Endgame: NDX Has Reached The Same Volatility Extremes as in 2000
I called for the generational short on US equities at the beginning of this year.
I was, in fairness, calling for a slower, more typical bear market and not the sharpest selloff in US history other than Black Monday. I didn't pick "global pandemic" as "the reason" it would happen - but rather my thesis was that we'd reached 2000's extremes of index valuations / GDP and were broadly heading into a decade with a lot of longer-term headwinds while valuing everything as if there were zero risk of anything significant going wrong.
To my credit, I did point at the October repo market collapse as a giant red flag that things weren't going well under the surface. That was dead-on correct - COVID-19 effectively triggered a financial panic and liquidity crisis which finally ended (or perhaps more accurately, the still-very-precarious scenario was stabilized for awhile) by approximately doubling central bank balance sheets.
...what I did not have the imagination to see was that we could... on the backdrop of failing to get COVID-19 under control and accruing damage to Q3-Q4 with the optimistic scenario of a V-shape recovery ruined... have the fastest rally in the history of the US stock market lasting for 5 months and counting.
We are in new paradigm territory. Everything now is either an outright superlative or it compares to exactly the 2000 tech bubble and nothing else. Arguments can be made for comparisons to 1929 instead (and realistically, this looks to me like it was going to be like 2000 but then COVID-19 as a catalyst did damage that puts us somewhere between those scenarios), but even in 1929 we only retraced 50%.
Extremes off the top of my head:
-ATH call buying
-ATH small # of contracts options buys (retail)
-ATH percentage of options with =< 2 weeks before expiration
-Fear and Greed back in Greed
-Citi's sentiment model deep into euphoria and in euphoria for the longest stretch since 2000.
-NDX is 25% above its D 200 SMA, the highest since 2000.
-ATH NDX/GDP, meaningfully higher than 2000
-Highest SPX/GDP for as far back as the FRED GDP dataset goes (starts right after WWII); only the 1929 bubble was higher
-Historically low breadth to the rally, with recent green days having 70% of stocks down on the day
-Highest concentration of the 5 largest stocks in SPX since the 1970s, exceeding 2000. Essentially all of the run after the brief pullback in June has been because of a handful of tech megacaps.
-NDX is >50% FANGMAN
-FX futures have extreme levels of speculative short interest against the dollar on COT
-Essentially 100% of hedge funds are exposed long to equities now
-Emerging markets are getting destroyed in this environment, and it's starting to show in things like Turkey losing control of USDTRY again
-We're still in a global pandemic. It's still out of control in the US. It's trending back out of control in Europe.
Valuations of the tech giants have become nonsensical in the post-March run. Two examples which are illustrative for different reasons:
-AAPL reported flat YoY Q2 earnings, which though impressive during the pandemic, is also known as "not-growth". Certainly, the resiliency is worth some premium, and profits are worth somewhat more as interest rates have fallen a point, but AAPL is currently trading at 2.5x what it was this time last year. Risks to AAPL's business model have actually increased substantially in that time, as it is the single Western company most exposed to China where it not only has much of its supply chain but is also its largest market for iPhones accounting for ~30% of sales. China, if you haven't been paying attention, is having a very rough year. The recent pattern of sharp D gaps higher has literally never happened on this stock since its listing in 1980.
-TSLA is currently valued at approximately 1.75x Toyota's market cap, the next most valuable automaker in the world. TSLA has had 6 modestly profitable quarters in its whole existence, has a bond rating 5 levels into junk status, and makes only cars priced to compete in the luxury market as the world slides into a major downturn. It is currently trading at ~15x sales as if it's some sort of small cap unicorn, rather than roughly the 10th most valuable company on the planet. To rationalize valuations anything like these, you have to ascribe multiple lines of business that TSLA is either not actually obviously winning at right now or which are invented for it out of whole cloth because they're not even in them yet, *and* assume that they will be the big winners in all of these lines of business over the next decade. This is to say nothing of the fact that the reason they used to be the most shorted company in the market (speaking of which, short interest is now basically gone) because there are endless enough red flags about this company to fill a book (which may yet well be what happens).
...but most of this has been basically true for several months now. So why make a new public top call today? ...because this is the point where my volatility-based indicators are finally saying that we've reached out to 3+ STDEV of the relevant periods on the W (and M) charts, similar to the 2000 tech bubble peak. Realistically, unless this time is truly different, we should expect *at least* ranging and retracement to the 1-1.25 STDEV even if still bullish and that's literally a 20% retrace by itself.
I think though that we should expect that retrace to go further, pop this business cycle's bubble, and mean revert on high timeframes. We're basically pricing NDX like there was never even a pandemic this year, despite the fact that we have all the symptoms of the worst downturn since WWII including already reaching the same levels of corporate bankruptcies as 2008 and greatly tightening commercial lending standards. Business confidence measures remain in the toilet. There's event risk of COVID-19 getting much worse during flu season "forcing shutdowns" (studies show shutdowns lagged people stopping most of their activity anyway) or persisting a lot longer than expected should the current round of vaccines in Phase 3 not prove to be effective, and other weedsy issues. There's a really serious setup right now for a broad EM financial crisis which includes the mother of all EM, China.
