Market Analysis

Signal Fire

The more things change the more they stay the same. So we had the bounce off of the 50MA and the other signal points we highlighted. The resulting rally brought markets right back to new highs, precisely the year 2000 script we had discussed.

Hence so far no surprises really. A steep rally since November, new all time highs in January, then a swift corrective move into the end of January and then a rally to new highs:

Oh, I’m sorry, that’s the chart from 2019/2020, here’s the current version:

No, this market is really not behaving that much differently from the one that led to the February 2020 top. Back then of course the Fed too was printing running their Repo program having cut rates three times already, now of course printing still $120B a month with rates at zero following the balance blow out to $7.4 trillion.

Numbers aside the structure of the broader market is behaving very similarly to last year, hence it is noteworthy that some of the signals are also virtually the same, in fact suggesting a signal fire of warnings is under way.

For one note the new highs on a negative divergence as in 2020:

Now that could just be temporary and if markets rally further the divergence could disappear. Yet note transports suddenly lagging, not making new highs while $SPX is, also very much like 2020:

Also notable, on the new highs here we see a similar program running with the $SPX components above their 50MA:

Nearly the same readings compared to January/February 2020 with lower readings versus new index highs. Weird. Same time frame, same behavior, same program.

In February 2020 these highs ultimately gave way to the now long forgotten 35% crash. Crashes are extremely rare, but corrections still do happen, the severity of course dependent on a number of factors, the relevance of which usually only become apparent after the fact.

Yet despite all the similarities there are also important differences to note compared to 2020.

For example, small caps are now at a record 40% extensions above their 200 day moving average and never before has the weekly chart seen such a steep disconnect from the weekly 50 moving average:

However there is no market history, none, that doesn’t see an eventual reconnect with the weekly 50MA, the question of course is the when and where. The moving average is by definition moving and is now trending higher. Just a standard/basic reconnect at this time would constitute a market crash as prices are so historically extended. And be clear: Reconnects can take quite some time to happen, but it’s rare for it not to happen for more than a year.

Bulls I suppose can take comfort in the history that extremes can become even more extreme as the tech sector showed in 2000:

So yes, extremes can become more extreme and hence the 4156 $SPX area remains a clear technical possibility for now.

If that’s the hill you want to die on go ahead for all chart history shows extreme extensions don’t last. Rebalancing will come and the severity of the rebalance is also driven by the extreme of the previous disconnect.

And that’s a critical point for there is yet another difference between now and 2020 and 2000 for that matter: Market cap to GDP now at 194.9% versus 158% in February 2020 and 150% in the year 2000.

Never have we seen markets this disconnected from the economy:

A rational bubble it’s been called because of the exorbitant amount of liquidity flowing through the system distorting everything.

Yet despite all this liquidity this market is behaving in a curious way. It is repeating the same behavior as it did last year before the crash. Except this year it is even more valued and more disconnected from technicals and fundamentals.

Last year the market topped February 19/20 and risk happened fast:

Don’t @ me saying I’m calling for a crash, I’m not. But a sizable correction remains very much overdue for this market that still appears impervious to all valuation concerns and remains among the most complacent markets in memory. In 2020 markets didn’t top until the later part of February. In 2000 markets didn’t top until March. 2021 has yet to show its hand.

But hey, maybe it’s different this time, although analyzing the charts above it appears that the more things change the more they stay the same.


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Categories: Market Analysis

28 replies »

  1. What is different this time is the size of the stimulus. It is going to drive markets much higher much longer than any of us would think possible. Then the inflation from the stimulus makes more stimulus unthinkable. Then the market has a Wiley Coyote moment. I am going out on a limb and putting the reconnect out into the late April, May timeframe. This time the drop will be much larger than what happened last March. There might be a few down days between now and then but any down days will be buying opportunities.

  2. Sven. I really love that you are remaining true to your message. I feel like the Scottish Highlanders from Braveheart standing up to the Charging British Knights! It is has been a very challenging couple of years! But like you I am not going to back down now! Even Everest has a peak!

  3. But there is a difference now. Treasuries, gold, dollar and commodities are performing very differently. This madness may last 2 or 3 more months. Thanks Sven!

  4. Sven I love your analysis,its always well done. I thought the same as you until lately. I think the most likely path for us equities is a pullback, maybe around 30%?? and then range trade for a year or more…. They are going to keep printing, they are convinced a prolonged recession is more expensive then printing to inflate/grow out. Have you wondered why crypto currency is not regulated? I suspect it is a fed tool, they like crypto currency…what if the key to inflating the debt away was an imaginary currency, one that does not effect any other asset, one that can absorb all that it is given. You could then pump, said currency make the gains attractive to all. When the money flowed there, it would allow the fed to be able to control the commodity and metals market…A pressure release valve? So with an imaginary currency in place, and money flowing there, the fed can print and print, and they will, to inflate the debt away like the 1940’s… meanwhile, crypto serves as a release valve to prevent the market from over heating. So, Stimulus,stimulus….when crypto starts to ramp, jawbone the other way and back it down……Crypto then would remain relevant until the debt becomes a workable level……..At that point, the fed has seen all of the digital currency creations, it chooses the best,,,, crypto goes to 0, and we create fed coin??? its a bit out there, but testable…..one check would be to see when the us (we) go parabolic with stimulus this spring….if crypto is truly a release valve they should go parabolic, and then back off as inflation comes down mid to late year…..isn’t it strange no one knows exactly who made bitcoin?

