The Long and Short of It: Crash Time

The crash window is open. It needs confirmation from high-yield debt. Once that goes, we'll have a credit event in addition to the stock market event, and then we can get free falling moves in stocks. Technical indicators are extreme as well. The crash window can also slam shut and trap the bears. My highest confidence trades are in treasury bond calls (TLT) and crude oil puts (USO).

BTC is busted again, but off the lows. HYG hasn't busted a support line, but it has a similar h-pattern forming.

All the pieces are in place for a rally, and a big one. After days of relatively even put/call buying by one ratio I follow, puts surged this morning. It looks like the opening of the collapse in SPY to new lows that kicked off on June 9.

Barring a bear trap here, the XLC trade is in the shitter.

NQ broke the megaphone. There is basically no downside support except the prior low.

The Universe Speaks: Seattle Genetics

I posted SGEN on March 22, 2020 in: Coronavirus & Markets Potpourri: Economic Phase Change and Yuan Deval Incoming. That was one day before the bottom.

With coronavirus, I see far too much panic these days. It's partially why I think the long-side will see incredible short-term gains. This sounds nuts even to me, but I think the market is primed for 15-20% upside in one day if there's a combo of good news and a short-squeeze. I'm becoming less confident in this forecast though. Monday might be the breaking point.

The Fed would announce its bailout and away the markets went. Yuan did not depreciate as expected, but here we are again with yen tumbling and the yuan would follow if it keeps going...crisis points keep rhyming and all the prior crisis points have been contrarian buy points...

Biotech is another rhyme. It was bouncing around long-term support levels. I posted on ABBV, BLUE and SGEN right as the bottom was coming in. I checked in on SGEN again yesterday and look here:

I have an alert on the resistance line. Perhaps it will break before the broader market rebounds.

Bears Strike Overnight, NQ Megaphone Gets More Mega

The conditions for a rally are coming into focus, but that doesn't mean a new low isn't reached first.

ZB is challenging its high from June 23. A breakout should take it towards 141, or about $117 on TLT. Update: ZB took out the June 23 high moments ago.

Crude selling off again this morning:

Why the Stock Market Boom Was Fake in One Image

If you understand socionomics, you get it just by looking at the chart.

It's been obvious to me for years that the market was detached from mood. Cultural trends such as transgenderism were found in Weimar Germany, a society that collapsed about as far as a civilized nation can go outside of war. All sorts of societal and cultural signs point to a deeply depressed populace.

There is a slight general rise in unhappiness, with fluctuation, after the 2000 peak in mood. Vast amounts of money creation and manipulation of finances, economics and information have gone in to keeping the illusion of a stable, prosperous and happy populace alive. Reality is now bursting in. Equities will give up all of their gains since 2000. There will be incredible backlashes on policy. First abortion, but soon gay marriage and anti-sodomy rulings could be overturned by SCOTUS. By themselves meaningless because powers will devolve back to the states, but my hunch is states will also go in for new bans. Open borders will give way to mass deportations. WWIII is already on the docket. The past 40 years or so of "progress" will be erased in under 10 years. The economic collapse will fuel a political and cultural backlash that will echo for decades. This won't be like the 1980s reaction to the 1970s, this will be cultural evolution in a different direction. Think religious revival, collapsing divorce rates, much higher fertility rates, anti-diversity/assimilation policies, manufacturing onshored, etc.

Restoration Hardware CEO is Back With Another Warning

Back in early April, I posted Wall Street Ignores Margin Collapse Warning. The CEO of RH talked about how dealing with inflation involved a number of bad choices, that collapsing margins were coming and that it reminded him of the scene in The Big Short, when people are listening toa speaker say the company is fine while the stock price is imploding. Now he's back...