So, I've marked out potential retraces to two high timeframe periods my model identifies, which would be ~35% and ~55% drops. I've marked a bit above 12500 as the stop; if we got up there without at least the first retrace, I really don't have a good answer for it and would have to concede that the idea is invalidated.
If you'd like to learn more about the indicators used to produce the charts on the left, check out SharkCharts.live, which has descriptions and a playlist of several hours of my explanatory videos.
I am an amateur and you shouldn't take anything I say as financial advice. I'm interested in any feedback.
I was, in fairness, calling for a slower, more typical bear market and not the sharpest selloff in US history other than Black Monday. I didn't pick "global pandemic" as "the reason" it would happen - but rather my thesis was that we'd reached 2000's extremes of index valuations / GDP and were broadly heading into a decade with a lot of longer-term headwinds while valuing everything as if there were zero risk of anything significant going wrong.
To my credit, I did point at the October repo market collapse as a giant red flag that things weren't going well under the surface. That was dead-on correct - COVID-19 effectively triggered a financial panic and liquidity crisis which finally ended (or perhaps more accurately, the still-very-precarious scenario was stabilized for awhile) by approximately doubling central bank balance sheets.
...what I did not have the imagination to see was that we could... on the backdrop of failing to get COVID-19 under control and accruing damage to Q3-Q4 with the optimistic scenario of a V-shape recovery ruined... have the fastest rally in the history of the US stock market lasting for 5 months and counting.
We are in new paradigm territory. Everything now is either an outright superlative or it compares to exactly the 2000 tech bubble and nothing else. Arguments can be made for comparisons to 1929 instead (and realistically, this looks to me like it was going to be like 2000 but then COVID-19 as a catalyst did damage that puts us somewhere between those scenarios), but even in 1929 we only retraced 50%.
Extremes off the top of my head:
-ATH call buying
-ATH small # of contracts options buys (retail)
-ATH percentage of options with =< 2 weeks before expiration
-Fear and Greed back in Greed
-Citi's sentiment model deep into euphoria and in euphoria for the longest stretch since 2000.
-NDX is 25% above its D 200 SMA, the highest since 2000.
-ATH NDX/GDP, meaningfully higher than 2000
-Highest SPX/GDP for as far back as the FRED GDP dataset goes (starts right after WWII); only the 1929 bubble was higher
-Historically low breadth to the rally, with recent green days having 70% of stocks down on the day
-Highest concentration of the 5 largest stocks in SPX since the 1970s, exceeding 2000. Essentially all of the run after the brief pullback in June has been because of a handful of tech megacaps.
-NDX is >50% FANGMAN
-FX futures have extreme levels of speculative short interest against the dollar on COT
-Essentially 100% of hedge funds are exposed long to equities now
-Emerging markets are getting destroyed in this environment, and it's starting to show in things like Turkey losing control of USDTRY again
-We're still in a global pandemic. It's still out of control in the US. It's trending back out of control in Europe.
Valuations of the tech giants have become nonsensical in the post-March run. Two examples which are illustrative for different reasons:
-AAPL reported flat YoY Q2 earnings, which though impressive during the pandemic, is also known as "not-growth". Certainly, the resiliency is worth some premium, and profits are worth somewhat more as interest rates have fallen a point, but AAPL is currently trading at 2.5x what it was this time last year. Risks to AAPL's business model have actually increased substantially in that time, as it is the single Western company most exposed to China where it not only has much of its supply chain but is also its largest market for iPhones accounting for ~30% of sales. China, if you haven't been paying attention, is having a very rough year. The recent pattern of sharp D gaps higher has literally never happened on this stock since its listing in 1980.
-TSLA is currently valued at approximately 1.75x Toyota's market cap, the next most valuable automaker in the world. TSLA has had 6 modestly profitable quarters in its whole existence, has a bond rating 5 levels into junk status, and makes only cars priced to compete in the luxury market as the world slides into a major downturn. It is currently trading at ~15x sales as if it's some sort of small cap unicorn, rather than roughly the 10th most valuable company on the planet. To rationalize valuations anything like these, you have to ascribe multiple lines of business that TSLA is either not actually obviously winning at right now or which are invented for it out of whole cloth because they're not even in them yet, *and* assume that they will be the big winners in all of these lines of business over the next decade. This is to say nothing of the fact that the reason they used to be the most shorted company in the market (speaking of which, short interest is now basically gone) because there are endless enough red flags about this company to fill a book (which may yet well be what happens).
...but most of this has been basically true for several months now. So why make a new public top call today? ...because this is the point where my volatility-based indicators are finally saying that we've reached out to 3+ STDEV of the relevant periods on the W (and M) charts, similar to the 2000 tech bubble peak. Realistically, unless this time is truly different, we should expect *at least* ranging and retracement to the 1-1.25 STDEV even if still bullish and that's literally a 20% retrace by itself.
