Market Analysis

Final Fantasy

Oh dear, the Fed has a problem. It’s one thing to deny a bubble when it’s only cranks like me on Twitter pointing out the unfolding market distortions. Yet bubble talk is now all the rage from Bloomberg, the FT, and others. Indeed Chineses stocks got in trouble last night when an advisor to the central bank mentioned the dreaded stock market bubble term.

US futures promptly ignored the Chinese bubble talk glitch as the overnight the action is as dip buying oriented as it was yesterday on the surprise reversal that itself was immediately reversed. The reversal inspired by a classic topping ingredient bears like seeing: Retail puking into any ticker that moves, valuations be damned:

Yes, we’ve reached final fantasy stage of markets, massive gains in markets and stocks in perpetuity because central banks will keep printing. To the moon risk free. Santa rally forever.

And it’s not that people don’t know it’s a bubble, everybody knows:

The only people still in public denial are the very architects of the bubble, Powell and cohorts. Too afraid they are of popping it, best to just keep expanding it. Now that the bubble question is out there Jay Powell’s next attempt at denial will ring even more hollow than usual, that is if he’s even asked about it during tomorrow press conference. Just recently he declared to not want to even speak about exit “as markets are listening”.

Yes he knows, one misstep and it’s raining stocks.

But he has an even larger problem besides communications and that is excess on every level and a stubborn volatility picture that suggests things could get dicey on the slightest misstep.

Take the aforementioned small cap chase as an example.

Small caps are as overbought as ever with a weekly RSI north of 78:

Not only that but small caps are still the technically most disconnected from basic moving averages ever, having hit 41.5% above the weekly 50 MA yesterday. There simply is no history of this never mind sustainability which raises an important question: Any reversion would raise the volatility component of small caps and note volatility has not only remained high but is remaining about what used to be key resistance levels of volatility for small caps.

Indeed the $RVX sits well above that traditional resistance zone of 25-30 that marked the end of many corrections since 2012. Now the 25-30 area appears to be support while the most recent peaks are printing lower highs meaning that the pattern is compressing and at risk of a meaningful volatility breakout, something to be mindful of as the chart is extending ever farther into uncharted territory.

Also noteworthy in the context of massive extended action in individual stocks is that $ES hasn’t really made much progress since the January 8 spike peak:

Even yesterday’s dip had broken below it before being saved again into the close. Rather algos appear to be content to play ping pong between specific price levels for the moment. None of this doesn’t preclude new highs still especially if the Fed remains ultra dovish and in public denial about asset price bubble behavior, but every new high stretches the equation and economic disconnect formula further and further into final fantasy land: Valuation without production

Volatility keeps warning. Is anyone listening? For now the answer appears to be no.


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Categories: Market Analysis

25 replies »

  1. Traders are buying on any oversold level and dip without any consideration for divergences. The Fed’s BTFD brainwashing and conditioning is now complete.

    • back test from under the bottom trend line of the ending diagonal and rejected on both attempts.

      market top. I’m ringing the bell.

      ding, ding, ding, ding, ding

  2. Jerome Powell would be hanged and burned alive if the low and middle class could understand what he did with the wrong called stimulus (a real white color theft action)

  3. Perhaps the most immediate question is how soon the Fed makes some stern comment on the growing market and financial asset silliness. I very much doubt they’ll withdraw the punchbowl this year but a grumble about the evident bubble they’ve created might come today. Markets won’t like it and the pre-US open jitters today perhaps hint they think it’s coming.

    • Jerome Powell is going to say that the Fed has more tools and could do more stimulus and Chamath Palihapitiya is going to call his bluff.
      Get out of the market, he closed out his GME position.

  4. hahaha

    Powell using big words now like…forceful, powerful, sizable but nothing changed.

    He’s BS’ing big time and his bluff is getting called. The billionaires will cause another market crash to get Powell to do more.

  5. XLK just retraced 78% of the 1st leg down and also closed the gap.

    time to load up on shorts again.

    Buy UVXY and TECS to stick it to ‘the man”.

  6. The 1%ers have taken control of your ability to buy stocks. The elite coup is complete. Now only the rich can play in the stock market and get richer via the Fed.

    Buy UVXY to stick it to the Fed.

  7. Well said Sven. Add corporations to your list.

    It’s all a coordinated scheme to enrich and protect the wealthy.

    Sven Henrich
    @NorthmanTrader
    But carry on pretending WallStreetBets is the problem. It’s not, at best it’s a symptom of a much deeper and larger rotten core that is institutionally enabled by the Fed, banks, Congress & top 1% & their lobbyists who all benefit from it.

    • Someone please forward this tweet from Sven with AOC and Sherrod Brown please. This will get them to the root cause of the current state of the market.

  8. Congress members are now asking for security allowances for security at their homes.

    They know their Fed Reserve scheme and their failure to oversee it for the people has now made them targets.

    It’s starting… 99%ers vs the Fed, politicians, banks and corporations.

    Take all your money out of banks.

    • What if this narrative begins to gain more traction as I warned a couple weeks ago? Perhaps the market will begin to price in that this is ‘as good as it gets’ with regards to the Federal Reserve backstop.

      ‘as good as it gets’ = market tops
      ‘can’t get any worse’ = market bottoms

  9. AOC, Warren, Ilan Omar, Sherrod Brown all looking for answers but they’re not focusing on the root cause of all this craziness. None of them have mentioned the Federal Reserve’s policies.

    So far only Sheila Bair has been brave enough to say that the Fed’s policies must die.

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