ZH: US Consumer Implodes As RH Cuts Guidance For 2nd Time This Month, Warns Of Cratering Demand

Well, fast forward to today when moments ago RH - aka Restoration Hardward - just pulled a Snapchat and just three weeks after the company with the outspoken CEO saw its shares tumble after it guided lower for Q2 and the full year despite sold Q1 results, RH just cut guidance again with CEO Gary Friedman saying that “the deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year.”

Taking into account the macro-economic conditions and our current business trends, RH provided the following outlook for the second quarter and full year, which assumes demand will continue to soften during the remainder of fiscal 2022:

Fiscal 2022 net revenue growth in the range of (2%) to (5%), with adjusted operating margin in the range of 21.0% to 22.0%.

Previously the company had seen revenue growth of 5% to 7% and operating margin of 23.0% to 23.5%, so a huge hit to both the top-line and profit margins.

For Q2, RH sees net revenue growth in the range of (1%) to (3%), with adjusted operating margin in the range of 23.0% to 23.5%. The second quarter outlook remains unchanged versus our prior forecast due to faster backlog relief offsetting lower than expected demand.

Friedman's catastrophic forecast continued, “With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year.”

The economy is imploding and RH is first in line because they report weeks before the rest of the market, plus have high exposure in the housing market.

While the past week or so have been focused on technical warfare between bulls and bears, the macroeconomic picture is rapidly deteriorating. It's a matter of if, not when, the Fed pivots now, and from what level of SPX. After the pivot, then we'll get confirmation on whether a cyclical turn to inflation is underway or not.

Bears Failed, Bulls Get Next Shot

Bonds up, crude down, stocks in a trading range. NQ and ES looked like megaphones, now looking more like diamonds. The next move out will be explosive. Bears couldn't get a breakdown today. Next move is for the bulls to try their breakout. I am currently still long TLT, newly short USO as of today (I moved into much closer to ITM puts in July), and still long the XLC trade. I closed out IBB yesterday, but still have some XBI calls. Also still have some META calls. USO and TLT are my largest positions by capital, XLC the largest potential position if everything played out as anticipated.

Seasonal Analogs: Crude Oil

I lined up crude oil almost to the day, 2008 and 2022. I don't think a precise analog is in play, but I see similarities with the blow-off move in oil these two years. This is the kind of hunch that make me drop some cash on OTM oil puts.

Market on the Precipice of Greatest Bear Trap or The Acceleration

The 2018 correction ended after the Federal Reserve ended rate hikes, not when it ended QT. The latter continued until September 2019, when the repo crisis hit and forced the Fed off QT.

High-yield credit spreads are widening again. Can't say for certain how much going by the various funds, but treasuries are up today and junk bonds are down. That is a recipe for a credit event if it goes on for a few more days.

Remember when the Federal Reserve cut rates even though oil was soaring? The Fed will lose its inflation fixation very quickly.

The Russell 2000 Index went below its January 2020 peak today and made a new low. It is fighting around that level in the afternoon. NQ and ES are in broadening formations. The break out of the pattern should signal the short-term direction. NQ is also battling around the inverted H&S neckline.

Free-Falling Commercial Real Estate Finance

I'm going to do a post after this on where the market is here. I think we're on the precipice of a big move. So don't take this as a "sell it now" signal, but I do think if or when the market goes, this type of stock is going to crater, and OTM options will pay off well.

USDJPY New 52wk High

The One Weird Trick Baizuo Are Using to Destroy the Middle Class and Financial Markets

Three main indicators to watch. Sell NQ below the line, along with the rest of the stock market. If BTC breaks down, aggressively short high confidence targets. If high yield funds such as HYG and JNK drop and treasuries keep rising, (look to IEI for a duration proxy) the sell line will be hit. After that, the odds of a major credit event and financial market collapse accelerate to the upside.

USDJPY looks ugly for Japan and the world financial markets. Nothing good comes from a higher yen.

