Projection? Wall Street Says Bears Hoping for a Fall

ZH: JPM: Wishing This Market Lower Is As Frustrating As Holding A Beach Ball Under Water

The above is a premium post at ZeroHedge, but comes on the heels of a relentless string of very bullish calls from all over finance. Not only are bulls bullish, but bears also are talking about a melt-up. This JPM headline makes me wonder if Wall Street isn't trying to dump as much as possible though. I can only speak for myself, but I don't hope the market will drop. I get that there are technical rallies. What I do not see here, is how the bond market rallies on a Fed pause or pivot when all signs I've seen from financial markets tells me commodities such as crude will rip higher if that happens. Additionally, I'm seeing gold behave like it maybe wants to crash afterall. Shouldn't it rip higher on a pause or pivot, since logically that would mean future real interest rates will drop? Real rates will rise if inflation falls and the Fed holds the line, but if that level of real rates is priced in, a pause or pivot should cause a bullish repricing of gold.

Stepping back a bit, about the only market "signaling" a pivot is the most solipsitic one: stocks.

Anything can happen in markets. Anything. Maybe bears are focusing on gold and copper instead of stocks because of the strength in stocks. Maybe bulls are focused on stocks and that's causing a divergence. Maybe bulls are right and the Fed will pivot or Powell will touch his face in a way that means stocks go up 10 percent. Sentiment is funny, that's why you have to pay attention to how stocks react on news items. The market is clearly in a very bullish and optimistic mood at the moment. I look out over the coming months and even years, and do not see how the Fed pivots or pauses. If anything, I expect the opposite. If they ease too early, they'll blow it the same way the 1970s Fed did. The risk of stagflation would climb. Bonds would eventually reject the pivot and sell off, forcing the Fed to chase the market interest rates.

In the 1970s the Fed cut rates midway through the recessions and that was the wrong move. Not repeating would mean the Fed hikes rates until a recession is evident (the recesion will likely be backdated) and then refuses any rate cuts or moves very slowly such that rates are still high at the end of the recession.

To sum it up, I don't hope for a fall. I don't see how it can rise for very long and if it rises, then it's more profit for the bears on the eventual downswing.

Palladium and Nasdaq, Unhappy Together

My bearishness is intensifying.

Bonus: another sign that platinum's time is coming.

This chart from Slope.

From Stockcharts, the line from the 1980 high hits 2000 and the recent high:

Related posts:

Palladium Signals Top at $3200

The Top is Coming

Palladium Still Calling Tech & Palladium Top

Is The Bull Market Over?

2020 pre-covid panic: Palladium's Pendulum: A Third Top in Time and Price?

XME/GDX Ratio Says Bear

The 2008 and 2022 patterns are similar. The layered chart has them offset by two months. The 2008 top was at the end of June and this year was end of August. The meltdown started in mid-September. A perfect analog would be a mid-November meltdown.

Update: Bulls Always Think They Can Hide

ZH: Money Always Goes Somewhere

Takeaway: These 11 names have soaked up just over three quarters (3.39 points, 77 percent) of the index weighting lost by the 7 US Big Tech names this year. Energy is still just 5.2 percent of the S&P 500, less than either Apple (7.0 pct) or Microsoft (5.3 pct). Health Care is 15.0 percent of the index currently, below the 16.0 percent that represents the upper end of its historical band. We believe both sectors can continue to take index weighting “share” from Tech and, by extension, outperform going forward.

Final thought: The only investment positive behind Big Tech’s ongoing declines (such as Amazon after hours tonight) is that they reduce these names’ impact on future S&P 500 returns. That has two benefits. First, it gives other stocks and sectors a better chance to affect overall index performance. Second, it makes the S&P 500 less leveraged to interest rates since it reduces the index’s price/earnings multiple. Bottom line: the S&P 500 doesn’t need Tech stocks to rally to show reasonable gains between now and year end. It does, however, need them to stop falling.

