Bullish Or Bearish: The Illusion Of Permanent Liquidity

Could the markets rocket up to 2200, 2300 or 2400 as some analysts currently expect? It is quite possible given the ongoing interventions by global Central Banks. The reality, of course, is that while the markets could reward you with 250 points of upside, there is a risk of 600 points of downside just to retest the previous breakout of 2007 highs. Those are odds that Las Vegas would just love to give you.

The Economy, The Stock Market, & The Fed

Currently no-one expects the Fed to hike today and it probably won’t. It is definitely possible though that the FOMC statement will contain a strong hint regarding a likely rate hike in November or December, since the Fed for some reason no longer wants to surprise markets. Such an announcement could well have the same effect on the markets as an actual hike though.

A Fully Automated Stock Market Blow-Off?

About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout to new highs should be delivering the required technical signals. All these strategies are more or less automated (essentially they are simply quantitative and/or technical strategies relying on inter-market correlations, volatility measures, and/or momentum). We believe this is an inherently very dangerous situation.

Still Looks Like A Trap

“If the weather forecast suggests it might rain, wouldn’t you carry an umbrella?

Standing At The Crossroads

The market is standing at the proverbial “crossroads” of bull and bear. From a “fundamental” perspective there is not much good news. The past week we saw numerous companies beating extremely beaten down estimates. However, while JPM and C got a boost to their stock price, the actual earnings, revenue and profits trends were clearly negative. But that is the new normal. We live in an environment where Central Banking has taken control of financial markets by leaving investors “no option” for a return on cash. Therefore, the “hope” remains that asset prices can remain detached from underlying fundamentals long enough for them to catch up.

What The Charts Say: 15 "Risks" To The Recent Rally

The stock surge from February is at risk, warns BofAML's Stephen Suttmeier as a plethora of bearish divergences could cap further gains from here. 2044-2022 are key nearby S&P 500 support for April, but a loss of 2022 is required to break the last higher low from 3/24 and suggest a deeper decline for the S&P 500. The following 15 risk-factors - from VIX term structure steepness to Dow Theory Sell signals - all point to a retest of the recent 1810-1820 lows.

"Everything Is Rolling Over" - BofA Watches The Carnage

"Should the S&P 500 “The Generals” follow the weakness in the Value Line, NYSE, Russell 2000, and S&P Midcap 400 “The Troops”, there is risk below 1812-1810 toward 1730 (38.2% of 2011-2015 rally) and then 1600- 1575."

Breadth Breakdown Bodes Badly For Budding Bulls

While the S&P 500 held support at January low (1,812) yesterday (and October 2014's Bullard bounce lows), BMO's Russ Visch warns "it may not hold in the days ahead" due to weak market breadth.

What The Charts Say: "Similar Topping Process To 2000 & 2007"

The deterioration of the indicators highlighted below point to a downside break for the late-stage cyclical bull market from 2009, according to BofAML. Should 1,867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is a top that projects down to 1,600-1,575; and derspite the last 2 days' bounce, volume and breadth suggest a market under distribution or selling pressure, not primed for new highs.

This Is The 'New' Most Important Number For The S&P 500

Weakness in Breadth, volume, sentiment, and momentum all lead BofAML to warn "sell rallies" in stocks. Starting 2016 under pressure, the S&P 500 has big support at 1994-1990 but 1965 is the level at which things become perilous. Simply put, holding 1965 is required if a 'bounce' like late 2011 is expected.

The 'Goldilocks' Warning

The problem of suggesting that we have once again evolved into a "Goldilocks economy" is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations. Such a backdrop becomes particularly problematic when the Federal Reserve begins to raise interest rates which removes one of the fundamental underpinnings of an overvalued market which was low interest rates. Ultimately, higher interest rates, particulalry in an economy with a deteriorating economic backdrop, becomes the pin that "pops the bubble."  It is true that the bears didn't eat Goldilocks at the end of the story...but then again, there never was a sequel either.

Goldman's Clients Are Suddenly Very Worried About Collapsing Market Breadth

"Clients are quick to point out similarities between the current low breadth environment and the narrow breadth regime that emerged during the tech bubble in the late 1990s. Our Breadth index currently equals 1, one of the lowest levels in the 30- year series. The typical episode lasted four months, with past episodes ranging from two months in 2007 to a high of 14 months during the tech bubble."