I think though that we should expect that retrace to go further, pop this business cycle's bubble, and mean revert on high timeframes. We're basically pricing NDX like there was never even a pandemic this year, despite the fact that we have all the symptoms of the worst downturn since WWII including already reaching the same levels of corporate bankruptcies as 2008 and greatly tightening commercial lending standards. Business confidence measures remain in the toilet. There's event risk of COVID-19 getting much worse during flu season "forcing shutdowns" (studies show shutdowns lagged people stopping most of their activity anyway) or persisting a lot longer than expected should the current round of vaccines in Phase 3 not prove to be effective, and other weedsy issues. There's a really serious setup right now for a broad EM financial crisis which includes the mother of all EM, China.
So, I've marked out potential retraces to two high timeframe periods my model identifies, which would be ~35% and ~55% drops. I've marked a bit above 12500 as the stop; if we got up there without at least the first retrace, I really don't have a good answer for it and would have to concede that the idea is invalidated.
If you'd like to learn more about the indicators used to produce the charts on the left, check out SharkCharts.live, which has descriptions and a playlist of several hours of my explanatory videos.
I am an amateur and you shouldn't take anything I say as financial advice. I'm interested in any feedback.
Comment:
Treasury futures are basically all near their lows from 2 weeks ago today, with shorter maturities making slightly higher lows. Eurodollar futures are clearly above those lows.
Now more than ever, watch the bond market to see if it's ready to confirm a potential status quo leg up with a breakout downtrend here, or if it holds and bounces. Bonds holding up here would imply a very weak appetite for risk assets, and while that's been true literally for the whole rally since March, breadth has become extraordinarily poor in the past 2 weeks and again, I see this area as a technical volatility extreme on the W NDX chart, hence the idea in the first place.
Now more than ever, watch the bond market to see if it's ready to confirm a potential status quo leg up with a breakout downtrend here, or if it holds and bounces. Bonds holding up here would imply a very weak appetite for risk assets, and while that's been true literally for the whole rally since March, breadth has become extraordinarily poor in the past 2 weeks and again, I see this area as a technical volatility extreme on the W NDX chart, hence the idea in the first place.
Comment:
Things are so bullish that even the VIX is green!
...but for real /VX is up more than /NQ today. Days where VIX cleanly goes up at the same time as SPX are not very common, and generally mean exactly what you might expect - that the rally is unusually precarious and a correction is imminent.
...but for real /VX is up more than /NQ today. Days where VIX cleanly goes up at the same time as SPX are not very common, and generally mean exactly what you might expect - that the rally is unusually precarious and a correction is imminent.
Comment:
twitter.com/hmeisler.../1299695708468109312
Citi Sentiment oscillator ~maxed out, comparable only to peak 2000 tech bubble.
A few other observations that have been making the Twitter rounds:
-SPX and VIX closing green together 2 days in a row (this week on Wed + Thurs) has happened only 3 times before, the most recent being the literal exact top of the 2000 tech bubble, and the two others in that run-up with one of them preceding the beginning of the start of Asian Financial Crisis by a couple weeks.
-Fear and Greed Index, which has a lot of inherent lag compared to the speed of 2020's move, has finally reached "Extreme Greed" again
-Various dark pool measures are slowing dark pool buying sentiment on the floor, something that has happened before basically every major correction (but also before more minor corrections as well)
-Parabolic call buying continues to be parabolic
-net speculator positioning against the USD on FX futures COT still increasing
-Equity Put/Call ratios at all time lows; people seem to like a variety of moving average lengths for this but since the trend has been down to deep new lows they're all saying the same thing.
I was going to write a novel about all the different sources of event risk, but thought better of it. There's a lot. COVID-19 is worsening rapidly in Europe and staying persistently high in the US. Civil unrest in the US is escalating and rather than giving multiple paragraphs to explain the sides fairly in detail, I'll just say that escalation is a huge risk right now and it's lose-lose for everyone, so regardless of your personal politics you should be on the side of deescalation. China is still facing more flooding and a lingering serious threat (inevitability?) of a sudden financial crisis.
The thing that seems to be new though, is that my feeds are showing a sudden surge in anecdotes about commercial real estate having big problems. Apparently this was the month when commercial credit seems to have really badly dried up, and anecdotal reports on social media tell of surges of commercial listings. This is something that could pull the rug on the system because all of this means a lot of debt defaults at once. There's also no conceivable mechanism for the Fed to backstop this stuff - no amount of loan programs will solve this scale of insolvency and there's no obvious instrument they could try to buy either.
Citi Sentiment oscillator ~maxed out, comparable only to peak 2000 tech bubble.
A few other observations that have been making the Twitter rounds:
-SPX and VIX closing green together 2 days in a row (this week on Wed + Thurs) has happened only 3 times before, the most recent being the literal exact top of the 2000 tech bubble, and the two others in that run-up with one of them preceding the beginning of the start of Asian Financial Crisis by a couple weeks.
