Market Analysis

The Cynic’s Guide to Markets

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The amalgamation of multiple factors are sending a strong message: While 2024 may send markets on a bumpy road (or not) markets are set for a path higher into 2025 and any corrections that may come along are a buying opportunity and in this piece that I call the Cynic’s Guide to Markets I’ll outline the reasons why.

Firstly, let’s take note that all the consistent bullish analyses outlined in 2023 have come to fruition, from the unique pre-presidential seasonal scripts interwoven with the technicals (Mega Bull), to larger technical patterns suggesting new highs were coming (the Path to New Highs), to markets hitting a major technical spring board of confluence support during the fall correction (Coiled Spring), to the historic runway for markets to embark on (Market Runway) and also positioning suggesting a major pain trade higher to ensue.

The common thread of all these pieces and others was that markets were set up for strength. During Q4 we then saw a major reversal in yields, a Fed pivoting and now a broad embracing of the soft landing narrative as price drives sentiment.

In short: A radical reversal of the expectations that were set at the beginning of 2023.

After all expectations originally presumed increased recession risk and Wall Street price targets were initially significantly lower compared to the actual 2023 year end $SPX closing print of 4769:

Instead of lower price targets coming to fruition we witnessed one of the most powerful rallies into year end in recent memory despite an on paper aggressive rate hiking cycle and QT by the Fed. Higher for longer suddenly morphed into bears being wronger for longer. What gives? Perhaps many were simply not cynical enough.

Indeed here is a much more profound conclusion to offer: In the last 4 years bears had every excuse in the world to break markets. From a global pandemic with a broad economic shut down, to resulting 40 year highs in inflation followed by the most aggressive rate cycle in history.

The end result: Nothing. At every step of the way a key measure of market control was saved, the yearly 5 EMA. Even in 2020 during the pandemic bears couldn’t close the year below it due to historic intervention. During the so called “bear market” of 2022 Janet Yellen got suddenly concerned just as $SPX was tagging the yearly 5 EMA and the rest is history.

If you can’t break the market with this backdrop then when can you? I think it’s a fair question.

Hence my discussion on all this here:

See here’s a potentially really dark takeaway of all this: In the past markets used to be smaller than the economy. But ever since the technology boom of the late 90s and the subsequent age of permanent intervention which prevented any true cleansing of markets save for the brief period of the global financial crisis markets have become ever larger versus the economy.

Measured as market cap to GDP the interventions following Covid saw markets rise to an unprecedented 200% market cap to GDP, the so called bear market of 2022 saw markets bottom at the top of the 2000 tech bubble in terms of market cap to GDP and here we are back to 175% market cap to GDP also greatly aided by the dominance of the tech monoliths:

It used to be that markets reacted to the economy, but things have changed so dramatically that the economy now reacts to markets as they are so much larger than the economy. Market levels and direction impacts everything from confidence, spending, investments you name it. The size of markets having become so large that managing them and their direction is an un-admitted policy imperative. No Fed and no administration can afford a true cleansing of the system for it would imply a deep depression. As all growth remains debt financed and ever further debt is required to keep the system afloat the only way you can sustain that system is higher markets which of course disproportionally benefits the asset holders. Over 90% of stock assets are held by the top 10%. It’s a viscous cycle from which there is no escape long term consequences be damned it appears. A big middle finger to the ever shrinking middle class and the permanent poor, but that’s the system we have.

The conclusions are dark for increased political instability as a result of the ever widening wealth gap continues to ferment all around the globe (a big separate discussion to be had), but unless one sees a faltering of control do you want to argue with the market or do you want to make money? It’s a question I raised several times in interviews last year as the true underlying root causes of what drove 2023 market performance to unexpected heights were largely ignored resulting in vast underperformance of hedge funds and many investors.

Hence my cynic’s guide to markets as a cornerstone for a 2024 outlook with a critical eye on 2025. Why 2025? I’ll explain further below as it’s mission critical.

But first: Understanding what drove the past fews years is key to understanding what may be happening going forward. As a long time critic of the permanent market intervention regimes since the GFC I would’ve thought the recent most aggressive tightening cycle into the highest debt construct ever would’ve produced a break of markets. But I got suspicious of all this in the summer/fall of 2022 as on the one hand technicals were screaming bullish at the October lows (see my October 2022 interview) and as I realized the intervention regime was still very much alive to awe-inspiring effect. ” A controlled bear market” I called it in 2022 as the $VIX kept making ever lower highs on each consecutive new $SPX lows that year.

