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Citi Warns US Equities Are A Cocktail of 2011, Slice Of 1998, Dash Of 2000

Tyler Durden's picture




 

Looking at the equity market and some of the background dynamics Citi's FX Technical group cannot help but be reminded of 2011. They also warn, despite the constant hope-driven rallies this week, there are also some aspects of what we saw in 1998 and similarities with 2000 that are worth noting. The bottom line, we have had the view for some time that we would see a much deeper correction in the equity market (in excess of 20%). Recent price action and developments might (just might) be suggesting that it is time to revisit that theme.

Via Citi FX Technicals,

DJIA pattern today looks very similar to that seen in 2011. (Daily)

After a 2010-2011 surge helped by QE2 in November 2010 (A move that was guided since August that year) the DJIA peaked with a head and shoulders formation completing in early August 2011(02 August break) at the same time as a break below the 200 day moving average.

The end of QE2 in June 2011, uncertainty about the US debt limit negotiations and (icing on the cake) a downgrade of the US by S&P on August 5, 2011 (Friday) created the backdrop for a sharp fall.

The target of the head and shoulders top was about 10,800 and the actual low hit in Oct 2011 (04 Oct) was 10,404. This gave us a high to low fall of 19% in the DJIA while the S&P fell 22%.

The present pattern could be viewed as another potential head and shoulders top with a neckline at 14,862 OR as a double top with a neckline at 14,760. The target on a break of this range would be 13,800-13,900 or about 12% high to low. (Compared to a 16% target in 2011 that was overshot). The rising 200 day moving average now at 14,686 also needs to be watched.

DJIA today compared to 2011 (Weekly chart)

The 55-200 week moving average set up is (not surprisingly) also similar, albeit more stretched this time than 2011.

In 2011 the DJIA eventually overshot the 200 week moving average by about 2%. A repeat of that would see the DJIA as low as around 12,200 or 22% off the peak set post the FOMC meeting.

While in 2011 we had some momentum divergence, this time around we have clear “triple momentum divergence” taking place at the peak.

VIX today compared to 2011 (Weekly chart)

The present set up on the VIX looks very similar to that seen in 2011.

In that instance we saw a smaller double bottom “morph” into a larger one that eventually sent the VIX towards 48% in August.
Right now we have a potential double bottom on a close above the 18% area that would suggest at least 24%

In that instance we would complete the larger double bottom at around 22% that would suggest a move to at least 32%

Such a development would be consistent with an acceleration below the support levels mentioned above on the DJIA

In addition the DJIA posted a bearish monthly reversal off the trend peak in August this year at 15,658. While we did get a daily close above that level on 18 Sept. (Fed debacle day) it was not sustained on either a weekly or monthly basis suggesting that this reversal is still valid.

What else was going on around this time in 2011? Actually the dynamics in Europe were on the threshold of deterioration also.

So, looking at the charts above the road map seems to be:

The Equity market is in danger of seeing a much lower level over the weeks/months ahead. High to low this move could end up being in excess of 20%.Given the fact that the Fed has been “setting it’s store” on a move to tapering it would be very difficult for them to quickly flip from tapering to no tapering and even further to expanded QE (This is pretty much what did happen in prior instances of equity market “stress”). In our view that takes away the short term potential for a “Yellen put” absent significant financial market/economic stress and makes it easier for that deeper correction to materialize.

 

Fixed income yields (US) will likely head lower and drag other long term yields with them.

 

EURUSD will likely move a bit higher in the near term but as the analogy of “When the US catches a cold the rest of the World catches a fever” kicks in, the USD is likely to go bid again. This may well be across the board as the USD once again sees itself benefit in a “risk off” environment.

 

We would expect that this backdrop could once again create stresses in peripheral Europe (With Italy looking a prime candidate at the moment) with an elevated EURUSD rate also not helping. This may manifest itself in

– Bunds going bid while peripheral bonds go offered.
– The European bank index turning lower off its present period of strength/outperformance as peripheral equity markets get hit again
– The ECB moving into “super dovish” mode culminating in
– A sharp fall in EURUSD from slightly higher levels (1.37-1.41) than we see today.(In 2011 that fall was 14 big figures between end August and early October)

It is also worth noting that we see some similarities in today’s markets to some other periods. Namely:

1998

The S&P surged to a trend high in August 1998 in a rally that began 4 years earlier in 1994

This was followed by a sharp reversal into October 1998 that saw a high to low fall of 22%

This period followed an attempt by the Fed to “tinker” with monetary policy in the summer of 1997 (they raised rates 25 basis points) that derailed emerging markets (Asia in particular) and culminated with a Russian debt default in August of 1998 and the collapse of LTCM (Long term capital management) in September 1998.