-Fear and Greed Index, which has a lot of inherent lag compared to the speed of 2020's move, has finally reached "Extreme Greed" again
-Various dark pool measures are slowing dark pool buying sentiment on the floor, something that has happened before basically every major correction (but also before more minor corrections as well)
-Parabolic call buying continues to be parabolic
-net speculator positioning against the USD on FX futures COT still increasing
-Equity Put/Call ratios at all time lows; people seem to like a variety of moving average lengths for this but since the trend has been down to deep new lows they're all saying the same thing.
I was going to write a novel about all the different sources of event risk, but thought better of it. There's a lot. COVID-19 is worsening rapidly in Europe and staying persistently high in the US. Civil unrest in the US is escalating and rather than giving multiple paragraphs to explain the sides fairly in detail, I'll just say that escalation is a huge risk right now and it's lose-lose for everyone, so regardless of your personal politics you should be on the side of deescalation. China is still facing more flooding and a lingering serious threat (inevitability?) of a sudden financial crisis.
The thing that seems to be new though, is that my feeds are showing a sudden surge in anecdotes about commercial real estate having big problems. Apparently this was the month when commercial credit seems to have really badly dried up, and anecdotal reports on social media tell of surges of commercial listings. This is something that could pull the rug on the system because all of this means a lot of debt defaults at once. There's also no conceivable mechanism for the Fed to backstop this stuff - no amount of loan programs will solve this scale of insolvency and there's no obvious instrument they could try to buy either.
Comment:
NDX currently up today ~1% despite very poor breadth; not new as of recent but galling for the size of the move.
TSLA and AAPL stock splits happened today. TSLA up 10%, AAPL up 5%, with Robinhood literally warning that they expected to get overloaded by trading activity related to these splits. Retail investors not understanding stock splits and thinking they meant... well, anything, really... is something that happened in the 1999-2000 tech bubble that we've been making fun of ever since.
...except this time it's even sillier because every major broker introduced fractional shares trading this year to preempt this liquidity concern, so the splits actually solve nothing about liquidity in the underlying. They do probably add liquidity in the options market, which (sadly) may matter since this is all happening as speculative FOMO on leverage to begin with.
My stop on this top call is starting to look sketchier now. That said, treasuries are having a good day, the internals are terrible, and it's plainly obvious that this rally isn't based on anything sustainable, so, with about 3.5% of space left, this is still very viable.
TSLA and AAPL stock splits happened today. TSLA up 10%, AAPL up 5%, with Robinhood literally warning that they expected to get overloaded by trading activity related to these splits. Retail investors not understanding stock splits and thinking they meant... well, anything, really... is something that happened in the 1999-2000 tech bubble that we've been making fun of ever since.
...except this time it's even sillier because every major broker introduced fractional shares trading this year to preempt this liquidity concern, so the splits actually solve nothing about liquidity in the underlying. They do probably add liquidity in the options market, which (sadly) may matter since this is all happening as speculative FOMO on leverage to begin with.
My stop on this top call is starting to look sketchier now. That said, treasuries are having a good day, the internals are terrible, and it's plainly obvious that this rally isn't based on anything sustainable, so, with about 3.5% of space left, this is still very viable.
Comment:
1.5% of that space eaten today.
I'm starting to get resigned to the possibility that I may be right about the big picture but that this is an idea that gets stopped out first anyway.
Still, more pressure to pile on - extremely low inflation numbers in Europe, EURUSD hit 1.20, and the ECB started making noises about EURUSD mattering to them. We continue build the coming bonfire taller - it's just a question of when it lights.
I'm starting to get resigned to the possibility that I may be right about the big picture but that this is an idea that gets stopped out first anyway.
Still, more pressure to pile on - extremely low inflation numbers in Europe, EURUSD hit 1.20, and the ECB started making noises about EURUSD mattering to them. We continue build the coming bonfire taller - it's just a question of when it lights.
Comment:
Crazy day with overnight ramp up 1%, then sharp reversal on cash market open, then a bounce to get most of the ramp back.
SPX up 1.5% with VIX rising.
Stop on this trade now down to only 1% of breathing room. Bounce today was not really what I wanted to see to have this trend finally break.
Trump tweeting about how amazing the market is has often characterized near-term tops (he tweeted about DJIA 29000).
SPX up 1.5% with VIX rising.
Stop on this trade now down to only 1% of breathing room. Bounce today was not really what I wanted to see to have this trend finally break.
Trump tweeting about how amazing the market is has often characterized near-term tops (he tweeted about DJIA 29000).
Comment:
This got within 1% of the stop I chose for this trade.
Then it dropped 6% in one day.
It's always best to be both lucky and good.
Then it dropped 6% in one day.
It's always best to be both lucky and good.
Comment:
Week has started with the first real retrace.
I'm seeing notice in my feeds that someone's buying a lot of ~90 delta UVXY calls for Dec and Jan. One way to read that is as a bet or hedge that the election result is messy and drags through the courts. Another is to consider it of a piece with the kind of large option plays we've seen used ahead of stocks running up in the past couple months. Either way, it's not a play you make if you think that a market is correctly pricing essentially zero risk of anything going wrong with extreme multiples and valuations.
