2022-05-22

Just Sell Already!

I felt a bit like Happy Gilmore asking the ball why it didn't go home on Friday, but in this case it's the major indexes not finding their home at a lower, buyable level.
I didn't feel angry though. I did give back a lot of profit on Friday because I didn't get out early enough, when I could sense the market wasn't behaving like it should in a meltdown. I made money on the day though, much more counting the entire week of trading. More importantly, I know the big trade is still in front of me.

What I feel even now is something more like resignation. Up until now, I've mostly enjoyed the decline and bulls getting their comeuppance. Friday was the moment I realized they might never sell. It's like watching a man walk on the train track. You feel a little worried when the train is far off. You expect he's going to jump off the track. Then you're yelling and screaming, maybe he's deaf? But then he looks at you and smiles. Friday was the moment when I realized many bulls won't ever get off the tracks.

Let's look at VIX from the 2000s bear market because I think that's our best template from the VIX data. The bear markets of 1973-1974 and even maybe 1929 are the more relevant setups for the geopolitical and macroeconomic backdrop, but there was no VIX then...

VIX peaks in the bull market! The 1998 high was the peak of the VIX and not even the 9/11 terror attacks could top it. There are some smaller peaks at capitulation points: the first sell-off wave in March 2000 ends in April, the bear market low in July 2002, the slightly higher low in March 2003 before the bull market really takes off.

Now here's the past 15 years:

The financial crisis produced a major VIX event because it was a financial crisis. It's a tautology, but when the crisis is the financial markets themselves, then extreme readings are going to be common. The coronaslam came close, but didn't beat 2008. All the other spikes came at the end of QE, a little after with yuan depreciation, and then Volmageddon and the 2018 correction during QT1. VIX is elevated again now with QT2 starting next month.

Takeaway: VIX can remain elevated during the bear market, but it's the bull markets that produce massive VIX spikes. A market needs to be caught off-guard for a VIX spike. All the sentiment and data showing bearishness is why VIX will stay suppressed during the bear market. It will be elevated and there will be capitulation points, but another massive spike will require an event or an escalation such as sovereign debt failures. We may well get them, I'd bet on it myself, but they aren't necessary.

So Much for Sentiment  

I don't find general sentiment too useful, haven't for many months. I am expecting a VIX spike and bull capitulation in some form, but I don't know when it arrives. Beyond that, I think it is more important to look at subject-matter sentiment. What trade is overdone? Inflation.

Supply chain problems do not equal inflation. Persistently high energy prices are not inflation in and of themselves. If there is a supply shock it can produce inflation if it is printed over. That's what happened in the 1970s and March 2020: the government and central bank panicked. They didn't let the economy suffer a recession. Result: high inflation. The mistake in the 1970s was they chickened out over and over until the early 1980s, then let a back-to-back brutal recession wring inflation out of the system.

Everyone thinks they know what the Fed will do now, and all assets are priced assuming a Fed policy turn is coming. Even down here at 3900 on the S&P 500, that is priced for a policy reversal. Bulls are still all in. Even many bears think the Fed will capitulate because of a recession.

I do think the Fed will capitulate, but the difference is I expect an extremely brutal conclusion first. They aren't going to act until they're reasonably certain inflation is done. Bulls who think a drop in interest rate is bullish are correct long-term, but very wrong for the short or intermediate-term.

I won't say energy is the place to short yet, but it is becoming a place to short. The volume profile shows support is about one-third below the current price of XLE.


2022-05-20

Bear Trap or Bombs Away, Bitcoin Awaits

Major support broke. The bears have it and can run with it. The only asset not following yet is BTC.

Bulls Will Be Wiped Out

Summary: necessary conditions for a Federal Reserve bailout of stocks are not in place yet and far from being in place.

Anything can happen in the short-term, of course bear market rallies happen without any Fed intervention.

Having said that, here is a paywalled article at ZH:

ZH: "80% Chance Of Dread": Every Time This Happened Before, The Fed Bailed Out The Market

Unless inflation risk is eliminated, the Federal Reserve cannot save the stock market. Or it could save it in nominal terms, but it would hyperinflate the U.S. economy. With the protests outside Supreme Court justices over Roe v Wade...it's frankly absurd to even think the Fed would try to do it. They are stupid, but not that stupid.