This is a good article, but I don't like the short-term conclusion. Bear markets are driven by money leaving the market, not by rotation. Rotation can cause downturns and corrections, but they aren't going to cause bear markets. In 2000, the consumer staples and utilities peaked in November and December. Here is how Merck looked from its IPP until 2000 top and from its IPO until now. Does that look like the start of a new bull market? It looks like the same chart to me. Merck topped on November 30, 2000. I call this bargaining stage fro bulls where they think there is somewhere better to put their money in the market, instead of accepting their best move is probably to get out of the market. They are retreating into safe areas and coming up with the well-worn talking points about stable, consistent earnings that will hold up in a recession. Or how the stocks are relatively cheap. All can be true, but bear markets are a psychological event that leave no sectors untouched, maybe some subindustries and always a few stocks. Big managers can't buy the little stocks that are best positioned to outperform in a bear market though. Almost everyone in the financial industry has a vested interest in keeping clients invested in liquid, large-cap stocks. Most are long-only and foribidden from taking short positions. Either soon, or early in 2023, the redemptions will begin.

Update: I took another look: the monthly candles for October in both years are very similar.

A Legitimately Bullish Chart

I found a legitimately bullish chart in technology. It hasn’t made a clean breakout in my opinion because the base has completed with the rally and I expect the rally will reverse. However, this is clear outperformance and the whole networking sector is outperforming technology and the Nasdaq. Since networking stocks trailed in the bull market, it is possible they lead in the bear market or become one of the tech sectors that outperforms.

Always pay attention when something doesn't behave as expected. It might indicate you are wrong or it may indicate the stock in question has herd-breaking potential. Outside of panics, there will be rising stocks in bear markets. Even in panics, there will be bullish divergences.

Chart Thoughts Heading into the FOMC Meeting

A few ideas I've been mulling. Some of these aren't new, but are timely again in the context of a rally. I'll start from big to small.

1. Bear markets are not merely 20 percent declines. A bear market is big in time and in price. The Nasdaq fell 30 percent over a couple of months in 1998 and you don't hear anyone refer to that as a bear market. You did hear people refer to the stealth bear market in value stocks from 1998 and beyond. There has been a bear market in ARKK, crypto and similar investments. There has been a bear market in gold miners and emerging markets. There has been a bear market in treasuries. There has not been a bear market in the major stock indexes if the bottom is in. Moving averages such as the 200-week moving average aka 50-month break in bear markets and once they're through, they go way lower. They do not break in bull market corrections or do peek-a-boo fakeout.

2. Bear market rallies of 25 percent are normal. There are much larger rallies in the most beaten down indexes or in very long-term bear market, such as Nasdaq in 2000, the 1929-1932 DJIA, 1970s DJIA, the 1989-??? Nikkei. A 25 percent rally from 3500 goes to 4375.

3. The DJIA is only down about 10 percent from its all-time high. The long-term chart looks like this:

4. Everyone is watching areas between 3900 and 4100. My sense is there is higher upside possibility to the degree bears are too aggressive or too skittish, but the Federal Reserve has to cooperate for a continued push. My sense is the market is moving into a binary event where the rally either has two or three days left, or it has many weeks left and people will be talking about new all-time highs come January (at least on the Dow).

Emerging Markets and Gold

I expended on the prior post showing real rates and gold, along with a discussion of EEM, as two current ideas. Both are at important levels and their short-term performance will give an important signal for the broader markets. The Bull and Bear Case for Two Important Assets

Crash: Real Interest Rates and Gold

The real 10-year interest rate is inverted on this chart. This is a calcualted figure from a model, so I'm more interest in the trend than in specific levels.

Frequency: Monthly

The Federal Reserve Bank of Cleveland estimates the expected rate of inflation over the next 30 years along with the inflation risk premium, the real risk premium, and the real interest rate.

Their estimates are calculated with a model that uses Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations.

Almost Time to Close All Shorts...Or Is It?

Am I closing my shorts yet? No, and I still have cash looking to open.

My view is diesel is up 40 percent in a month, oil still high, markets are showing they are still filled with crack-addled speculators who will throw their inflated cash into stocks at the first whiff of a Fed pause, let alone a pivot. Gold is moving like it wants to crash too:

Days like today hurt, but it also makes me even more pessimistic about this bear market and its impact on the United States. The bubble in stocks wasn't as extreme as the dotcom bubble, but in my opinion, the economic situation is far worse. The 2000 market top was a big one, but it was concentrated in the technology sector. The Federal Reserve was overly aggressive and helped create conditions for a housing bubble that ultimately led to a lower stock market low in 2009. They've been insanely aggressive since 2009 and went nuts in 2020. This produced a profound sentiment shift among investors. Sentiment surveys ymay say bearish, but I don't think there are any real bears out there. Investors are valuing stocks on peak earnings, assumption of resuming earning growth, assumption of a return to low interest rates and so on. If I'm wrong, point out some examples not named Hussman or Druckenmiller. I keep coming back to charts such as corporate profit margins, which hit 16.5 percent

Long story short, I shorted more. I'm out of firepower unless I close other positions now.