I'm seeing notice in my feeds that someone's buying a lot of ~90 delta UVXY calls for Dec and Jan. One way to read that is as a bet or hedge that the election result is messy and drags through the courts. Another is to consider it of a piece with the kind of large option plays we've seen used ahead of stocks running up in the past couple months. Either way, it's not a play you make if you think that a market is correctly pricing essentially zero risk of anything going wrong with extreme multiples and valuations.
Comment:
Time to dust off this idea.
...which is still alive, despite two more rallies higher.
We are past the US election. Markets likely were pricing in a Biden victory because just about everyone's polling data said as much, but the polling was meaningfully off enough that we're on track to have Biden + a GOP Senate. So, this was a pleasant surprise to the market, which was expecting to get a lot more stability out and stimulus out of a Biden administration but at the cost of higher taxes. Now it looks like it gets the stability while keeping the low taxes.
So, we just had one heck of a fast blowoff rally in the week following the election, culminating in "positive vaccine news". This changes the timeline on completion and distribution of a COVID-19 vaccine... not at all, still the same schedule to scale production and distribute that experts have been giving since March where this all drags into at least the middle of next year.
(Don't get me wrong - if Pfizer's vaccine is as effective as they're claiming, that's genuinely good for the world, but for those majority of you out there who don't have any bioscience background, a company selectively releasing info like this should be treated with extreme skepticism until you see the full, peer-reviewed data.)
We produced one heck of a shooting star on most equities indices today, with SPX poking nearly 5% up to a new ATH, DJIA similar, and RTY doing limit up insanity before the cash market sold it all back. Suffice it to say, that's the kind of behavior that happens at market tops.
In the real economy, Europe is locked back down because of parabolic COVID-19 cases, and the US is barrelling towards the same for the same reasons (no matter how much Europe didn't want to, their healthcare systems were about to blow past all capacity if they didn't; their hands were forced). We nonetheless sit at ATH valuations relative to GDP, with the possible exception of 1929 (dataset that far back isn't as good). The economy is stalling, no stimulus appears to be coming to help this time, and we've got a long slog of a winter before vaccines can be produced for very much of the population.
I will admit: if not now, then I've got something truly fundamentally wrong about what matters in my thesis. If not now, we are melting up based on what to me looks and smells like "New paradigm!" explanations that I clearly don't understand.
...but for now my thesis is intact, active, and sees Monday's shooting star as a a true know-it-when-you-see-it market top.
...which is still alive, despite two more rallies higher.
We are past the US election. Markets likely were pricing in a Biden victory because just about everyone's polling data said as much, but the polling was meaningfully off enough that we're on track to have Biden + a GOP Senate. So, this was a pleasant surprise to the market, which was expecting to get a lot more stability out and stimulus out of a Biden administration but at the cost of higher taxes. Now it looks like it gets the stability while keeping the low taxes.
So, we just had one heck of a fast blowoff rally in the week following the election, culminating in "positive vaccine news". This changes the timeline on completion and distribution of a COVID-19 vaccine... not at all, still the same schedule to scale production and distribute that experts have been giving since March where this all drags into at least the middle of next year.
(Don't get me wrong - if Pfizer's vaccine is as effective as they're claiming, that's genuinely good for the world, but for those majority of you out there who don't have any bioscience background, a company selectively releasing info like this should be treated with extreme skepticism until you see the full, peer-reviewed data.)
We produced one heck of a shooting star on most equities indices today, with SPX poking nearly 5% up to a new ATH, DJIA similar, and RTY doing limit up insanity before the cash market sold it all back. Suffice it to say, that's the kind of behavior that happens at market tops.
In the real economy, Europe is locked back down because of parabolic COVID-19 cases, and the US is barrelling towards the same for the same reasons (no matter how much Europe didn't want to, their healthcare systems were about to blow past all capacity if they didn't; their hands were forced). We nonetheless sit at ATH valuations relative to GDP, with the possible exception of 1929 (dataset that far back isn't as good). The economy is stalling, no stimulus appears to be coming to help this time, and we've got a long slog of a winter before vaccines can be produced for very much of the population.
I will admit: if not now, then I've got something truly fundamentally wrong about what matters in my thesis. If not now, we are melting up based on what to me looks and smells like "New paradigm!" explanations that I clearly don't understand.
...but for now my thesis is intact, active, and sees Monday's shooting star as a a true know-it-when-you-see-it market top.
Comment:
I have /ES sitting on its 1.25 pivot on the 4h:
I really only think two outcomes make sense from here, given a spiraling COVID-19 crisis (seriously, be safe out there, this will get worse and stay worse for a couple months before we get past it) paired with confirmation that we will have effective vaccines which will be scaled up and distributed over the course of 2021:
(A) This is the start of a parabolic blow-off breakout, where the market decides to FOMO a narrative about being able to see the end of COVID-19 and return to "normal", leading to 1929-level valuations that don't bust until the leverage and stupidity has to reckon next year with an anemic economy that looks like a bad recession-depression in terms of steadily increasing permanent job losses.
(B) We just can't pretend any longer.