How are the Baizuo destroying the world? Via their sadistic anti-Russia obsession. Commodities are cratering, the latest being cotton:

Oil should be much lower already, but it is not because of Baizuo foreign policy obsessions. Their green idiocy already laid an inescapable recession, but their foreign policy could be the difference between recession and depression. Everything is more expensive because the oil price continues rising. As long as oil stays high, there's no escaping economic decline. The Federal Reserve has to keep tight monetary policy because if credit or spending starting taking off, it would unleash the inflation seen in the 1970s, when the Fed chickened out on controlling inflation because it though the recession was worse. There's no good option here because high oil prices are like a huge tax on the economy.

This is also feeding into financial markets. The Japanese yen is being crushed by the rise in interest rates in countries such as the U.S. Japan desperately needs a lower oil price, which would stabilize bond markets and let the Fed ease its tightening approach. If instead the Baizuo escalate their psychotic green policies along with antagonizing Russia and, no doubt, encouraging China to join in with supply chain damage aimed at the U.S., then all the pieces are in place for a deflationary, depressionary collapse in the financial markets. Wholly owned, wholly owned by the Baizuo admin and their supporters. The Federal Reserve cannot remake foreign policy and undo the green agenda. They are bystanders. They screwed up a lot, but the collapse is on the Baizuo.

Prepare for a 1929-style implosion of stock and bond markets imminent if these policies are changed very soon.

Rally on Life Support

The NQ line is the necline from the inverted H&S pattern. Rally is done if it cannot get back above.

Place Your Bets: 3400 or 4100

It does seem like most of the market is either expecting a plunge to new lows or an extended rally to the upside. If everyone is looking for it, it's unlikely to appear. Are 3000 and 4400 the possibilities? Or will it frustrate everyone and bounce around 3800-4000 for six to eight weeks?

Nomura: Everyone Is Waiting For This "Final" Shoe To Drop Before The All-Clear Signal

More on Fertility

The vaxx is a possible explanation, but don't discount that fertility could be signaling a collapse in social mood and the economy. Look at those collapses in the 1930s and 1970s and consider the worse demographics in developed nations along with anti-natalist culture.

Sources

Stocks and Sex: A Socionomic View of Demographic Trends

IS FERTILITY A LEADING ECONOMIC INDICATOR?

Out of More Calls, Stopped Out of Long, Added XLC, TLT

If this rally will survive, it will have to turn around here. Nasdaq has retraced the entirety of its breakout from the inverted H&S pattern.

Here is the ES and SPY. The former has formed a nice base and retest around 3820. The latter still has that gap down at $378.83, but also still has that island reversal below.

I did add to the XLC trade today when it filled the gap.

Here is TLT. My sense is that bonds can rally on stock weakness or strength. It's a trade though, not sticking around for a flush to new lows should the bond and stock markets crash together.

If the market has peaked ahead of another sell-off, this could be the carnage wave that takes SPY down to the 3400 area. Stocks that are "off the beatean path" may be good for options. Real estate and a commercial mortgage fund such as this one could prove profitable.

5-year Covid Lockdown Plan

UPI: Quote from Beijing official on '5 years' of COVID-19 restrictions causes stir

A story first posted in the Beijing Daily, the official publication of the capital's ruling party, quoted former mayor and current party chief Cai Qi as saying the city will uphold the controversial "zero-COVID" policy "for the next five years," the Guardian and CNN reported.

Lowered Delta on Biotech

I sold some biotech positions earlier today and lowered the delta on my calls. As long as I was before, but with less capital in the position.

Long SPY from 3850

Playing a bounce now.

Started Trimming Longs

I might re-enter later, but I started trimming long positions related to biotech and communication services trades. The consolidation that had formed broke today. I'm net short via 1 DTE puts on SPY. I think that surge up will be retraced down. Whether that kills the rally or not, we'll see...

Communication Services and the 50-day MA

I can see a bearish interpretation. This market is either turning lower from here and if so, it is going lower very soon. As in get your puts loaded now. Conversely, support is still holding on the indexes. ES and RTY are green. If the market turns higher, these will all break their 50-day MAs in the midst of a more powerful counter-trend rally.

