is a known fact during 2020. Last night alone, at the risk of oversimplifying the complexities of the total markets, 89,000 SP500 e-mini March futures is all it took to get the SP500 up 0.60%. Assuming $10,000 margin per future, it only took $890 million (with assumptions on bid/ask dynamics) to move the $30 trillion SP500 total market cap up $180 Billion dollars. That my friend is a 20,000% increase in value per each future bought. Can you explain why all the gains have come from the futures in 2020? Does this ever reverse, and who is doing this (govt, hedge funds, Sweden, etc)? When it only takes $1 Billion to make $200 Billion, and we are confident the Fed is going to print trillions a year and throw it all at the markets (and a few hudred billion at consumers which ends up in the markets via materialism), what stops the SP500 from going from $30 Trilllion then to $30 quadrillion, to $30 quintrillion, $30 sextillion, $30 septillion, $30 octillion, $30 nonillion, $30 decillion, and then to infinity and beyond…

  9. FB closed below the 10 week moving average today. could be a shorting opportunity if the fed wasn’t always coming in to save the market.

  10. Markets up 234% from 2009 to date, yet real economic growth up only 21% over the same time period and all the Fed had to do was inject $36 Trillion in order to “Make Billionaires Great Again”. (Per L. Roberts Stats).

    The Elites can’t wait for Grandma Yellen and Papa Pow to drive the markets up another 234% over the next 10 years, for the sake of minimum wage job gains of course!

    Best F-U shaped Recession Ever?

  11. RealClearPolitics polling average shows Perdue leading Ossoff by 1 point, while Loeffler leads by 0.2 of a percentage point.

    2021 gridlock euphoria for Wall Street or does Wall Street get fked January 5th, 2021?


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