Market Analysis

Has the Bubble Already Popped?

Has the bubble already popped and we haven’t realized it yet? I recognize it could be considered a ludicrous question to even ask considering indices just made new all time highs last Friday and we’re barely down 2% on $SPX.

And frankly I don’t know the answer myself here, but in context of the peak liquidity question I am submitting some data points that suggest that the speculative part of the bubble may have already popped back in February/March.

Consider the following:

What happened in February? Well, the same thing that happened in March and April. Risk assets made new all time highs, be it $SPX, crypto, you name it.

Yet while $NDX made a new all time high again last week along with Bitcoin and $DJIA and $SPX we can observe changes. Take a look at cumulative advance decline $NAAD. It peaked in February and last week’s highs show a very pronounced relative weakness in cumulative advance/decline:

That’s the kind of reading that got markets in trouble back in 2020.

New highs can be deceiving, especially if they occur in context of a trend break, and $NDX broke its March 2020 uptrend in February and these most recent highs constituted a back test of that broken trend line.

People ignore the trend breaks, new highs are deemed bullish when they may not be as suggested by internals.

So you know this is not just a theorem look back toward 2018 when $NDX did exactly the same thing:

Basically the same script. Trend break, a new rally to new highs that back tested the broken trend line and then lights out.

We can observe something very similar with Bitcoin. It too made a high on February 21 and then recently broke its trend only to make new highs on a negative divergence again raising the question of the Hedge Myth:

Bitcoin is now below the February highs.

Indeed, using the February peak as a benchmark the performance picture in many asset classes is not commensurate with the new highs picture seen last week:

Speculative vehicles such as SPAC have been decimated:

The rout has not gone unnoticed:

A lot of things peaked in February and one wonders if the February 19/21 time frame was perhaps the time of peak hubris:

Celebrated hedge fund manager Cathie Wood has seen her main ETF peak in February as well:

These February highs have also come on a pronounced negative RSI divergences with a pronounced trend break in February as well. Unlike $NDX there have not been new highs nor a back test of the trend line. Just a broken chart. And now the ETF is down for the year.

On the way up everyone looks like a genius, but what really is the key driver of success in an environment where everything goes up? Is it superior stock picking or is it just riding the general liquidity wave a lot of which just ends up in speculative high risk investment vehicles seeking superior returns?

I ask as I see ARKK, as an example, just track the liquidity train:

No printing, no performance. Printing and off to the races we go.

If one uses these vehicles as a proxy one could make the case that the speculative bubble has already popped despite still seeing pockets of relentless chasing in select vehicles (think Dogecoin). Call buying by retail has already calmed down, many stocks have stopped performing and the easy chase appears to be over and there is a lot of pain in these highly speculative momentum stocks.

Even small caps, themselves having sported an unprecedented performance since the March lows, have stopped making new highs:

You know it’s bad when even a log chart looks like a linear chart.

Small caps too put in new highs on a negative divergence and have significantly lagged in the past 2 months. The underlying volatility index, $RVX, also showing ( as $VIX) a budding bullish volatility structure.

Small caps peaked in March:

That final high being vertical  and aggressive similar to what we saw in $NDX in 2000:

Bubbles popping are only known in hindsight, indeed one could’ve been entirely oblivious to a bubble bursting in 2000 looking at $SPX as the index chopped in range for months following the March bubble popping:

It just took that long for that realization to filter through the  broader stock market and the economy.

Bottomline here: Last week’s highs in markets and crypto may have been deceiving. Whether we get new highs still or not I submit there is a lot of damage taking place in this hyper valued market that is masked by the new highs headlines of last week. And the cumulative picture leaves the door open for the possibility that the bubble has already popped, except none of us realize it yet for recent new highs are masking it all.

Now I freely acknowledge all this could end up being wrong and the ghost of 2013 may just continue ticking here, especially as nothing big has broken yet in the broader market.

But I also submit that we will only know for certain in hindsight, but if these data points send a viable signal then the implications could be profound. At least nobody can say the warning signs weren’t there when the realization sinks in that the bubble may have already popped.

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Categories: Market Analysis

32 replies »

  1. The SP is down only 40 pts… UBS has a target for 2021 at 4400…
    People can move the benchmarks like Pennystocks. I would not say too much.

  2. Were just back filling is all as you can see we took back the 8dma SPY to day IWM took 8dma back and tested the 20dma QQQ held 334 VIX is being pushed back down below 20dma 10Y 1.58% being controlled. Just a normal back fill is all. But I do love your work Sven and you Wife’s chart work is all that!

  3. We’re nearly at the “sell in May and go away” timeframe. So we’ll see. I have a small position in VXX that was making some money until today….

  4. A brave hypothesis, Sven, but it may just be prescient. If my hypothesis – that ever increasing liquidity (rather than just a constant absurdly high level) is required to keep the bubbles inflated – is correct then the first 5% correction is likely to force the issue: will central banks capitulate yet again and admit that it’s infinite liquidity forever (ie. in this financial reality) or will they baulk at the absurdity they’ve created? Besides, May is looming…

  5. The Fed/Primary Dealer macro liquidity situation is still at full flood stage and rising. Probably will be at least through May. So the best bet is to figure a march higher. With all the leverage in the financial markets however accidents can happen. Archegos for instance. Onesies no problem. Three or four?

  6. Any taper talk given internals and margin debt and we would then see a big sell off. But the Fed has united against any hints of that for as far as the markets care to see, so unless a fed governor says something that spooks market or Powell….then we likely march higher. The Capital gains tax spooked market and could push us below 4115 and run us down to 4000…where i would then pick up SOXX standouts.

  7. The USA economy is a bolchevique economy….LOl, a Bulshety economy based in printing more and more for the cronies…..
    What is Russia waiting for?


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