  5. If, big IF, this ends up being true,then greatest task was not in creating digital currencies. It was in convincing a majority of people to invest in nothing, while it was obvious inflation was imminent……strange times indeed.

  6. David Rosenberg is saying look out in July. Similar to comments above. But all valuation measures on stocks and bonds are at extremes. Something has to break whether it is the market or inflation. Has anyone checked out the prices of luxury watches lately? An interesting measure of asset inflation.

  7. highly bizzaro price action across so many asset classes, interesting to watch from the sidelines neither long or short. the vanity trade is not ready yet but potentially very near….these physco mkts these days are drawn to big round flashy numbers/Gamma pins , 4k ES a few weeks ago looked a long way off. today looks like we could be there by next friday! wow wee….i enjoy your analysis esp on the majors vs vix v dxy etc.however you need to look under the non technical charty hood more for the larger technical construct on the VIX or as my old boss lliked to say the derivative of a deriverative of a load of derivates…SPX realising 10% and people paying 22-32?!?! Something is wrong but even before last week mar 90% puts cost 27 ivol.
    I was reading the reddit thread on ganging up on the UVXY ystderday, can’t quite understand their due diligence and thread seems to have gone cold now but makes me puase for thought as there are defo signs of excessive stress in the vix complex, trading at big prems to both realized vol and spx 1month variance swaps…also the three largest outflows in
    the US ETF space were from S&P500 (SPY, $5.3bn), Nasdaq 100 (QQQ, $1.7bn) and MSCI US
    Quality Factor (QUAL, $1.2bn). The unwinds in the large cap holdings directly lead to
    increased volatility as these tech/quality stocks carry large weightings in the large cap index.
    This can be seen by the high correlation between the hedge fund favourite stocks and the VIX.

  8. If you’re buying stocks and/or still contributing to your 401K you are a suit or a wannabe suit and the Fed is your master.

    Resist the greed and the Fed…buy $VIX

  9. We’re getting above average volume in the Nasdaq but with very little price increases over the last three days. This is a sign of distribution. The billionaires are unloading their shares and cashing out.

  10. Off topic.

    Disclaimer: I am anti Trump and about every policy he’s enacted, especially environmental.

    I’ve just watched a couple of hours of his prosecution in the Senate. How damning does it need to be? My guess is many GOP senators who refuse to convict will be signing their own political death warrant.

    On topic.

    As per my last post, US stocks look tired, minor decline imminent. TSLA & AAPL not looking strong, they are my prime indicators of sentiment and direction, respectively.

    • Off topic.

      When the US analogue of Genesis’ “The Knife” (now 50 years old!) is performed the images will likely be of Trump’s insurrection.

  11. Head and shoulders top on the XLK. Check out the 30 minute timeframe.

    Head formed on climaxing buying volume yesterday. Volume spike occurred during the 2:30 pm est hour.
    Right shoulder neckline ended lower than the left shoulder neckline and on above average selling volume.
    Right shoulder formed on below average buying volume.
    Right shoulder back tested the left shoulder neckline from below and failed.
    Right shoulder rolling over on above average selling volume.

  12. The only reason for xlk making a new high today is due to investment firms, hedge funds and pensions looking for a defensive position in the big cap tech stocks. Since other typical defensive sectors like utilities gold and staples are also hitting lows. They have to stay invested. But tech will go down with the rest of the market.

  13. If you’ve been increasing your contribution % to your 401K or reallocating your funds to the big cap and small cap funds, you are a wannabe suit and a slave to your Fed master.

  14. What a fake fake markets. No shame with the manipulation. No volume during the day, only in the first and last hour.
    Maybe same Fed buying and selling to themselves.
    A disgrace for the US.
    Hope the world gave them the middle finger

  15. I missed the top call on XLK yesterday but today’s new high in XLK is just a back test of the bottom of the ending diagonal.

    The end of the bull market up trend since the 1930’s is over.

  16. Now that trump is not guilty here my prediction.

    Stock market crashes under Biden and Trump becomes president again in 2024 due to a down stock market.

    • Au contraire, Edward, despite continued liquidity infusions stocks are very tired and won’t be making any significant pushes higher in the near term. Watch TSLA and AAPL, both are back below month ago levels. I expect SPX to lose about 5% over next 2 to 4 weeks and approach 3720, whereupon it will have a decision to make 😉 Watch also US 10yr yields, if they push much above 1.3% it could amplify the stocks’ correction.

  17. XLK completed first wave down yesterday. The wave 2 bounce completed today and turned out to be a running flat correction. XLK is now in it’s third wave down.

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