Inflation-Adjusted Possibilities

If the Fed can't or won't stop inflation, the inflation-adjusted losses on the market indexes may erase the entire 40-year bull market. A drop to the 1966 inflation-adjusted DJIA seems like a lock to me in any major bearmarket. It is about a 69 percent loss down to the 1500 area onthe S&P 500, the 2000 and 2007 topping area (I used DJIA for any data before the 1980s because it was the most watched index then), that I think can be hit in nominal terms during a front-loaded bear market. The longer a bear takes to unfold, the more losses will be made up of lost purchasing power. That might sound nuts, but consider the CPI-adjusted low in 1982 matched where the DJIA was in 1947.

The CPI is about 300 right now. What if the CPI hits 500, about 60 percent inflation, over a decade. Multiply the CPI by 30 to get 15,000, matching the inflation-adjusted peak in 1966. Zero inflation-adjusted gains not including dividends. You may point out the dividend gains aren't too shabby and you're right, that's a lot of compounding. However, we are looking ahead. Do you want to suffer that loss while only collecting about 1.6 percent yield on the S&P 500 Index? Also, bonds can compound too. If inflation rises, 10-year treasuries will be paying substantial interest, possibly as much as the 8-percent investment return target many investors and institutions default to.

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?

Dominoes Lined Up and Falling

ES traded down to a support level this morning. THe Dow Jones Industrial Average lost the 1929-2000 trendline. Palladium is threatening a top completion and breakdown.

Binance is in trouble and it is the market:

Platinum:

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.

Value Crushing Growth

The DJIA is barely down at the moment while the Nasdaq is almost down 1 percent. Value has been crushing growth all year and outperformance has accelerated during the rally from 3500.

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).

DJIA

The DJIA ETF touched its January 2020 high on Friday.

Market Top: Stock Bond Ratio Charts

Tech Weakens

Energy and commodity stocks are bouncing today with energy, gold and copper higher. Gold (and silver, platinum) aside, I'll be looking at materials and commodities shorts today.

Final Run of the Bulls, You Can Hear the Salmon, Let Gold Be Your Guide and Crude Goes

Yesterday was a macro disaster for stocks. It was a bullish day, but damage in commodities and bonds signal this rally is running out of fuel. Going to run through a lot of charts today, all after the jump. 

For myself, I am always early. I closed out the biotech trade when it got into that consolidation range. I had July puts so it wasn't a bad trade, but then I also closed SMH calls and they've run as well. I've done fine with other positions such as short oil, long treasuries, and long yen, but I say to this to be clear: my WAG targets for the rally initially were 25 percent for Nasdaq and around 2000 on the Russell 2000 as my charts show. They might get there and that is a risk for bears. 

That said, I'm buying puts here for September and October. I have a big "crash" trade on FCX and I'm looking for more trades like that. If Apple fills its gap, I'm really not kidding when I say that's a retirement line. I'm going all in at that point as long as nothing has changed to shake my outlook.

On to the charts.

What Bear Market?

I think this is a bear market, but I want to point out something note worthy: SPX hasn't cracked its uptrend support formed by the 2009 and 2018 lows. Why does this matter? Bulls. They will interpret a larger rally as the end of the bear market.

QQQ is in "even better shape" despite its plunge. It was about 8 percent above that support line at the low. Note I dubbed the line "New Target" in case of a break below the green line target. I am keeping it because the all-clear for a rally isn't here yet. If we get the rally and then go down, this will not be the target. These support lines will break.

The Dow has already busted its support line from these dates.

Top Pattern

The DJIA divided by 30-year bond price.

Industrials

QE, QT and Why Stocks Will Implode

Every time QE happens, stocks went up.

Every time QE ended, there was a significant correction in stocks, commodities or both. Stopping QE tanked markets.

The one time QT was tried, Volmageddon hit and then a 20% correction occurred when QT maxed out at $50 billion per month from Oct-Dec 2018.

This time the Fed will try ultra-QT of $95 billion per month, QE in nearly full reverse.

The only outlier time period was Nov 2016-Jan 2018, Trump's election led to huge corporate tax cuts. Jan 2018 is when QT starting picking up and Volmageddon hit in early February.

I see the inverted H&S pattern on the chart, but for the life of me I cannot think of any reason why it should complete other than a Black Swan emerges after or bulls have gone totally insane. I don't see anything visible that says a bullish resolution is coming in the next six months, at least not until the bottom of what I see as an inevitable QT correction. Any bullish scenario with the market at new highs involves at least a 20-percent correction from here.

Welcome to the 1970s

Dow-30Yr Bond Ratio

Can stocks keep outperforming bonds?

The Suspense is Terrible...

I am amused.

I Found a Reversal Candle from 1929

Market was down 6 percent and went green. That was it for that rally.

Dow Broke Above 1929-2000 Line

Bullish? Dow went above the resistance line formed by the 1929 and 2000 tops.

SPY-TLT Ratio vs R2K and Index Checkup

Back in October, I looked at the S&P 500 Index divided by TLT and how it had a very close relationship with the Russell 2000. I also discussed shorting the market on the assumption rates peak when the taper starts. Thus far, TLT has moved up a bit from the November taper announcment, but the Russell 2000 is threatening a new low. This tells me weakness in SPY or strength in TLT, or probably a combo, could be on the way. I'm not using this to forecast a target, but if ratio caught down to the Russell 2000 it would imply about 8 percent downside in the ratio, which coould come from a combination of SPY down and TLT up. (The Russell 2000 could be oversold, but I'm not leaning that way.) This also highlights how negative inflation and higher rates can be for stocks.

Here are the major index ETFs. The DJIA looks the strongest. The rest are all at crisis points. Break lower and there isn't support until much lower. Reverse higher and support is recaptured. I'm open to any interpretation here and focusing on the shittiest stocks I can find. If I could have a wish, it would be a rally into the open tomorrow and then a collapse taking out supports everywhere on the indexes. I would close the day heavily short XLY January puts.

Here is TLT. It isn't clear to me. Moreover, I can't say whether inflation will takeover or bond market traders seeing through to the next Fed move will bid it up even if inflation and crude rise. What I can say for sure is that if TLT starts dropping, the stock market is in serious trouble. Then we talk about 1987 style moves and 20-percent limit down days because of two facts. One, if the Fed intervenes it will drive crude and inflation higher. Two, every time the Fed does QE, long-term bond yields go up. That's the scenario where I would throw all cautioun to the wind and look to get my entire portfolio leveraged up as high as possible with OTM puts because there's no escape for bulls or the Fed. I still lean towards deflation though. I don't think the final endgame is here yet.