This led to a capitulation by the Fed who then eased rates by 75 basis points between Sept and Nov 1998 creating a platform for the equity market to move higher again into 2000.

This is very similar to what we saw in 2011 where following the end of QE2 on June 30th we saw a complete “about face” by the Fed as they put in place Operation Twist by November that year. In both these instances we saw the S&P fall 22% into the October lows only to post a bullish monthly reversal (In both instances) as the Fed reacted to the deteriorating backdrop.

Overall, the equity market, USD and bond market dynamics of 1998, 2011 and 2013 all show some striking similarities.

Now on to our last period that the Equity market is trading in a similar fashion to….2000

2000

This focus is the most “one dimensional” of the 3 periods and really just focuses on the equity market price action similarities.

Path of the Equity market 1998-2000 compared to 2011-2013.

The 1998-2000 rally was 68%. By contrast the 2011-2013 rally (So far) has been 61%

Then again, the broad market was not “dragged higher” this time by the huge NASDAQ bubble as in 1995-2000. Rather it has been dragged higher by the huge QE “bubble” encouraging misallocation of capital by putting the “Bernanke put” under risk. In addition we do not, at this point, anticipate a fall of the magnitude seen in 2000 and 2007.

In 2000 we had a massive NASDAQ bubble and in 2007 we had a housing bubble. These bubbles created a negative feedback loop into the broad economy and the core equity markets when they burst. This time some might argue that we have a “bond bubble”. There is an important difference though. When the NASDAQ bubble burst the Fed was not a “buyer of last resort” of NASDAQ stocks. When the housing bubble burst the Fed was not a “buyer of last resort of houses”. However in this cycle the Fed has been a buyer of last resort of Treasuries and mortgages. As we saw from the recent meeting, any disruption in the level of long term interest rates does affect the Fed pattern of buying. Having said that, what if we fall as we did in 1998 and 2011 (20%+) and the Fed once more backs away from normalizing monetary policy (As happened in 1998 and 2011)?

On the one hand that might create a platform for another “shot of 2 year adrenaline” for the equity market into 2015 and renewed bond market support. On the other hand, we would be concerned that we could once again get into the quandary we saw in 2000 and again in 2007 (Bubble) without the same degree of scope for a monetary response, leaving the Fed ineffective. (This more than anything is a good reason for them to look to end this “market interference/mispricing of risk/misallocation of capital that we call QE.

Let us just hope (we know that hope is not a good investment method) that if this fall in the equity market transpires as we expect (20%+) that the Fed adopts a more responsible approach for a change and does not respond with expanded stimulus.

Overall, we should point out that this 2000 dynamic is, in our view, a distant 4th from our preferred big picture view of the late 1970’s (Where the DJIA corrected 27% between late 1976 and early 1978) and the 2011 and 1998 pictures noted above.

In addition one of our favourite “Techamental” charts suggests a warning sign

Consumer confidence and the S&P500

Peaks in consumer confidence in 2000 and 2007 were followed by sharp falls beginning in the equity market within 3 to 4 months. In addition we did see sharp falls in consumer confidence into both October 1998 and October 2011.

If this June 2013 print is the peak in consumer confidence in another 4 year 4 month cycle then Equity market weakness in Sept-October this year is consistent with that picture

To sum up:

We retain our overall view that the big picture set up (2000-2016) continues to follow a similar path (with some material differences but a lot more similarities) to that seen in 1966-1982.

Within that the present period also has some similarities to:

– 2000 (Mainly Equity market)
– 1998 (Fed policy, EM, Equities, Fixed income and the USD but in particular...
– 2011: (Fed policy, EM, Equities, Fixed income, European periphery and the USD

For the weeks and months ahead we are now most focused on the July-October 2011 period as the road map for what the markets may hold in store for us.

 

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Fri, 10/04/2013 - 21:09 | 4024550 fonzannoon
fonzannoon's picture

The S&P finished 2011 flat, then blasted up in 2012 and obviously 2013. City is discounting the Yellen announcement followed by 100 bil of QE in November. 

