Market Analysis


As markets have continued the non stop levitation to new highs they become ever more untethered from basic market history and I want to highlight one interesting example.

But first for context:

In Failure is not an Option we discussed an unusual program running through markets and the market’s need for constant new highs to prevent a trend break. Since then markets have continued on this required program delivering new highs every week and on many days since then ending August with the most new highs since 1929 and 1987. Quite a feat.

But nobody should be surprised, liquidity remains the name of the game at the exclusion of all other factors.

After all Jay Powell did his bid to not disappoint markets and offered a predictably dovish non committal taper speech at Jackson Hole that markets used as an excuse to continue on the path of new highs.

But perhaps more importantly the period between June and August has seen incredible liquidity expansion on the side of just 2 central banks: The ECB and the Fed:

Just since June the ECB and the Fed combined have added $1 trillion to their balance sheets. For all the taper talk, the hot inflation prints, they have injected another $1 trillion in just the past 3 months.

For reference: It took the ECB and Fed THREE YEARS to expand their combined balance sheets by $1 trillion in the period immediately following the great financial crisis between January 2009 and December 2011.

What took 3 years then, they’ve just done in 3 months.

And coinciding with a $1 trillion liquidity injection since June suddenly the S&P makes a new all time high every single week:

Constant levitation has consequences and the evidence can be seen in the charts. One of the most common technical events in markets is a reconnect with the monthly 5EMA. Whether in bull or bear phases this EMA acts as support or resistance and gets tagged on a regular basis.

Sure, there are some months were it doesn’t get tagged, it may not get tagged for a couple of months, but it always gets tagged. But not in 2021:

Only 1 reconnect in 2021. Only 1 reconnect in 9 months. And now we are on month 10 with 6 months in a row of no reconnect:

There is no precedence for this. None. Not in 2000, not in 2007, not in 1987, not in any history of previous market extremes that I’ve seen. What was a regular part of regular market functioning has been removed from the market equation.

The 5 EMA is such a regular magnet for markets that all history also teaches us that the farther markets move away from the 5 EMA, either to the downside or the upside, it tends to revert and reconnect, a balancing out from excess if you will. Consider even the violent reactions to the upside and downside in recent years in the chart above and you see the regular revisit.

Not now. So far. Which makes one question the veracity of what we continue to witness driven by all this liquidity.

I’ll add one more piece of history for consideration as we are now in September. In the past 15 years $SPX has tagged its monthly 5 EMA in the month of September in every single year but one. That’s a 95% hit rate.

The one year it didn’t tag it? 2018, right before the 20% drawdown into Q4 of that year:

What’s this all mean? For one markets continue to defy all history, but not in a good way. It means markets are disconnected and distorted and all of history demands a reconnect with the monthly 5EMA.

Currently the monthly 5 EMA sits at 4383 or nearly 5% lower from here. No big deal right? After all these markets are way overdue for something larger than a 2%-3% pullback right?

Well, actually just a basic reconnect with the monthly 5EMA would come with a major price: The breaking of the uptrend:

Oops. So not only must markets make constant new highs, they can’t even afford a 5% pullback without breaking the uptrend which would invite all sorts of negative technical consequences and could change the current market landscape dramatically not necessarily staying confined to a mere 5% pullback.

The only way for markets to avoid a trend break then is to continue to avoid all market history of monthly 5EMA reconnects. All of history. This is what investors must then count on. Best of luck.

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Categories: Market Analysis

12 replies »

  1. I would say the markets became silly (in a Monty Python sense) in 2013 when the SPX was around 1500; they became very silly in 2017; there were signs of extreme silliness in late 2019 but covid-19 briefly suppressed that; the last 18 months have been full on extremely very silly. I don’t think there are any levels of silliness to go. One way or another this is going to fall over backwards foaming at the mouth.

    You’ve documented above and over several months the deluge of foolishness and technicalities that is accumulating behind the dam. There are cracks appearing but it could be months yet before it breaks. We’re almost certainly past the point when corrective action could be taken to avert that catastrophe even if there was a will. The water above the dam is calm and still rising so keep buying with fairly tight stops, if you happen to be active when it starts to break you could make a killing on the way down.

  2. The “Crash of all time” is just around the corner. As I’ve said before………….I am 100%
    certain the Fed will lose control………and just like that…………without hardly any warning………..DOWN THE RABBIT HOLE WE ALL GO. Losses and destruction of wealth will be in the HUNDREDS OF TRILLIONS! When the dust settles the poverty, bankruptcies, homelessness, un-employment, crime, despair and hopelessness will be EVERYWHERE! It will mark the official beginning of the next “Greatest Depression” the world has ever seen. Life will become bleak, gloomy and grim for billions of souls until at least 2030 to 2035. The world as we knew it peaking in 2019 is now….”Gone With The Wind” We are transitioning into a “New World”. The question I ask myself is, Will it be a better world full of new hope and enlightenment?, or are we heading into the second “Dark Ages”?