Short-term, that horizonal on Netflix is a major resistance level.

Very Helpful Cleveland Fed Answers My Question: CPI Isn't 10pc

The Cleveland Fed saw this post, which was inspired by seeing the 10 percent CPI figure whipping around social media. Doug set me straight on the calculation:

Thanks for your interest in the Cleveland Fed’s inflation indicators. I wanted to suggest an edit to your June 27 post; specifically, to clarify how the 10 percent inflation projection should be described. The Cleveland Fed inflation nowcasting model expects a month-on-month reading in June of 0.98% for CPI, translating to a year-over-year reading of 8.67%. Estimates here. The 10% figure is for CPI inflation during the second quarter, at a quarterly annualized percent change—that is, the average CPI level during April-May-June, divided by the average CPI level during January-February-March, to the fourth power, minus 1, times 100. So this inflation rate is different from the statistics that are most commonly reported.

This is a polite and helpful answer. "Read the website dumbass" is how I would answer myself, because it's right there on the page. I didn't read it carefully enough. I troll myself:

So, what did I learn aside from reading is fundamental? The 10 percent figure going around is bunk as presented. It's the annualized figure for Q2. Cleveland Fed's inflation model predicts a 1 percent mom increase for June and 8.7 percent yoy. 

The annualized quarterly number is a very helpful number for clarifying why I think second quarter GDP could be negative. The BEA similarly reports on an annualized basis and the Atlanta Fed projects 0.3 percent growth:

Atlanta Fed says the economy grew 0.3 percent (as of June 27) in Q2. Cleveland Fed says inflation is 10.0 percent in Q2. These numbers are not directly comparable because BEA has their own inflation calculation, but for illustration, the nominal GDP growth would be about 10.3 if both of these numbers were precisely accurate. A small adjustment in the inflation calculation could be the difference between a positive and negative GDP number, as could a divergence in inventories or imports.

Mish discusses where GDP it might be headed in GDPNow Forecast Inches Up to 0.3 Percent, But What's On the Way? He discusses how the Atlanta Fed model works too, and why good or bad data can produce opposite moves in the forecast because it's a model and adjusts based on incoming data and how that data relates to forecast. In other words, "less bad" can produce an upward move.

Whether BEA reports a technical recession a month from now will depend on inventory adjustments, imports and the GDP deflator. I think growth is going to be low enough that it could be within the margin of adjustment, such that statistical adjustments will decide whether it is positive or negative now and in the future. I believe with highest confidence that a recession will be backdated because I expect inflation (the BEA calculation) will be revised higher next year. If a positive number comes out next month, it'll be revised away next year. I'm not claiming the numbers are cooked, I do not believe numbers are politically massaged. Nor am I making the claim that CPI is undercounting real inflation. I'm speaking specifically of their model. I think they will revise their own numbers as they get a fuller picture from more complete data.

In sum, peak inflation is probably here on an intermediate time frame. It could rebound higher down the road, but right now it is rolling over. This assumes, because it is impossible to predict, that oil goes lower with QT and slowing demand, and that a shooting war doesn't erupt because Russia tries supplying Kaliningrad. For trading purposes, assume inflation has peaked and that inflation trades will keep taking it on the chin after a brief counter-trend bounce.

P.S. For all the crap many of us give the Federal Reserve and government economic calculations, the economists who work there are dedicated to reporting good data and quite helpful in answering questions. When I emailed the BEA for a GDP question way back when, I received a helpful answer within a day or so. The Cleveland Fed saw this post and responded, which is the most proactive outreach I've ever seen. This is the kind of responsiveness all government and quasi government institutions should have. The Federal Reserve also provides a ton of data at FRED. The addition of GDP and inflation forecast models from various regional banks provides excellent forecasting for the public. The individual investor who makes use of these resources will have a leg up on many, if not most, professionals.