The silence of the bears is deafening. And who can blame them?
The last 2 years have been absolutely brutal for any fans of price discovery, volatility and anything analytical mattering. Nothing matters. Be it divergences, valuations, earnings misses, slowing data, yield curve, equal weight, internals, catastrophes in nature, slowing loan growth, slowing auto sales, slowing real estate, retail apocalypse, debt levels, etc…I can drone on. Nothing matters. Markets keep drifting higher despite it all.
Price discovery as we used to know it, the back and forth of buyers and sellers engaging in the argument of forward valuations based on expected earnings growth, has ended with the disappearance of sellers as part of the normal market functioning:
Corrections as a means of price discovery don’t exist any more. Every day we don’t have a 3% correction is a new record in length of time without any such correction. And the chart above illustrates this adequately. It is a global phenomenon, it’s not only US based.
5% corrections, what also used to be regular part of markets and a bare minimum at that, have also disappeared:
Not quite at a record, yet the message is nevertheless clear: There’s not much happening in these markets on a day to day basis.
The abomination of what passes for intra-day trading ranges these days illustrates the point quite nicely:
Whatever downside does occur can’t sustain itself for more than minutes, a couple of hours at best. Case in point: The $DAX was only negative for 1 hour 16 minutes after the surprise collapse of German coalition talks on Monday. Nothing matters.
Hence it is no surprise sentiment is as bullish as it is. Recall allocations are all bullish, people, funds, even central banks all own the same shrinking universe of stocks.
Indeed there is not even a sense that anything could change this program:
This chart of the global Dow Jones, more than any other, shows how historically out of balance this rally has been. Red bars don’t exist and this is the steepest uninterrupted ascent ever accompanied by the steepest volatility compression ever.
In this context yesterday’s capitulation by Goldman Sachs was classic. They were the investment bank that kept citing valuations as a major concern and were the most bearish on 2017. Then they capitulated. Now their mid range target is 2850 for 2018. with little to no downside risk:
That’s if the exuberance stays rational they say, if it goes irrational they covered themselves with an irrational scenario of 5300.
As I said classic. It is notable how both Monday and Tuesday were suddenly flooded with bullish forecasts. I won’t bother to recite them all here, I gave you a glimpse yesterday.
I’m just highlighting this as a latest example of the complete lack of any divergent views remaining in the marketplace. Which is fine. It simply illustrates market sentiment, but also again underscores the extent of the bubble.
Bulls will counter that growth is solid. I’ve documented variant signs of a slowdown in the works (Caution: Slowdown). And I’m not the only one to notice:
And yet while bulls cite supposed great growth figures the ECB keeps printing like we’re in the middle of the financial crisis:
The numbers behind the chart via Holger Zschaepitz: “#ECB ramps up balance sheet expansion despite booming #Eurozone economy. Total assets rose by another €24.1bn to a fresh life-time high of €4,411.9bn on QE program, equals to 40.9% of Eurozone GDP.”
Now that’s just intellectually insulting. If things are so great we wouldn’t need this level of intervention or any intervention.
But this is what they are doing. Every day. I keep asking: What is the organic market price balance without intervention? The answer remains the same: Nobody knows as we haven’t seen markets without intervention other than the brief moments were they produced full out panic. 2011 and early 2016 are examples coming to mind.
So I continue to view price extensions and disconnects to be a direct result of trillions of dollars in ongoing intervention and exacerbated by record ETF inflows.
Let’s be clear: I don’t know how or when it ends, but it will end. Our primary mission here is to figure out what we consider good risk/reward set-ups knowing that we are finding ourselves in the most one way focused and technically disconnected markets in decades:
But this is precisely the point in time when the $GS capitulation takes place and all the bullish forecasts are coming out. And I understand why they are coming out. No corrections have taken place and we are in a bullish seasonal part of the year.
Now that we have entered the seasonally most bullish time of the year I can certainly understand the silence of the bears. What is there to say? No rationally reasoned argument has mattered, prices keep going up and there appears absolutely nothing on the horizon to stop this train.
Indeed, not only are bulls bullish, but some of the remaining bears I still see floating about have resigned themselves to talk blow-off top coming and are busily identifying higher upside targets from 2700-3000. Funny that. Bulls are bulls and bears are bulls.
But this is the lay of the land folks.
Add some oversold signal charts coinciding with new all time highs and I could easily argue 4 to 5 weeks of upside coming:
The message: Markets cannot possibly go down. There is no risk. Everybody is bullish, join the party.
Bottomline: Fading this action and sentiment is the most contrarian thing anyone can do here and for that reason it can also be the most dangerous. I have no illusions about that.
Folks are piling in long at the technically most disconnected market ever since the 2000 Nasdaq bubble. But that doesn’t mean it will stop here.
Are there any issues with the bull case here other than technical disconnects and divergences that don’t matter?
Well, here’s a few considerations I wanted to share:
This chart doesn’t tell us we can’t go higher. We can. But it suggests something disturbing and I’ve made reference to it in the past, but the overlay with the 10 year gives additional context: It could be argued that these waves of bullish action were driven by one primary factor: Cheap money. Artificial low rates and debt.
Furthermore it could be argued that the bearish break on $SPX in 2008 was never technically repaired. Yes massively higher prices as a result of over $20 trillion in central bank intervention, zero rates and a global explosion in debt levels to the tune of above $145 trillion in the non financial sector. All made possible by cheap money:
"Total debt of the nonfinancial sector amounted to $145 trillion in the first quarter of 2017, an increase of 40% since the first quarter of 2007"— Sven Henrich (@NorthmanTrader) November 22, 2017
All made possible by:https://t.co/09iONTE4f6
h/t @lisaabramowicz1 pic.twitter.com/rnpLCzKF3g
The lower the rates the higher the debt :
So the big question is simply this: What if that down trend in the 10 year yield bursts above its trend line for the first time since 1987?
As you can see in the $SPX chart above we have never seen a break above trend to the upside. Yet the entire market advance has been dependent on its declining trend. All of it. To fix any downside in markets rates had to be lowered and lowered.
None of this tells us anything about this week or next, but it highlights perhaps the precarious nature of the construct.
While the ECB keeps printing $DAX remains at a critical long term juncture:
And the quarterly chart also raises red flags:
The ECB is scheduled to slow down their QE program in 2018, but not end it nor will they raise rates at any time during Mario Draghi’s reign. The ECB remains in full policy panic mode. Because that’s what NIRP is. Panic mode. And you know why they keep pressing? Because inherently they know prices could not sustain themselves. They have to keep rates low.
The yield curve keeps flattening, but it matters not, it is now at the flattest level since 2007:
We are told not to worry of course:
If you are worried about how 2/10 UST Yield Curve flattening to below 60 bp for 1st time this cycle will affect $SPX - don't be. Over last three cycles, the median gain to "the" mkt peak from initial YC drop to 60 bp was 67%, with worst case gain of 36% last cycle— Tony Dwyer (@dwyerstrategy) November 21, 2017
We can only go up and nothing matters.
The only thing that matters is that people keep piling long into these markets.
ETF inflows have now reached an all time history high of $400B of inflows just in 2017:
There’s a QE program right there.
I’ve been mentioning the weekly 5 EMA:
As you can see from the chart: No weekly close below the weekly 5EMA is permitted. Any break lower is saved by the end of the week.
This is what we need to see changing before a change in trend can be considered.
For now markets can only go up and growth is wonderful.
Now who’s going to tell the bond market?
The screaming of the bears has ended. Their silence is deafening.
And perhaps that should worry bulls more than anything.