Look, equity put/call ratios are almost already back down to the floor from a month ago. Meanwhile, Q4 is to have new lockdowns and a negative GDP print before all is said and done. Fiscal stimulus on any proportionate scale is a nonstarter now or in February with divided government. It's hard for the Fed to conjure up very many novel kinds of bullets it hasn't fired yet when there's a parabolic stock market on the backdrop of new COVID-related job losses.
Global pressures continue piling up too. Europe's a month ahead of us in the disaster. USDTRY is starting to go parabolic on the log chart. Signs of something being broken under the hood in China's financial system are ongoing.
I don't know which one of these catalysts, domestic or international, becomes "the one" - and frankly I've been aghast in horror about how little the summer COVID wave 1.2 in the US seemed to matter to the market, so maybe it's genuinely a crapshoot... but it is clear that the foundations are impossibly broken and it's just a matter of which stiff breeze finally does it.
While I accept the possibility from my indicators/modeling that we really could be on the verge of a blow-off breakout, I am not, as of today, willing to get long. I see this as an important inflection point though, where my thesis should finally get an answer.
I really only think two outcomes make sense from here, given a spiraling COVID-19 crisis (seriously, be safe out there, this will get worse and stay worse for a couple months before we get past it) paired with confirmation that we will have effective vaccines which will be scaled up and distributed over the course of 2021:
(A) This is the start of a parabolic blow-off breakout, where the market decides to FOMO a narrative about being able to see the end of COVID-19 and return to "normal", leading to 1929-level valuations that don't bust until the leverage and stupidity has to reckon next year with an anemic economy that looks like a bad recession-depression in terms of steadily increasing permanent job losses.
(B) We just can't pretend any longer.
Look, equity put/call ratios are almost already back down to the floor from a month ago. Meanwhile, Q4 is to have new lockdowns and a negative GDP print before all is said and done. Fiscal stimulus on any proportionate scale is a nonstarter now or in February with divided government. It's hard for the Fed to conjure up very many novel kinds of bullets it hasn't fired yet when there's a parabolic stock market on the backdrop of new COVID-related job losses.
Global pressures continue piling up too. Europe's a month ahead of us in the disaster. USDTRY is starting to go parabolic on the log chart. Signs of something being broken under the hood in China's financial system are ongoing.
I don't know which one of these catalysts, domestic or international, becomes "the one" - and frankly I've been aghast in horror about how little the summer COVID wave 1.2 in the US seemed to matter to the market, so maybe it's genuinely a crapshoot... but it is clear that the foundations are impossibly broken and it's just a matter of which stiff breeze finally does it.
While I accept the possibility from my indicators/modeling that we really could be on the verge of a blow-off breakout, I am not, as of today, willing to get long. I see this as an important inflection point though, where my thesis should finally get an answer.
Comment:
NDX has been lagging for weeks but today it joined in with the move up on other indexes.
We're a couple days past monthly options expiration, and typically the theme for the next few weeks takes hold within a few days. I can look at higher timeframes and say that NDX may be at the top of a compression range, but lower timeframes look like early trending.
Small caps have been rallying to insanity in the past month. In fact, this is apparently the largest one-month move ever for the Russel 2000. Dow just broke 30k for the first time, in what is apparently its best month since... 1987.
Fear and greed index is at 89 (lol). Equity put/call is pushing new lows at 0.38 and total put/call ratio is at 0.64, the lowest since a spike down 5 years ago. Open short interest on SPX companies is the lowest in my lifetime. No, I won't tell you my age, but suffice it to say, it's never been this low in the entire history of retail traders being able to trade stocks on the internet rather than by calling a broker on the phone.
There are, simply put, no bears left. That brings me full circle to my previous post - either we have a parabolic blow-off breakout and go full 1929 because this is literally all just bulls piling over each other into call options (which has the de facto same effect in the short run as longing on high leverage due to market maker gamma hedging) - or reality hits us like a truck now, heading into December.
One last note - this Thanksgiving holiday week has the markets closed on Thursday, and with a partial day on Friday, with lower than usual volume to be expected on Wednesday as well. It's not entirely unusual for these kinds of holiday low-liquidity timings to make inflection points.
Happy Thanksgiving to anyone still reading this. Probably too late to convince anyone to change any plans, but really seriously with America's COVID-19 situation spiraling out of control, please don't travel. This is literally one of the worst things we can do when it comes to increasing spread according to the probability math of epidemics, and the healthcare system in much of America is under extreme strain, running out of some combination of beds, staff, and PPE. This isn't just about the risk you'd be taking by traveling, but also the risk to people you care enough to travel to - and tragically just mere months from wide distribution of vaccines we're teeing up the worst case scenario anyway.
We're a couple days past monthly options expiration, and typically the theme for the next few weeks takes hold within a few days. I can look at higher timeframes and say that NDX may be at the top of a compression range, but lower timeframes look like early trending.
Small caps have been rallying to insanity in the past month. In fact, this is apparently the largest one-month move ever for the Russel 2000. Dow just broke 30k for the first time, in what is apparently its best month since... 1987.