Fri, 10/04/2013 - 21:25 | 4024585 LetThemEatRand
LetThemEatRand's picture

Exactly.  There are two things that will bring this market down:  1) Fed stops printing money and propping it up in order to enrich the top .01% and create fake wealth effect for the top 1% (which would only happen if there is a reason for it, such as to prove some political point or another, and only they will know the day it will happen), or 2) things become so incredibly bad that even unlimited taxpayer funded giveaways to the banks can't save it (could happen next week or next decade, who knows).  Everything else is noise at this point because of the money printing.

Fri, 10/04/2013 - 21:38 | 4024620 Manthong
Manthong's picture

Methinks more like a brew of 1606, with a slice of 1929 and a dash of 2008  

Fillet of a fenny snake,
    In the caldron boil and bake;
    Eye of newt, and toe of frog,
    Wool of bat, and tongue of dog,
    Adder's fork, and blind-worm's sting,
    Lizard's leg, and owlet's wing,—
    For a charm of powerful trouble,
    Like a hell-broth boil and bubble."

-MacBeth

Fri, 10/04/2013 - 21:39 | 4024629 LetThemEatRand
LetThemEatRand's picture

So foul and fair a day I have not seen.

Fri, 10/04/2013 - 21:43 | 4024640 fonzannoon
fonzannoon's picture

do you bite your thumb at me?

Sat, 10/05/2013 - 10:51 | 4025470 Jumbotron
Jumbotron's picture

Out damn'd spot! out I say!

Fri, 10/04/2013 - 21:10 | 4024553 Rimon
Rimon's picture

All these charts and analogues look pretty but this is the 20th time this year CitiFX team is putting together a nice package to push a theme..

They have a terrible track record.. So not clear why would anyone want to listen to someone with such a poor track record..

 

Just as it's not clear the utility of pitching Hugh Hendry's views given his track record of bleeding money for his investors for 2yrs despite

plenty of big macro moves during that time.. 

 

Who cares wihat someone with poor track record thinks? I want to hear the views of someone who is nailing it..

Fri, 10/04/2013 - 21:33 | 4024609 MrSteve
MrSteve's picture

An old Zen saying:

Those who speak don't know and those who know don't speak.

Very old and very true.

Sat, 10/05/2013 - 01:08 | 4025037 Call me Ishmael
Call me Ishmael's picture

Don't play, don't experiment, don't guess, don't try and wait to see what happens.

Don't let the noise make you think you see something you want to see.

Do the most obvious, easiest, surest thing to do when given the opportunity.

Fuck you Citi.

Sat, 10/05/2013 - 10:34 | 4025450 Jumbotron
Jumbotron's picture

Looks like head and shoulders to me.  Maybe something more than dandruff is about to drop.

Sat, 10/05/2013 - 13:48 | 4025854 AbbeBrel
AbbeBrel's picture

Here you go courtesy of pundittracker

 

 

http://blog.pundittracker.com/barrons-roundtable-2012-update/?utm_source=rss&utm_medium=rss&utm_campaign=barrons-roundtable-2012-update

 

Zulauf has a CAGR or 23.8 since 2005, beating out Faber at 20.2.   Zulauf also has pretty amazing commentary - see the google translate of his recent interview along with his son at the tracking blog felixzulaufblog.blogspot.com.

If you read German, the original interview is here:

http://www.wiwo.de/finanzen/geldanlage/felix-und-roman-zulauf-erholungsfantasien-sind-eine-fata-morgana-seite-all/8432470-all.html

Sat, 10/05/2013 - 16:48 | 4026245 ajax
ajax's picture

 

 

Further to Rimon: if there has ever been a "bank" ripe for nationalization look no further than "Citi". The fucking thing has been bailed out how many times now? Don't bother looking at their charts, don't listen to them. Nationalize the fuckers, fire every CEO COO etc. Just do it. 

 

Fri, 10/04/2013 - 21:15 | 4024564 buzzsaw99
buzzsaw99's picture

C is full of beans. They know nothing. They are criminals. Pandit the bandit, chuckie prince, maggots all.

Fri, 10/04/2013 - 22:17 | 4024718 Savyindallas
Savyindallas's picture

Yeah, but sometimes the maggots try to fool us by telling the truth  -or they just get lucky.

Fri, 10/04/2013 - 21:14 | 4024567 Yen Cross
Yen Cross's picture

  I might have you beat Tyler. If not I'm running a close 2nd!  Have a look at this chart...

 http://imageshack.com/scaled/large/21/n7q8.png

Fri, 10/04/2013 - 21:16 | 4024568 soopy
soopy's picture

<-- number of fucks given on a Friday night

Fri, 10/04/2013 - 22:50 | 4024800 Yen Cross
Yen Cross's picture

  Soopy

Fri, 10/04/2013 - 21:42 | 4024596 Yen Cross
Yen Cross's picture

  Technicals are bullshit! It's price action.  Last night I went to sleep and closed my gbp/jpy position as usd/jpy is manic depressive right now.