  3. 100% accurate on the fact that the last 10-12 years have seen the US economy on a constant morphine drip from the Fed .. and yes .. they need to inject more and more morphine to keep a smile on the pig, that part is OBVIOUS… But please keep in mind that the DOW was around 7200 at it’s low in 2009 and is now 35,443 and some change … while Sven is correct and has been for the last 8 or 9 years … if you listened to him and sat this out .. you lost your ass financially. If you tried to short the market based on the fact this is all Bullshit .. you lost your ass … so, please, enjoy the conversation but realize that until Sven can actually tell you WHEN the game is over … this is useless … One day in the future this bubble WILL pop .. they all do … but bubbles are HOW you make money in the market … And yes, one day it will all go to shit and Sven will say “Look, I told you so” … If I predict the end of the world every day for 10 years and one day I’m right .. is that 1 day out 3,650 days??? that is a VERY low percentage … I would have been much happier if Sven had said … “Look, this is all bullshit but understand that if the FED is backing the market with QE-1-2-3-4-… .. you NEED to be in this market because they will ONLY let it go up … And THAT continues to be the case … when you see/hear that the FED … “IS” … raising interest rates or slowing down QE shit .. THEN get the hell out … and yes, understand this is all bullshit … but that IS the game. While Sven IS providing solid technical analysis of the stupidity … THAT is NOT the point … Find a bubble and INVEST … just know when to get out.

    Just saying.

  4. Hi, Sven.

    Agree 100% market is rigged and now is as obvious as it is in silver. But I have a request for background I seem to be missing.

    Why is a break in the trend so feared? What happens that’s so catastrophic to the CBs with a 10-15% correction below the 50 MA?

    I often feel like it’s simply the Fed implementing wealth transfer from taxpayers to bankers and elite while keeping the con going. And perhaps we’re at the end of the ponzi scheme…

    Can you post a column or link to one that explains the Fed’s fear of the trend failing?


    • “What happens that’s so catastrophic to the CBs with a 10-15% correction below the 50 MA?”

      Meant to say 10-15% or below 50 MA.

  5. Sven – You’ve been predicting that this is ALL bullshit for … about 5 years now … gonna get it right one of these days?

  6. MrMarket: Nice nothingburger there Jay, but you could have spiced it up a tad.
    JayPowell: Thanks M, how so?
    M: Cut all the MBS buy shit, you know it makes sense, and almost no one would care for more than a few minutes.
    J: What difference would that make, it’s only $40 billion a month?
    M: Almost none, LOL, but that’s the point!
    J: I’m not getting you M.
    M: Well, don’t get me wrong, we love all the juice…
    M: But things will be getting real soon and we need to see you’re real, too.
    J: I’m real, M, I’m very real.
    M: Well you gotta show it, expose your inner Volcker!
    J: I’m not sure that would be wise, M, you wouldn’t like the pain.
    M: Small pain now better than big pain later.
    J: I thought you didn’t like pain, M?
    M: I don’t, I hate it, but a little pinprick now is nicer than dying from covid in a few weeks.
    J: Now don’t get all Fauci on me, LOL.
    M: Heck, a 10 or 20% correction now is better than a 50% correction next year.
    J: I don’t think those are likely scenarios.
    M: I’m thinking you’re planning to duck out next March, leaving someone else to clean up the shit.
    J: Not at all, M, I love my job.
    M: You’re portfolio loves your job, you mean. You planning on doing the ethical?
    J: ???

    M: LOL, be seeing you J.

    I pay attention to Tic, he has an infuriating unncanniness and is generally bullish on AAPL so I find this significant:
    ==== quote
    TicTock ( @TicTocTick ) 22/9/21 after RTH close
    Decided to cut AAPL at 146 (given my me at 142)
    I am positioning for a retest of 115-120 handles after a close below 140..

    To translate it to simpler English: AAPL bearish bets only below a close of 140 which I am expecting but is not guaranteed

    A 20% drop in AAPL would have repercussions. (this Sven missive being 3 weeks old I’ll repost this comment when he gets around to doing a new one)

  7. ‘Twas an ugly stonking month that ended fuglier. Been making pennies on the closing ramps with tight stops lately but today (Thurs 30th Sept) I sold into the close, it just smelled down. And down it was, bigly; some key levels broke and – unlike 10 days back – they’re gonna stay broke. The last few weeks have been choppy, plenty of profits if you were nimble and ever alert, but methinks the down leg begins properly here with some quite big moves. Too soon to say with any confidence where the pauses and bounces might come but a 1000 point SPX drop within a few weeks is plausible. So far key stocks like AAPL, TSLA, MSFT have been holding up pretty well, if they start to fall seriously then you’ll know the rout has begun. US 10 year looks to be encamped back above 1.5%, if it breaks back lower then there could be temporary respite for stocks, if it breaks above 1.75% watch out below stocks. DXY is closing in on 95 which is where it makes its big decision.


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