Who Returns in May: The Bear or the Ghost of 1999?

The first part of this post is a rehash and link to other posts. The new info is at the bottom.

On December 26, 2018 I posted What a Tantrum, Is 1998 in Play?
Bull scenario: the economy will hold up and avoid recession. Interest rates are rising and will remain elevated because there's no recession and core inflation will stay near 2 percent. The spike in volatility is the "equal and opposite" reaction of ultra-low volatility during QE, especially the final phase from June 2016 through January 2018. Investors expect low or even no volatility and an accomodative Fed. Investors were asking the Fed to stop hiking or even cut interest rates after a modest double-digit decline. They are behaving like coddled children throwing a tantrum and the Fed is the parent putting their foot down. Investors reacted by losing their minds, full blown on the floor kicking and screaming tantrum.

The Nasdaq fell 20 percent in 1998. Credit risk spiked in 1998, as it is spiking now. There are signs the global economy is weakening, but there were also clear signs in 1998 because that sell-off came at the tail end of the Asian Crisis. I remain bearish, but 1998 is the only non-bear scenario left. Even that scenario is not very bullish, since the top was 18 months after the 1998 correction.
It was a very good call as far as the market goes. I had covered my shorts a few days earlier and went long, but didn't stay in that position too long. I thought 1998 was a possibility, but didn't follow through. The Fed would eventually cut rates and expand repo operations, an echo of 1999 policy.

I discussed the idea a few more times. This first reference was actually in early 2018: End of Rally or End of Bull: Is It 1987, 1994, 1997, 1998, 2000, 2007 or 2014?
It's 1998
1998 Redux: Bonds Not Behaving Yet, 1966 Rising?
Late 1990s Analog Again: Summer of '98

In early February 2020 when stocks still hadn't sold off for coronavirus yet, I was still focused on a 1998-2000 scenario.

I posed two charts in That 1998-1999 Analog Again
I've also wondered if coronavirus could produce another melt-up scenario if the virus lifted or stimulus/QE was too much. Could this all be a more complex topping pattern similar to the 1998?

Finally, let me draw your attention to the dates of these posts. They have usually come about 1 month before being proven correct or incorrect. The dates on some of these posts are Feb 2018, the weekend right before the vol implosion. Sept 2018, right before the 3-month swoon. Dec 2018, right at the market bottom. May 2019, right as a tradable correction unfolded. July 2019, right as a tradable correction unfolded and then would fail into Sept, becoming a melt-up into Feb 2020. I'm not writing these posts to time the market. They are the result of ideas bounding around long enough that I put them down, from seeing charts at inflection/continuation points or sparked by what's being discussed in the wider market. I'm going to leverage up my current position and intermediate-term outlook in the market soon, or I'm going to abandon it. It is time to fish or cut bait.

Why again now? First, let me repost a magazine cover from 1999, one I posted here in March.
I believe in market cycles and that human behavior rhymes. What sparked this post is a confluence of anecdotes, echoes of the late 1990s and important levels in the stock market indexes. The collapse in oil is a major echo of the late 1990s. The stock market has retraced 50 percent to 61.8 percent of its decline. If this is a bear market, the market should turn lower very soon. It should also turn down here for seasonal reasons (sell in May) and for a retest of the rally. If the market keeps rising, a V-shaped market rebound becomes far more likely.

Another data point: Robin Track. Robinhood has a tracker that shows stocks ranked by their popularity on the site, along with how many users hold the stock over time. The site appears to be down at the moment, but here is one of Norwegian Cruise Lines to illustrate retail behavior:
"Dumb" money has beaten "smart" money over much of the past 12 years because the "dumb" strategy of "buy the dip, the Fed has your back" has been proven correct. I'm not sure it has ever been this extreme though. Granted I'm bearish, but this behavior looks insane to me. It looks like retail investors are throwing caution to the wind and piling into beaten down companies. At bear market bottoms, speculative excess is gone. Prices may enjoy a partial V-shape rebound, but the "number of users" wouldn't look like that green line. This behavior may show speculation is alive and well, that the bull market is alive and well. It may also be the final speculative gasp that comes at the start of a bear market, the very behavior that, when it reverses, will cause a breaking of the March 23 lows when the bear resumes.

Another anecdote: I was served up an ad for RagingBull.com while on YouTube. It claimed it was the fastest growing investor education site and was pushing on options strategy. This was a double-wow for me because aside from the content of ad itself, Raging Bull was started up in the late 1990s and it was popular during the dotcom bubble:
Additionally, you may have seen this chart go around the past couple of weeks: The Market Is Now Just 5 Stocks: S&P Now More Concentrated In Top 5 Names Then Ever
In response, I've started seeing arguments for why this could continue, why the S&P 500 can keep growing as a share of GDP, why these stocks could keep increasing as a share of the market. Those are the same arguments I heard in the late 1990s, and that I think you have to believe if stock market indexes are to keep rising. I had a similar thesis in 2011 as gold was topping: either this is incipient hyperinflation or this gold move is about to terminate. The fact that people are coming up with theoretical justifications for the market's valuation indicates it has reached an extreme.

I'm once again heavily short the market. I believe the 1998 scenario is in fact played out. If not, if this is more like 1999, then stocks will keep rising through May. The final top is off in the future, perhaps the fall or sometime in 2021 depending on if the Federal Reserve keeps adding support or not.

With respect to the Fed and government stimulus, that will decline if the virus fades. Stimulus is also likely to decline after the election. The additional debt added is a repeat of QE1, QE2 and QE3, all of which led to a potentially larger collapse. The current effort has weakened the economy and stock market. Deflation remains the greater threat until the government or Federal Reserve break their policies and start literally printing fiat currency backed by nothing. Everything done thus far is backed with debt and U.S. treasuries.

In order to fully eliminate my bearish outlook, the U.S. dollar must peak. The U.S. dollar rallied in the late 1990s and into the the bear market though. If the U.S. dollar breaks out along with U.S. equities, that would be another confirming signal of a 1998-2000 scenario. EURUSD is still very close to a breakdown, as I showed in a post last Friday: Countdown to Market Mayhem: Sell Now And Go Away or Buy Buy Buy.

Update: If a melt-up or rally in to new highs follows, look for the yield curve to resume its decline.

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