Bear Rally Over? Yield Curve and VIX Turn Higher

It has been a long and winding road in this bear market. Yes, I still believe a bear markert is underway until new highs are made. I haven't been tactically bearish on the market over the preceding months, onyl taking some small swings when setups looked good. Until those old highs are taken out, my bear market call from November 2021 remains intact.

First, the classic bubble chart pattern hasn't been violated:

A double-top is a valid expression of the "return to normal" phase. Bullish sentiment and speculative behavior return to near peak levels, propelling the major indexes or stocks into double-tops. Anecdotal, but cryptocurrency speculators believe a new bull market is underway. Bitcoin BTC has a pattern that is consistent with the classic top though:

Tesla, Google, Amazon and Meta all sport the classic pattern with no hint of an imminent double-top. The paradox stocks are Apple and Microsoft. Both have achieved new all-time highs. Their massive weight in the S&P 500 technology sector (nearing 50 percent at times) propelled that sector to a new all-time high in July. If I'm correct in my assessment, this will turn into an overthrow of a double-top pattern and not an extension of the bull market.

Industrials also achieved new all-time highs this year. Energy and materials made new highs in the second-quarter of 2022 and remain within striking distance of new highs.

I'll digress here and give the bullish argument over the longer-term. Assume for a moment the U.S. was primed for a recession around the time the coronavirus hit. The government then wrecked the economy and then flooded it with far too much stimulus. Even though there's no official recession in 2023, the U.S. government is running deficits on par with the fallout from 2008:

There's nothing bullish about that chart long-term. Growing deficits will increase inflationary pressure. Falling deficits could trigger deflationary pressure. Since stocks are priced for perfection, deviation out of the Goldilocks Zone will trigger price declines in all sectors at least for a time, barring an explosive move higher in energy as we saw in early 2022.

I don't want to belabor the valuation topic, but here is the price-to-earnings ratio divided by the growth rate (PEG) and the spread between investment grade corporate bonds and the Federal funds rate.

Going back the to the bull thesis: what if the government front-loaded stimulus and the bear market/recession doesn't materialize? In that case, either an extension of the bull unfolds or the transition occurs without the bear move. Both EFA and EEM, the developed and emerging market ETFs, bottomed in October 2022, with EEM having a little overthrow this year:

To wrap up the bull case: the government flooded the economy with stimulus, triggering a temporary inflation surge. Inflation settles back into the Goldilocks Zone, as does GDP growth, sub-2 percent for both. In the short-term bull scenario, stocks enjoy an extension with tech and other speculative assets resuming leadership. In the longer-term scenario, the transition to new leadership such as industrials, energy, commodities and foreign markets takes place without a major bear.

Back to the bear scenario, one of the strongest signals for a recession has been the inverted yield curve. It doesn't indicate an imminent recession, rather it signals the pre-recesesionary stage. The actual recession comes when the yield curve steepens. Going back the past four decades, this has always occurred when the Federal Reserve slashed rates. Right now, the yield curve is steepening because long-term bond yields are rising faster than short-term yields. It is a small move at the moment, but the spread has made a higher low, indicating the final low might be in.

The 10-year treasury yield has a bullish formation that may or may not complete. If it completes, then higher long-term rates will sink financial asset valuation and could indicate a stagflationary recession. The 30-year mortgage would be on its way towards 10 percent, a level that would almost assuredly kill home prices too. On the flip side, a traditional steepening via Fed rate cuts would be another bear market and recession like we've seen in 2000 and 2008.

The decline in the VIX has been a hallmark of this bull market. The VIX has fallen below the level reached at the November 2021 peak, indicating fear is gone. Here's the VIX overlaid with the 2s10s spread:

VIX isn't a great indicator in that it tends to be coincident with the 2s10s, but a rising VIX indicates rising fear, likely because there's bearish action in parts of the market ahead of the full-blown bear. Here's a look at when the VIX bottomed ahed of prior bearish periods:

There will be bearish trades emerging very soon if the yield curve has finished inverting and moved into steepening. Ditto if the VIX follows it higher. With September and October coming up, the calendar supports a market top scenario here. New highs on the major indexes will invalidate the bear scenario, as will a falling VIX. If the 2s10s inverts further or moves sideways, it will indicate no imminent economic pressure. If the 10-year yield fails a breakout for instance, the yield curve might invert further while the broader stock market interprets the falling yield as disinflationary and therefore bullish.

The 40-Year DJIA Chart Resembles 1928-1929

Tesla too! I don't take this too seriously. Bears are depressed and I noticed some similarity between 1900-920 and 1960-1980, and then wanted to see if the bull markets looked similar. Markets are fractal though, with similar patterns at larger and smaller time scales. Human nature doesn't change either. Maybe there's something to it?

The Inflation Trade is Over

This morning's spike in the CPI was the last torching of the inflation bears. Inflation peaked in June 2022 and a lot of bears didn't get the memo. They continued pushing a bearish outlook based on fading inflation, with a resulting series of squeezes. It appears that like the dodo, these animals are now extinct.

All is not well in the markets though, at least this morning isn't yet a clear victory for the bulls. The DJIA reversed all of its CPI gains by 11 AM and Tesla broke to a new 52-week low.