The Bear Pill, Revisited

Back in December 2021, I posted The Bear Pill. In it, I noted:

Here are charts of the utilities and consumer staples SPDRs in 2000, and then compared to technology. Utilities peaked in November and staples in December. Both made their all-time high 8 to 9 months after the dotcom bubble had burst. Between March 24 and December 29, 2000 (simply the slice I grabbed when highlighting the chart), the returns for XLU, XLP and XLK were +32 percent, +41 percent and -51 percent.

It's All Apple Now

There's some squeezing in the Nasdaq now, but when the NQ was up about 1 percent this morning, the entire amount was from Apple alone. Apple was 13.67 percent of QQQ coming into today. It was up about 6.5 percent when the QQQ was up less than 1 percent. A 6.5 percent gain in Apple was enough to lift QQQ about 0.89 percent (lots of moving parts so this isn't precise). They reported not good earnings. Not terrible earnings though, and the stock was probably heavily shorted by bears looking for carnage. Hence a big squeeze this morning that propped up the markets. I expect it will run out of steam around 11 am, not far from here, although it might get all the way back to 3900 before reversing.

Speaking of Inflation, Diesel is Up 40pc in a Month

Many people rightly point out that a supply shock is not inflation, but what they fail to consider is that if you have a supply shock, you by definition have printed too much money. If the central bank doesn't tighten up money supply, then people can easily bid the price of say, diesel, to the Moon. Hiking interest rates doesn't make more diesel available, but it can be the difference between $7/ga diesel and $20/ga diesel.

Bulls Want to Go Back, But We Only Go Forward

My expectation coming into today was that I either short again on a bounce or have to wait to short as the market drops. There's the PCE bounce on the release. I thought the numbers could come in lower, but they are in line with the market consensus. That is negative overall because according to the Cleveland Fed, inflation accelerated in October (confirmed by the rebound in commodities). Also, Cleveland Fed was looking for a lower number and was wrong. Their models have been biased on the underside lately, and they're already seeing faster price increases in October.

The peak conditions for peak stock prices are in the past. Not only is the bull market dead, but the future bull market will be a totally different animal. Bulls are still clinging to hopes of pivots, blaming the Fed for hiking rates and so on. They are going to keep being sucked into dip buying until they realize it's over. Then we can see a capitulation wave down, probably not the final one either. I suspect that wave is already underway with BigTech earnings coming in weak.

We've Only Just Begun

I am strolling through the charts and seeing areas of the market that haven't even completed tops yet. It took 5 minutes of looking at charts to find these, this is the top of my giant pile of charts. And by top, I don't mean the best, though some are great. I mean I made it through only a sliver of all my watchlists and had enough charts for a short video.

Amazon in a Precarious Spot

Amazon and Apple report after the bell. Leaving aside extreme outcomes, even a modest miss by Amazon could break a support line that goes back to 2017. Next support below is at $65, though it rises over time. Apple has support in the $120s, but my eye is drawn to the ratio wedge. If Apple misses earnings, the might be enough to break the wedge. When that goes is when Apple is clearly in the process of being dethroned as market leader.

I sold half the Apple puts I bought yesterday because I've almost doubled my money. The rest is free ride.

Update: Amazon fell as much as 20 percent on terrible guidance. Apple wasn't great, but stock is holding up ok with either small single-digit losses or even flat at times. Tomorrow morning's PCE will be the make or break news event for the day. It should come in weak and help a little, maybe not a enough. If it comes in hot, then Cleveland Fed is probably too conservative for October too. That'll kill any talk of a pause/pivot.

Epic Bear Market Unfolding and Adding to McDonald's Short

I've filled out my put position on McDonald's today. Full caveat: it has room to go up another 10 percent. If it gets up there, then I'm going to make far more than I will lose if I'm wrong at this spot.

The stock market is entering month 11 of a bear market and yet. Look at this pattern on XLY. I was bearish on XLY and I was early, but that pattern eventually broke.