And then the seeds of cynicism were firmly planted as it became clear they, the powers that be, wouldn’t let anything burn down for they kept showing up always at the right time just as markets were about to break.

The point of potential breakdown came in October of 2022 when another mission critical control pivot was being approached:

And this is the point when it began: Whenever markets subsequently got in trouble there appeared a helping hand signaling the market lows:

Think this is coincidental and not related? What would break markets? Over-tightening of financial conditions. What do you need to prevent a break at a critical point? A rapid reversal of financial conditions and so then a chart of a financial conditions proxy overlaid with $SPX and the magic appearances crystalizes the point:

Not only in words but in real terms via various liquidity back stops that included the massive fiscal impulse from a record non recessionary fiscal deficit, the March introduction of the BTFP program and the liquidity effect from bank reserves all greatly determined the directional flow of equities.

Am I being too much of a cynic? Perhaps, but being a cynic certainly paid in 2023. Not understanding the impact of the cumulative effect of all these factors was hazardous to the financial health of bears and asset managers. And worse: 2024 is an election year with precious little policy appetite to risk a repeat of 2008. Hence one could argue liquidity backstops and fiscal impulse are designed to front run any trouble. That would be an extremely cynical view of the world of course. But is it wrong?

For all these factors one could argue kept the “economy so resilient” for the largest liquidity backstop of all was also a large contributing factor: The fiscal impulse of a record non recessionary deficit north of 6% of GDP. While people marveled at the surprisingly surprising resilience of the US economy amid rate hikes and QT (after all the Fed’s stated goal was to slow down the economy to bring inflation down) many underestimated the stimulative power of a US government spending spree untethered from any debt ceiling once the can was kicked in 2023 with an unlimited credit card into 2025. The question arises: Can one even have a classic recession with US government spending equating 6%+ of GDP, i.e. intervention, crisis like levels?

And be clear: None of this is looking to stop any time soon. US debt has hit $34 trillion at the beginning of 2024, a stunning increase from the $31.5 trillion at the end of 2022, and debt is slated to increase to $35 trillion by the end of Q1 2024 (according to BofA). Fiscal impulse remains with us as do the liquidity back stops.

Indeed we can see it even now in the beginning of 2024 in the form of bank reserves. A quick dip in early 2024 (driven by a year end spike in reverse repo) saw markets reeling, the subsequent reversal higher saw markets rallying again last week along with a continued to rise to new ever higher records in the BTFP liquidity backstop which has now morphed into a free money arbitrage facility for banks.:

These correlations remain with markets into 2024 unless something changes. Reverse repo and BTFP are certainly meeting key deadlines this year and will force decisions by the Fed which may be market impacting depending on how they are managed.

Another key item of note: Rising interest rates put the Treasury in direct conflict with the Fed for interest expense on US debt have been sky rocketing to now being larger than the entire US military budget. Non sustainable especially knowing the US has trillions of debt coming to maturity in 2024 and 2025 which have to be refinanced at much higher rates increasing the pressure on an already strained US budget.

This made higher for longer a fantasy construct by the Fed PR machine hence Janet Yellen, with every incentive in the world as Treasury Secretary to want lower rates magically came out in October stating higher for longer was not necessarily a given while every Fed speaker kept insisting on it.

One could firmly smell the coming pivot:

And lo and behold in December:

Powell pivoted to everyone’s surprise. Oh yes, it does pay to be a cynic in these markets.

Now one can certainly debate the wisdom of all this as we just witnessed a record easing in financial conditions ahead of the Fed actually reaching its 2% inflation target as even the very Fed that helped bring this all about has some concerns:

But that’s what a pivot does and Powell can hardly claim ignorance about the impact his December words had to have on markets.

And here we are entering 2024 with a massive gap between the Fed’s own dot plot (always to be viewed with a healthy dose of skepticism) and what the market is pricing in in terms of rate cuts for 2024.

And this gap certainly will have to be negotiated in 2024 perhaps setting up for a bumpy road of disappointment throughout the year.

