As PeakProsperity's Adam Taggart writes, for too many years now, the financial markets have been conditioned that “dips don’t last”. Confident that the Fed will always provide the liquidity needed to push assets higher, investors have come to believe that risk doesn’t matter.
But, after the last few days of market carnage...
The question that springs to mind is simple - Is the coronavirus the pin that will end the 10 year-long Everything Bubble?
Quite possibly, cautions Sven Henrick, technical analyst and lead market strategist for Northman Trader.
Well, covid-19 is exactly the kind of unexpected exogenous shock that central banks are powerless against. No amount of intervention by the Fed, the ECB or the PBoC will slow the spread of the virus, or force-start factories idle from workers quarantines.
So, what to expect from here? In terms of damage to market prices, we haven’t seen anything yet, predicts Sven.
And today’s failed recovery is a sign that the previously-bulletproof market ‘exuberance’ of the past decade is now losing out to ‘fear’.
Combine further spread of the virus with continued de-celeration of global trade, then “all bets are off” warns Sven.
Click the play button below to listen to Chris’ interview with Sven Henrich (44m:45s).
As Henrich wrote earlier in the day, all things being equal... this rally has been terrible. Yea, the headline numbers have been great due to the disproportional market cap weight of a few key stocks such as $AAPL, $AMZN, $MSFT, etc, the usual suspects.
But one of my key complaints has been the narrowing of the rally and the inability for other key indices to make new highs, such as transports, the banking sector and small caps.
And now the bill has come due as $NDX has flushed over 8% in a matter of days:
And with that flush comes the revelation that the index headline numbers were simply bogus.
Greatest bull market ever? With the banking index down nearly 10% on the year?
Hardly. A bull market that can be taken out this quickly in just a few days is reeking of weakness beneath. Not only in 2020, but even throughout 2019.
And we can see this structural weakness in $XVG the equal weight index:
I maintain that the Fed’s liquidity injections have distorted everything and caused a massive FOMO melt-up.
But what this chart shows is that despite all this liquidity the broader market simple hasn’t played rally. Yes we have had bigger and better prices overall and new records on the main indices, but look how weak the relative picture is versus 2018 on an equal weight basis.
Didn’t even get close.
And now we saw new highs on $XVG for January, but then a negative divergent lower reading in February before it’s now flushed lower.
At the same time we saw $SPX break a trend in January, retesting that trend from beneath with new highs in February and now falling to the way side making new lows versus January.
Oh we’ll get rallies again, but what $XVG shows clearly is that there has been something profoundly wrong with this rally since 2019 and into 2020 and hence it’s been a selling opportunity on strength.
Why is this important? Because we’ve seen $XVG being a major warning signal before. Guess when?
It was in 1998 when $XVG made a massive new high. As markets corrected in 1998 new rallies following produced ever weaker readings, not only on $XVG but also on the RSI. A big negative divergence as markets made new highs. That worked until it didn’t and then the bubble burst in 2000, not even 2 years later.
This time we had a big correction 2018 and now made new highs in 2020 on an eerily similar structure.
For rallies to be structurally sustainable we need to see a dramatic improvement in equal weight.
We haven’t seen this. All things being equal, this market has major issues that the Fed’s actions have been masking, but these issues are now well reflected in the charts.
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