Look at McDonald's and auto parts in this context. If this is a bear market, do you think these stocks already at relative all-time highs, or near those highs, versus the S&P 500 Index are going to explode higher from all-time highs?

There are scenarios where stocks such as McDonald's and Autozone, trading at or near all-time highs and at or near relative all-time highs versus the S&P 500 Index somehow lead a new bull market. I don't know what they are outside of something like a hyperinflation scenario, but they're out there. The bear market scenario looks more compelling though. Here are patterns that look like technology a year ago. This isn't like 2000 though, when there was a 2-year stealth bear market in value stocks as the tech sector kept soaring higher. There are some examples such as FedEx and Boeing, sitting at lifetime support, where you could make a case for them not going lower. If the market rallies, they could bounce a lot. The stocks above have ignored the bear market and they benefited from 2020 to 2022. If this is a bear market, these are the types of stocks that might outperform technology as short candidates for 2023.

Keep It Simple

New high on ES, step aside or go long. No new high on ES, accumulate short positions.

I'm guessing the market will end up pinned going into the Amazon + Apple + PCE news. Three massive pieces of information that in hindsight probably don't matter. There won't be good enough news to stop a bear market and there probably also won't be the kind of shockingly bad news that will derail a rally amid bullish sentiment. The marekt is going to do what is it going to do, but there could be major distractions in the next 24 hours that carries forward for days.

Look at this Ho

This is gaining in popularity. I don't know what to make of it. I see both a major top and a potential bull flag in the making. What I do know is that higher prices = higher shipping costs = higher inflation.

Weak Knees

Watching the market overnight and it’s drifting back up. I don’t put much stock in the overnight moves because they frequently reverse, but I’m not bearish short-term if the market goes to a new rally high. The bull trap scenarios I laid out will be in play if the market cracks 3900 and goes for 4000 or 4100.

Apple and Amazon earnings will be huge tomorrow after the bell, followed by the PCE report for Q3 before the open on Friday. Harking back to those bull traps, the Cleveland Fed has the September PCE numbers coming in lower than expected. That will be crack for bulls if Amazon and Apple can merely avoid a “Meta” scenario with their earnings reports. Bulls will not care if October inflation numbers are worse and a weak dollar lifts the inflation rate. They'll enjoy a few days of rampage before the Federal Reserve drops the hammer on November 2.

Best case for bears who have shorted already is that Apple, Amazon or both disappoint and Cleveland Fed is wrong about the PCE. If not, one of the bullish trap scenarios is the best outcome.

Boeing and FedEx Remain Near Lifetime Support

QQQ Target is Live

$220. A new rally high on the S&P 500 Index will send me to the exit, but stock-specific pops such as Apple or Amazon spiking on earning might have me buying more puts. Risk of spike with Meta earnings today, Apple and Amazon tomorrow. All after the bell.

Financial MIRV

Gambler strikes: RY $80, XLF $30. Lots of targets in this sector. Avoid ones hitting support such as SIVB. Zion is an example of the mondo topping patterns in small and regional banks that haven't busted yet.

Nuclear Silos Opening

Bombs away. It's time to short away. I will get out if new highs are taken out. I'm buying December puts.

Inflation Inflation Inflation

The most interesting chart today is ZB and the reversal in treasuries. It has made it back to my initial target level at 121. Above and there's a potential base in place. I've been holding some calls since Monday that were a short-term trade with possibility. The big question going back to the summer for me has been: when/will bonds signal a shift to deflation? Home prices are down on schedule, but as I've discussed before, the government inflation indices may not capture this until as late as early 2023 if Larry Summers has it right.

Copper and oil have stabilized with the markets. These factor into the "big question" beccause inflation is hard to kill. The 1970s saw the Federal Reserve take their foot off the rate hikes when recession hit and the CPI reversed, but it never made it back down. Result: endemic inflation.

As for the market, I don't think we're in an uptrending market with earnings season volatility. I'm not convinced in a rally yet. My current thinking is the transition scenario where the economy moves from inflation to deflation, bonds rally and stock market bulls and maybe commodity bulls (less successfully) interpret this as bullish. Then around January, the reality of deflation sets in. Contra that, the Cleveland Fed has been hiking thier inflation forecast for October. Maybe this rally gets garrotted like it has the past couple of months.