But let’s first acknowledge technical reality: The bullish patterns of 2023 have asserted themselves and remain in full control at the beginning of 2024.

Using just the $SPX as an example this was the structure I had outlined in October:

While the structure was temporarily challenged when Hamas attacked Israel it held and has followed through in a spectacular way:

The message: Bulls remain in full control and technically speaking this pattern has room higher, a lot higher, i.e. $SPX 5400.

That doesn’t mean markets will head there in a straight line, indeed it is conceivable we may see a back test of the breakout at some point. But unless bears manage any breakdown of the pattern and of key MA’s any correction or pullback will likely get bought.

And these pattern structures are all around us in tech and of course the S&P 100:

And now it gets really interesting.

Late last year I highlighted a surprising historic trend in markets and I want to dig a bit deeper into this.

If you haven’t seen it I recommend you watch this:

It speaks to a curious 10 year cycle in markets:

The conclusions and implications were pretty eye opening as we again saw a repeat performance this decade so far including a recent low in 2022, a rally in 2023 and now approaching 2024.

The basic seasonal chart suggesting a choppy 2024 with intermittent new highs, some corrective activity dispersed throughout the year and then a big ramp into the 5th year, i.e. 2025.

Is this cycle chart really this compelling? Hence I wanted to go back and actually look at all of these year 3-5 cycles in any given decade to see if there is something to this and if they offer any conclusions and it’s actually quite profound.

So let’s look at all of these holistically and unbiased:

2013-2015:

That one’s pretty straightforward, the 3rd year was an up year, so was the 4th year with every corrective activity bought and with further highs in 2015.

2003-2005:

 

2003, also a presidential pre-election year like 2023, saw a massive rally into year end similar to now and was followed with significant chop and corrective activity that lasted into Q2 in the election of 2004. The chop consistent with the larger cycle seasonality chart, but then a big ramp for further higher in 2005.

1993-1995:

1993 was an up year followed by a sizable correction into Q1/Q2 which then marked the low of the year. Tremendous chop through the rest of the year followed by a massive ramp into year 5.

1983-1985:

Year 3 an up year followed by significant chop and corrective activity lasting into Q2 for a low then in that year and then followed by yet another big up year in year 5.

1973-1975:

1974 was a terrible year for markets and marked the trough of the bear market cycle amid high inflation. Year 3 was a down year in the seasonal sequence and markets were already in a bear market heading into year 4. But then the magic: Year 5 again an up year.

1963-1965:

Again pretty straight forward, nothing but up in year 3 and 4 with every corrective activity bought and further highs into year 5.

1953-1955:

Year 3 struggled, but year 4 and 5 were nothing but up with every corrective activity bought.

1943-1945:

Year 3 was an up year despite challenges in the 2nd half and then year 4 and 5 simply trended higher also aided by World War II ending.

1933-1935:

Year 3 was a big up year followed by a very challenging and choppy year 4 and then a massive up year 5.

1923-1925:

Year 3 was down, year 4 saw heavy corrective activity into Q2 for a yearly low following a big initial Q1 rally and then a big up year 5.

1913-1915:

World War I caused havoc in markets in year 4, but year 5 was a massive up year again.

And finally 1903-1905:

Year 3 was down, but then the familiar refrain: Year 4 and 5 were trending up.

The most glaring conclusion of all this: Year 5 is up. Every single one of them. Wild. The most consistent history in stock markets. Don’t ask me why, but it is so. Every time. Can one decade at some point be different? I suppose so, but at this point I have zero basis to not expect a repeat.

Year 4? While some are smoothly up, some are not and in fact some can be quite nasty with corrective activity into Q1 and Q2 in particular. But the larger message stands: Whatever weakness there is in year 4 it’ll get bought.

And yet here again the cynic’s view of markets rings a bell. Suppose the soft landing narrative, as in 2007, meets a nasty surprise in 2024 and perhaps yield curves indeed do matter with the recent rally just following the historic script of market strength when the yield curve initially heads toward un-inversion as suggested in Market Runway:

Suppose then the soft landing narrative will be met by a recession offering the nasty year 4 scenario with large corrective activity in markets. What does this imply for year 5 i.e. 2025?

