Here we go again, creating another asset bubble for the third time in a decade and a half, is how Monument Securities' Paul Mylchreest begins his latest must-read Thunder Road report. As Eckhard Tolle once wrote, “the primary cause of unhappiness is never the situation but your thoughts about it," and that seems apt right now. After Lehman, policy makers went “all-in” on bailouts/ZIRP/QE etc. This avoided an “all-out” collapse and bought time in which a self-sustaining recovery could materialize. The Fed’s tapering threat showed that, five years on from Lehman, the recovery was still not self-sustaining. Mylchreest's study of long-wave (Kondratieff) cycles, however, leaves us concerned as to whether it ever will be. More commentators are having doubts; and the problem looming into view is that we might need a new "plan." The (rhetorical) question then is "Have we really got to the point where it's just about more and more QE, corralling more and more flow into the equity market until it becomes (unsustainably) 'top-heavy'?"
The risk of a more meaningful reversion is rising. It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout. Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to. This is the danger that exists today. Are we in the third phase of a bull market? Most who read this article will immediately say "no." However, those were the utterances made at the peak of every previous bull market cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk and manage accordingly. With the current bull market now stretching into its fifth year; it seems appropriate to review the three very distinct phases of historical bull market cycles. While the current bull market cycle may not be set to end tomorrow; it seems sensible to take a pause to question mainstream beliefs.
As stocks press back towards all-time highs amid a US government shutdown, extreme weakness in earnings pre-announcements, slower-than-expected China growth, Europe's recovery in doubt, and a looming debt-ceiling debate in the US, we look at four 'big picture' charts of dismal divergences that suggest it's not different this time at all...
Two months ago we were the first to highlight the 'real' great rotation in US equity markets as so-called "professionals" were selling in size as "retail" was the big buyer. Since then, market breadth has been weaker and the new highs are made on the back of fewer and fewer supposed "cult" stocks (as Cramer so aptly put it before Lumber Liquidators started to crumble). Perhaps the most infamous of the "cult" stocks is TSLA. At twice the market cap of Fiat, needing to sell 537,815 cars to meet expectations, and the gap in GAAP, Tesla closed at all-time highs on Friday. So who is buying?
An ugly day all around...
30Y Treasury yield - biggest 4-day yield compression in 15 months
Dow Transports - biggest single-day loss in ~5 months (2nd worst in 11 months)
Nasdaq - 2nd worst day in 10 months
AAPL - worst day in 3 months (2nd worst day of 2013)
USDJPY - biggest gain in JPY in 10 weeks
WTI - biggest single-day gain in 10 months
Financials - worst day in 10 months
In no particular order: Weak (and strong) US data (good or bad news?), War, Taper (Treasuries 'special'), Debt Ceiling, German elections, New Fed Chairman, imploding developing markets and collapsing global currencies... (S&P 500's first close <100DMA in 2013) it is on... (oh and S&P 500 futures 2nd biggest volume day in 2 months)
Even with duelling Fed members today (Bullard vs Plosser) the message from 'the man' led markets on a one-way street all week. Even though Boeing impacted the Dow (and Trannies):
- S&P managed its best week in 6 months (+2.6%);
- Gold's best week in almost 8 months (+5.1% or $62);
- Treasuries' best week in 13 months (10Y -14.5bps);
- High Yield bonds best week in 20 months (+3%); and the
- USD's equal worst week in 21 months (-1.8%).
VIX remains modestly bid and IG credit spreads are underperforming. Market breadth today was weak as S&P volume was very low and the intraday range the lowest in 5 months. The 330ET Ramp was 10 minutes late but just as effective in its goal of running stops to a green Dow as Bullard's words seemed magical.
My muse today was from the movie Network from nearly 40 years ago. In this clip you merely need to substitute global central banks (Fed, ECB, BOE, BOJ and etc) and mega-banks (GS, JPM, C and etc) into the mix.
Presented with little comment aside to note that the 6 point vertical ramp in the S&P 500 (which just happened to stall perfectly at VWAP) was accompanied by no news, no other-asset-class support, and a smack-down in front-end VIX... S&P futures are back above the 50DMA once again intraday (as Discretionary names outperform and builders are battered). Did 3:30PM Ramp Capital leave for the Hamptons early?
Did you know there was a large POMO Thursday? And, did you know Friday is quadwitching? Do you care?
The table is set for a counter-trend rally Friday given these events.
But, as with any oversold or overbought condition, markets can remain that way for longer than you expect—just look at gold as an example.
We’ll know more next week Wednesday when the Fed meeting concludes with a language parsing contest. In the meantime, stock market volatility is increasing as we’re experiencing alternating triple digit days now.
This was one helluva week. Nevertheless current markets are still hooked on QE.
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Unfortunately, the majority appear to be purposely ignoring the economic horror that is breaking out all over the globe.
Sell in May and go away will be on every investor’s mind after Friday’s week performance. It’s always been when you sell that’s been the measure for this maxim to be effective. If so the high for SPY would have been May 21st at $167.17. Then there’s the reappearance of the Hindenburg Omen but that’s for another day’s discussion.
The market’s performance Thursday and Friday are misleading since there is so much destruction in many sectors globally. But the media depends on selling what’s going on with the DJIA. It’s just window dressing for the tourists frankly.
Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.