  Low and behold the fucking Cable tanks and usd/jpy trades in a 40 pip range. GFC, the gbp ,high yielding "Gilt" side of trade drags the fucking gbp/jpy down. Anyways, I did ok.

  The moral of the story is? Stay the fuck up 24-7 or close your trades before your eyes> Bitchez

 

  Tommy Stolper must be reading Z/H? Better yet, it's those douchebag FX clowns at Nomura? Long gbp/jpy LMAO!

  It's ok girls, usd/jpy will hit the wall just below 98.00

Sat, 10/05/2013 - 20:09 | 4026723 maskone909
maskone909's picture

I suck at trading currency. Its almost like the damn stops are hit on purpose. I cant tell you how many times my stops were hit and then served as support. And i mean to the damn pip! Pretty creepy. Felt like i was truman in The Truman Show.

Fri, 10/04/2013 - 22:52 | 4024806 RiverRoad
RiverRoad's picture

We've been needing at least a 20%er for awhile.  All hands on the Ouija board now.

Sat, 10/05/2013 - 00:16 | 4024973 World of Debt
World of Debt's picture

This has to end badly... but many of us have been thinking that for years now.

See Hilarious Music Video: WORLD OF DEBT!!!

 

https://www.youtube.com/watch?v=99xsqxzJnXs

Sat, 10/05/2013 - 03:32 | 4024989 Yen Cross
Yen Cross's picture

  I'll bet you're under 40?

 The silence is deafening..  

   Sleep Well Bitchez ®

Sat, 10/05/2013 - 09:00 | 4025338 Hedgetard55
Hedgetard55's picture

Charts today are the equivalent of leeches used back in the day to "cure" people. They don't work, or mean a thing, as long as Berskanky is printing dough.

Sat, 10/05/2013 - 09:57 | 4025403 moneybots
moneybots's picture

"The 1998-2000 rally was 68%. By contrast the 2011-2013 rally (So far) has been 61%"

 

A 20% drop.  1998 was a 20% drop, then it was off to the races.  Greenspan did the old fashioned version of QE, dropping the rate to 4.75 and the Nasdaq was on its way to blowing its top off.

Just buy the dip and make another 60%.  The FED has your back.

 

Sat, 10/05/2013 - 10:10 | 4025410 moneybots
moneybots's picture

"In addition we do not, at this point, anticipate a fall of the magnitude seen in 2000 and 2007."

 

In 2000 and 2007, a fall of the magnitude of 2000 and 2007 was not anticipated.  But maybe you are right this time.  The FED is afraid of its own shadow. 

 

"In 2000 we had a massive NASDAQ bubble and in 2007 we had a housing bubble."

The housing bubble was also massiver than the Nasdaq bubble.  Where is the massiver bubble this time?

Sat, 10/05/2013 - 11:01 | 4025483 PAWNMAN
PAWNMAN's picture

When the fundamentals are as meaningless as they are today, the technicals are equally as worthless.

Sat, 10/05/2013 - 18:51 | 4026591 Jumbotron
Jumbotron's picture

When the fundamentals are as meaningless as they are today, the technicals are equally as worthless.

Until they are not worthless.

Sun, 10/06/2013 - 06:00 | 4027273 WhosNext
WhosNext's picture

I'm a little bit short, but worried of a massive short squeeze should the budget and debt ceiling get resolved. Note that until this happens, markets can still go significantly lower as uncertainty builds up.

Sun, 10/06/2013 - 12:07 | 4027649 Law97
Law97's picture

Everybody's thinking the same thing as you, that's why markets haven't sold off amid the shurdown/debt ceiling.  A full resolution is already priced in.  Just look at all the articles that are ho-humming the shutdown.  Article after article on the MSM about how everything will be resolved and dips should be bought.  The result is that longs are sitting toght and there hasn't been any dip.  What bulls are forgetting is that even when everything is resolved, earnings still stink, and there are a host of other headwinds that are being ignored right now with the Washington Show nowplaying.  Get that out of the way, and attention turns to how crummy everything else still is.  So that's why I agree the shutdown will be quickly resolved, yet why I also remain short. 

Remember, everybody is expecting a resolution and a short squeeze.  That's exactly why it won't play out that way.

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