Massively lower rates, no QT and a likely return of QE, with a massive liquidity flood to come to “save the economy” which really means “save markets to save the economy” also potentially aided by big productivity gains coming from AI. It basically suggest 2025 is again slated to be an up year no matter what happens in 2024. That’s the message.

And if liquidity was the driver of 2023 what do you think liquidity will do to 2025 if there is a recession in 2024? That is if there is a recession for the fiscal impulse remains with us and rate cuts are coming as already signaled buy the Fed.

No, the big macro and historic message is pretty clear: Any weakness in 2024 will end up getting bought for a big bull run into the 5th year. That’s what all of history strongly suggests. The question is how deep any weakness may end up being.

Given the history and macro backdrop then nobody should be surprised by new highs in 2024 (they already happened on $OEX and $NDX), but also corrective activity into Q1 and perhaps Q2 in particular which are very much a real prospect, and the task for traders in 2024 is to navigate through what could be quite extensive tradable chop in the 1st half of the year, but also be prepared to buy weakness when it comes.

Finally: There remains much geopolitical risk with ongoing conflicts. There is also much angst about the US election this year and perhaps the time around the election and following may also present volatility risk. For the US and the world I hope this all turns out to be a big nothing burger, but political uncertainty can also breed volatility so we will have to keep a close eye on it as well for when the time comes.

While volatility remains very much compressed in early 2024 we should all expect volatility events in 2024, but the cynic’s guide to markets strongly suggests that volatility will again get restrained and corrections will again get bought and big new highs will come in 2025. If I’m wrong you can @ me on 12/31/2025 😉

This may sound easy on paper, but as we all know the daily reality of markets is often more complicated than that and continually assessing the ever shifting risk/reward proposition at key market points of control is key in our view to successfully navigate through the market gyrations to come.

As in prior years we expect technicals to help guide us along the way and you are of course welcome to join us for the analytical journey.

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Categories: Market Analysis

19 replies »

  3. Fascinating and convincing analysis Sven, thank you.
    Bears keep putting the cart in front of the horse but the horse is the stock market, not the economy now.

    Reply

  7. Mkt cap to GDP and, ‘Save the markets to save the economy…
    Indeed, Sven, the tail is now wagging the dog…

    Reply

  11. Beavis, you’re no better than the meme stock pumpers and use “technical analysis” like a blind man reads a stucco wall. Yes, the market is bigger than the economy but that fact didn’t prevent the GFC. 10 year cycle? LMAO. Maybe you did too many drugs to remember the 80s, 90s, and 00s but the economic environment is very different today. All your analysis translates to a cargo cult like leg humping of money printing which ignores a much larger dataset of economic data. You could take all your cherry picking and just replace it with the phrase “we are turning into zimbabwe” and be done.

    Reply

  12. I really used to like your content a lot but whether you like it or not you’ve turned into a perma-bull in recent weeks/months. And yes I know that your call for a big rally in October turned out quite well. Why I call you perma-bull? Well, even though in this article you acknowledge that severe corrections might happen – your final message is to “buy the dip” cause stocks are going to rally back up anyways. It’s shocking to see how many former bears are uber-bulls now – I guess this is what happens right around major tops. Well, what if the FED runs out of ammo and their tools stop working at some point? Just because we’ve got used to stocks rallying in the past 25 years it doesn’t mean it will go on like this forever.
    What if we’re near a major top and it will take years to return to these levels? Check out how long people that were buying stocks near major tops in 1929, 2000, 2007 had to wait to break even. Not even mentioning the Nikkei at this point.

    Reply

  13. Amazing analysis, forget the naysayers attacks. Regardless of the eventual outcome in 2025, we appreciate the work and historical trend analysis. Always appreciate your insights, and your willingness to flip either bull/bear-ish based on your research. Thanks again !

    Reply

  15. Am with you on all that arguments. However, what scares me most is the matter of fact, all debt crises have been resolved with war. If we look back 6000 years of financial data, extreme over-indebtedness had always led to war. Right now, the problem is by when is the debit no longer sustainable and triggers …

    Best
    Roland

    Reply

  16. This is not only an excellent analysis (and I appreciate analyses by bulls and bears) but also a pleasure to read. Please keep your cynicism, otherwise the current economic environment is hard to bear.

    Reply

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