Fear and greed index is at 89 (lol). Equity put/call is pushing new lows at 0.38 and total put/call ratio is at 0.64, the lowest since a spike down 5 years ago. Open short interest on SPX companies is the lowest in my lifetime. No, I won't tell you my age, but suffice it to say, it's never been this low in the entire history of retail traders being able to trade stocks on the internet rather than by calling a broker on the phone.
There are, simply put, no bears left. That brings me full circle to my previous post - either we have a parabolic blow-off breakout and go full 1929 because this is literally all just bulls piling over each other into call options (which has the de facto same effect in the short run as longing on high leverage due to market maker gamma hedging) - or reality hits us like a truck now, heading into December.
One last note - this Thanksgiving holiday week has the markets closed on Thursday, and with a partial day on Friday, with lower than usual volume to be expected on Wednesday as well. It's not entirely unusual for these kinds of holiday low-liquidity timings to make inflection points.
Happy Thanksgiving to anyone still reading this. Probably too late to convince anyone to change any plans, but really seriously with America's COVID-19 situation spiraling out of control, please don't travel. This is literally one of the worst things we can do when it comes to increasing spread according to the probability math of epidemics, and the healthcare system in much of America is under extreme strain, running out of some combination of beds, staff, and PPE. This isn't just about the risk you'd be taking by traveling, but also the risk to people you care enough to travel to - and tragically just mere months from wide distribution of vaccines we're teeing up the worst case scenario anyway.
Comment:
Last update on this - will make a new idea for further updates.
The past month has seen us grind a bit higher, but not with the momentum seen for much of the year. Volatility intraday has fallen a lot.
Nothing about the fundamentals has changed - everyone's still positioned bullish, Russel did another insane month. We've made new ATHs on everything, now cleanly breaking my NDX stop from months ago, but only by a few percent. We haven't seen the kind of large percent melt-ups from the summer this month, outside of Russel.
Out of seemingly nowhere, we have a compromise stimulus bill likely to pass - but it's small ball, probably $900B of which half is unspent CARES Act money. The compromise involves removing much of the additional lending authority given to the Fed in the CARES Act. Last I saw, this bill would have a $300/mo extra unemployment benefit + $600 stimulus checks - half of the CARES Act version. This is better than nothing, but it should be readily apparent that it's not to the scale of the now much bigger COVID problem than in March.
New unemployment claims have started rising and surprising to the upside.
Serious analysis of the COVID outbreak expects this to continue rising to a peak in February. It's going to get worse in America before it gets better - possibly 2x as bad as it is now or worse. This assumes no surprises - something like what just happened in the UK with an outbreak of a more virulent strain could make this worse. It's normal for epidemics to mutate over time towards spreading easier, though generally that also tends to mean it mutates in the direction of being less deadly because dead hosts can't spread a disease (this doesn't mean it can't cause significant permanent damage, so you still really really just don't want to get this).
There are growing signs of weakness, and you can make some comparisons right now to the Dec 19 - Feb 20 pattern where the main trend peaked, consolidated, and made one more weaker leg higher. Most of the megacaps peaked in October and are still meaningfully down since then. Breadth got wide to the point that the overwhelming majority of stocks are above their D benchmark MAs. There is admittedly little above us to stop a further melt-up first now on SPX, but NDX is back at 3.2 STDEV levels on the W and M.
I continue to believe that we will crash again, and remain stunned that we ended up going this far while the fundamentals are just obviously degrading in a way that's starker than 2008. Everything you've ever read about how markets top when dumb retail enters at the end has happened in 2020, and at some point, a COVID crisis that's still getting larger into February is going to forcibly become a catalyst for recalibrating expectations.
The past month has seen us grind a bit higher, but not with the momentum seen for much of the year. Volatility intraday has fallen a lot.
Nothing about the fundamentals has changed - everyone's still positioned bullish, Russel did another insane month. We've made new ATHs on everything, now cleanly breaking my NDX stop from months ago, but only by a few percent. We haven't seen the kind of large percent melt-ups from the summer this month, outside of Russel.
Out of seemingly nowhere, we have a compromise stimulus bill likely to pass - but it's small ball, probably $900B of which half is unspent CARES Act money. The compromise involves removing much of the additional lending authority given to the Fed in the CARES Act. Last I saw, this bill would have a $300/mo extra unemployment benefit + $600 stimulus checks - half of the CARES Act version. This is better than nothing, but it should be readily apparent that it's not to the scale of the now much bigger COVID problem than in March.
New unemployment claims have started rising and surprising to the upside.
Serious analysis of the COVID outbreak expects this to continue rising to a peak in February. It's going to get worse in America before it gets better - possibly 2x as bad as it is now or worse. This assumes no surprises - something like what just happened in the UK with an outbreak of a more virulent strain could make this worse. It's normal for epidemics to mutate over time towards spreading easier, though generally that also tends to mean it mutates in the direction of being less deadly because dead hosts can't spread a disease (this doesn't mean it can't cause significant permanent damage, so you still really really just don't want to get this).