Zooming out, this is supposedly a bear market, but even the technology sector failed to crack its 50-month moving average.

Does this mean it isn't a bear market? Not necessarily. The 2000 bear market was a similarly slow starting affair that was frontloaded with massive losses in speculutive growth stocks. This cycle has crypto, that one had Beanie Babies. It could be a giant correction though, a huge rotation from growth to value, with energy becoming the still-extant bull market's leader. I still lean bearish because the charts strike me as bearish, particularly where many Dow components are situated, yet there is some fog at the current price levels. If the bear resumes, it won't be because of inflation fears. It will be driven by a new fear, most likely recession.

Tesla Crash Conspiracy Theory

I don't need any fundamental reason for a trade, but some people need to hear one. For Tesla, I have a Tesla Crash Conspiracy Theory.

Are We Done Here?

The elevator doors are open and there is no elevator. Will the market step in today?

Engulf Crisis

I will not be shocked if the S&P 500 Index ends up with a bearish engulfing candle into the close. Unlikely, but not impossible because last major support is around 3580 on the ES. As for stuff that is already or almost engulfed, here are a few. Note that if there is a trendline visible (uptrends, not horizontals), it is at last a few years old. Some are lifetime. I included QQQ to show how far away it is on the indexes. It would take a major drop in the last hour to get there. If the market drops another 50 points or so, them majors will still be well off Thursday's lows, but there will tons of these candles out there on individual securities.

Another one almost almost guaranteed if the market dips a little bit: Tesla.

太死了

Apple and Tesla Are Done Propping Up the Market

The major indexes are very "bullish" looking compared to underlying stocks because Tesla and Apple were propping them up. No more. Even if the market rallies, watch Apple and Tesla. They will be the tell when it's time for the market to reverse.

Tesla Breaks Support

Good Enough for a Top Call

If you're buying puts for October or later, the top is in as far as I'm concerned. Tesla was one of the few winners today among BigTech. Cryptos were down, ARKK barely up considering how the major indexes moved. You might not want to go all in on puts yet because the indexes can be funny. Apple hasn't filled its gap yet and I worry there could be a fakeout pop higher. Having said that, I also wouldn't be shocked if SPX is sub-4000 when the calendar rolls to September.

Doomed Markets, Doomed Economy

Here are various trash indicators that, if they go, will unleash total capitulation in the markets, a waterfall crash. A link to view them updated.

The other asset to watch is BTC. Will $20,000 will hold? There's really no floor for BTC once the financial system starts blowing up because most of the DeFi will be wiped out without Fed support, and there will be no Fed support.

Last Stop for Bulls and Bears and Clueless Fed

The blips are no longer all bullish. Mexican peso and treasuries are red this morning along with stocks, while the USDJPY and crude are down too, but those moves aren't as cleanly bullish. The yen was, prior to recent history, inversely correlated with stocks. Crude oil has to fall for a sustainable stock rally, but it can also fall with stocks. Hence why my highest conviction trade has been short energy.

Note that the oil futures curve is in backwardation. The December 2022 contract is at $103 per barrel. If at any moment there is peace in Ukraine, I suspect around $20 will come off the price of oil.

All of the major stock indexes have broken to new lows in the past day. The ES and RTY contracts made new lows this morning, the NQ made a low in the 3pm hour yesterday.

Various pummeled stocks are above their lows in pre-market trading such as ARKK and biotech. Tesla and Amazon are of their lows. New lows are coming in sectors such as financials, maybe industrials if they market indexes go to a new low after the open. I will be watching stocks and ETF such as TSLA, ARKK and XBI for a tell and as the final signal to sell. If those don't make new lows, then the market is experiencing chop and could be headed for a reversal. I will remain short energy though.

Finally, the Federal Reserve delivered a 75 basis point hike as expected yesterday. There was lots of commentary on whether this was good or bad, including that the Fed took 75 bps away in May, only to do it in June. Even the Fed worshippers were asking about the Fed's credibility. If this is what makes you question Fed credibility...you're not gonna make it.

There was one big misstatement. A "subprime is contained" level of stupidity. I say misstatement because the Federal Reserve is incompetent to the point where they don't know what's going on in the economy. In his press conference, Chairman Powell said there was no sign of a recession. He said that the same day the Atlanta Fed's GDP Now model projected 0 percent growth this quarter. They have been cutting forecasts for weeks, which doesn't bode well for the GDP report in July. If the BEA reports a negative number though, then not only are there signs of recession, but we are in a recession and have been for six months. Powell didn't take the view I have which is, signs of recession are everywhere although we might escape a technical recession. No, he's saying there are no signs, and that's ludicrous. All workers who haven't received a double-digit wage increase the past two years have taken a huge pay cut and those cuts will keep hitting as the lagging impact of higher costs roll in via higher energy bills, rent resets, higher mortgage payments, etc.

XLY Next Stop $120

Air Balls

The setups are incredible again. The next move will be big in either direction, but a move down will be far larger and far more important. It is a new wave of selling if these stocks break lower. A short-term rally may require positive earnings. Google and Microsoft report today.