The only way it can be done in current conditions is direct buying of stocks. If they went the traditional QE route, bonds would collapse in a panic and the stock market would be below 1000 by next year. The Fed would have to print enough money and pump it directly into stocks such that stock prices outrun double-digit inflation and brush off soaring interest rates.

Maybe a bailout is coming. Maybe the world is still trapped in the QE-economy 2008—20?? That scenario involves a collapse in commodities and stocks ahead. Since commodities have barely moved yet, the major indexes would probably have to test March 2020 lows at a minimum. If inflation/commodities don't come down, then it is a bear market for sure because no rescue is coming.

Turkey

Defund the Police

People who scream loudest about racism, do things that lead to lots of dead black people. Or why I don't care about racism at all anymore. It's a word devoid of meaning.

China Rate Cuts are Bearish

ZH: Futures Jump After China Cuts Main Lending Rate By Most On Record But $1.9 Trillion Op-Ex Looms...

Markets may bounce for whatever reason short-term, most likely no reason. Yet longer-term, Chinese rate cuts are unequivocally bearish.

Here We Go

Symmetry on the ES.

2022-05-19

10-Year Reversal

Can bonds turn the corner? Seems unliekly tonight, but a sharp drop in equities would probably complete this incompete inverse H&S formation.

Fed Still Blowing the Housing Bubble

Can't make this stuff up. Wish I could, wish it was a conspiracy. Destruction of the economy in plain sight. Sure, there will be a housing crash, but by blowing it bigger, it only makes for a larger crash. They're supposed to be fighting inflation and yet still inflating housing credit. The Fed should be abolished. Period. It had a good run and its time to go. To paraphrase Jackson, kill the bank before it kills America.

Double Bottom Holds, But Weak Bounce

The S&P 500 is about 1.6 percent away from making a new low. Next upside target around 4000 or about 2.2 percent away.

Monkeypox Spreading in the Homosexual Community

iNews: Monkeypox: Gay and bisexual men warned to take precautions as experts fear virus transmitted through sex

Back in 2018, I wrote in Socionomics Alert: Avoid Norwegians to Avoid STDs:

Socionomics theory says rates of STD infection should rise in periods of negative mood. Along with a general rise in disease/pandemic risk, the periods of negative mood also correlate to looser sexual morality.

The last major period of negative mood produced the AIDS virus and the subsequent rise in mood in the 1980s and 1990s saw a major effort towards combating it. This period of negative mood will be far more negative and last far longer than the 1970s decline. Antibiotic-resistant STDs and their rapid spread is one sign of negative mood.

The post was created by a domestic advertisement that upset Norwegians because it implied they have high rates of STDs. I wrote:
The key point here is not the ad itself, but what the people creating the ad are thinking about. During periods of falling mood people shift from social concern (such as banning smoking, attacking junk food, making life healthier for everyone) to a personal concern. This ad is clearly a sign warning you to protect yourself from everyone else. Social mood has turned.
Sure fits with what we've seen the past couple of years, no?

HYG Gap Filled

I used this as a shorting signal today, added puts as this completed. Occurred simultaneous with a huge spike in the indexes to the high of the day.

Double Bottom on ES

These are the gut-check times because if there's to be a geyser in VIX, there have to be a lot of trapped bulls who throw in the towel. To get there, there has to be enough doubt among bears too.
There is a spike in junk bonds, but HYG has a gap at $76.44...
The euro is rallying.
Treasuries are rallying, but that doesn't tell me anything because I expect bonds will rally alongside a sell-off in stocks, as happened yesterday.
Is this bullish?

Not Buying It

Maybe it's time to short wheat (alogn with most of the ag complex). I do see problems on the horizon, but maybe it's all overpriced in and food supply won't be as bad as expected.

Positioned Short, Thinking Long

My plan for today is to sell what I expect will be a rip and buy Monday puts. I'm going to be going through all the junior mining charts and preparing stink bids.

2022-05-18

There and Back Again

How high will the next wave go? The 10-year divided by 2-year yield.

Industrials

Newell

Right to support.

Wayfair Update

Most of the market will go back to the March 2020 lows eventually. What I like about charts like Wayfair is the symmetry. Very easy to trade. I'm not currently shorting W though because the puts have been too expensive since February.

Reversal Patterns Busted on Major Index

All the inverted H&S patterns on major indexes are busted at this moment. The Russell 2000 Index was the strongest index today and the last to break support.