There are growing signs of weakness, and you can make some comparisons right now to the Dec 19 - Feb 20 pattern where the main trend peaked, consolidated, and made one more weaker leg higher. Most of the megacaps peaked in October and are still meaningfully down since then. Breadth got wide to the point that the overwhelming majority of stocks are above their D benchmark MAs. There is admittedly little above us to stop a further melt-up first now on SPX, but NDX is back at 3.2 STDEV levels on the W and M.
I continue to believe that we will crash again, and remain stunned that we ended up going this far while the fundamentals are just obviously degrading in a way that's starker than 2008. Everything you've ever read about how markets top when dumb retail enters at the end has happened in 2020, and at some point, a COVID crisis that's still getting larger into February is going to forcibly become a catalyst for recalibrating expectations.
Comment:
The bigger picture heading into 2021 - do we come out of COVID-19 with a big bounce in economic activity, returning largely to trend - or do we get to summer-fall 2021 and find the economy scarred bad enough that a forward-looking market starts expecting it to take years to dig out of the hole? The former means we likely have a correction for the oncoming Q1 disaster but that we terminate a bear market quickly, maintaining the post-WWII endless high timeframe US bull market. The latter sets up a 1929 moment followed by a multi-year bear market as we reconcile what it looks like to see long-term unemployment work its way further up the income ladder.
The optimism has never made sense to me. We're pricing the impossible - zero consequences from the pandemic, and in fact, increased corporate profits at the other end. Insane IPOs where 80%+ have negative earnings lasted from 1999-2000 in the tech bubble, and they've now gone 2 years here from 2019-2020. We just unloaded TSLA on all passive investors, in what will be infamously remembered as the largest distribution of a single stock in history - a stock that based on its fundamentals should be worth several percent of its current valuation, assuming its accounting isn't outright fraudulent.
But, unless we get a selloff starting next week (we're past options expirations, weird tax planning happens this time of year, liquidity is lower this time of year, so it's plausible) - I've just been wrong about this market in 2020. I got that we were preparing for a big reversal early in the year. We got it. I didn't have the imagination for a year-long bull market based on the Fed actually succeeding in stabilizing everything and a flood of new retail activity to extend the trend.
Humbling - but I'm still going to be proven right in the end in 2021 :)
The optimism has never made sense to me. We're pricing the impossible - zero consequences from the pandemic, and in fact, increased corporate profits at the other end. Insane IPOs where 80%+ have negative earnings lasted from 1999-2000 in the tech bubble, and they've now gone 2 years here from 2019-2020. We just unloaded TSLA on all passive investors, in what will be infamously remembered as the largest distribution of a single stock in history - a stock that based on its fundamentals should be worth several percent of its current valuation, assuming its accounting isn't outright fraudulent.
But, unless we get a selloff starting next week (we're past options expirations, weird tax planning happens this time of year, liquidity is lower this time of year, so it's plausible) - I've just been wrong about this market in 2020. I got that we were preparing for a big reversal early in the year. We got it. I didn't have the imagination for a year-long bull market based on the Fed actually succeeding in stabilizing everything and a flood of new retail activity to extend the trend.
Humbling - but I'm still going to be proven right in the end in 2021 :)
Comment:
Oh, and one last observation that I thought of after posting all that - in recent weeks, equities futures have felt remarkably similar to trade as in Jan-Feb. That is to say - volatility intraday is so low that amounts of leverage which would have blown you up most of this year suddenly don't.
That's a big change in character - we've returned to baseline for the first time since Feb.
That's a big change in character - we've returned to baseline for the first time since Feb.
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Feel free to reach out to me with any questions; more information is available on the SharkCharts website and the SharkCharts discord discord.gg/YVpTeSK
Feel free to reach out to me with any questions; more information is available on the SharkCharts website and the SharkCharts discord discord.gg/YVpTeSK
Not seeing enough attention to this - record size 2-year note auction at record low yield today, with unusually high take down by indirect (proxy for foreign) bidders. This comes a couple weeks after a 30-year bond auction was weaker than expected.
I think there's more to this though than just saying that the yield curve is widening - this matters because short-term treasuries are the gold standard for repo market collateral. It's a bit of a pain to put together the dataset (doesn't appear to be a good source other than pulling the historical data via TreasuryDirect's API), but the Zero Hedge article does have a chart.
You'll notice if you look closely that spikes in indirect take down heavily correlate with moments where there was repo market stress. Beyond just being wary of black swans in the stock market appearing out of (seemingly) nowhere - the more direct way to trade this observation would be to bet on the 2-year note or STIR futures.
In the Feb-March drop, shorter maturities outperformed longer maturities. After all, we are past the key yield curve inversion part of the business cycle, with all the benchmark inversions happening in 2019, so we should expect this.
Keep in mind - the curve is widening doesn't tell you anything about the absolute level of rates. We can go negative on a whole bunch of the curve while still widening, especially if the market starts pricing a period of deflation.
(Zero Hedge is dumb and posts mostly dumb things with dumb takes on even the occasional smart things it posts like this linked article.... but hey, they do have the chart and AFAIK there's no better place to point people to that just has the chart handy. Credit where credit is due.)