Friday, February 23, 2018

In A Vacuum Of Bullshit No One Can Hear You Scream

The definition of insanity is shoving your head up your own ass, each time expecting a different result. Clearly, the low volatility vacation from reality can't be over yet - we haven't reached the pot of gold at the end of the rainbow. This past two weeks was the eye of the hurricane. The front wall of the hurricane loosens the structure, the back wall of the hurricane blows it down...

Who remembers the reflationary headfake at the end of 2008? I do. Of course even that con job was more real than the Jedi Mind Trick for serial-conned dunces we have today. Following the deflationary trend-line, we see how dull this geriatric Idiocracy has become over the past decade. How else could they believe that Donny is their saviour?

Replacing the stock/bond ratio with Wells Fargo , gives us October 2008

The heart of the third wave down at all degrees of trend. Which lines up with our wave count below.

But first, I've been five days without Zerohedge, thank you. Detoxed of man-boy bullshit, I'm a new man. I may relapse at any time, but for now I'm supplementing with National Enquirer. Sadly, my artistic ability to produce drunken rants seems to have taken a hit. I know you're disappointed. But you're only thinking of yourself. And anyways we all know that my rage is uncontrollable...

Following a week of back and forth rallies to nowhere, I figured I would give one more signpost for where things stand at this juncture. Going back three weeks now, the casino peaked, broke the trend-line and then went back and forth to nowhere for a week. Bueller?

Daneric marked that week waves '1' and '2'. And of course the following week all hell broke loose. This week, Skynet has been defending the tax cut Maginot Line at all costs, and yet still managed to close lower than the key reversal registered last Friday:

Now you say, what other evidence can I provide that may indicate a similar fate meets this week's backing and filling. After all, bulltards are anticipating the next leg higher. 

What led the upside this week was oil. Which is what led the back and forth three weeks ago:

Europe held its a-b-c island gap higher all week, apparently waiting for something to happen...

Bond yields and $USDJPY have finally agreed that fake reflation is fake...

The crash ratio ended this week at a new cycle low extreme as gamblers crowded into Amazon:

For the week to nowhere, there was more than meets the closed eye...

Thursday, February 22, 2018

Nothing Matters Until It Implodes Spectacularly

What we've learned from this era, is that the Idiocracy can ignore any amount of risk...

Stop me any time:

For months and years, various outlets warned about the low volatility fad that was taking over the markets. As recently as this past October, the IMF warned:

"The IMF has issued a warning on low volatility products, saying they could present an "unknown risk" to financial markets, and may prompt a severe shock."

Of course that warning fell on deaf ears and seemingly didn't matter, right up until February 5th when the VIX doubled and the inverse volatility trade lost -90% overnight. Handmaiden to the low volatility trade has been the mass inflow into passive ETFs. They have been a "symbiotic" pair trade wherein passive inflow has been a key factor in generating persistent low stock market volatility. And while the short vol trade may have just imploded, gamblers in passive ETFs took no notice.

For months now I have warned that due to passive indexing the market was becoming increasingly top heavy, as indicated by the Russell / Dow ratio. However, that too didn't matter until February 5th:

Here we see that the Russell / Dow ratio has not improved much at all during this recent rally:

The consequence of this large cap overweight is that large cap volatility exploded relative to small cap volatility, despite having been comatose for two years straight. Which also explains why the S&P VIX had an outsized move relative to the drop in the S&P. For example, when the S&P dropped -20% in 2011, the VIX hit 50. On Feb. 5th, VIX 50 was reached on a -10% drop. Basically double sensitivity:

Putting it all together is where it gets interesting. Because, recent events have proven that the "low volatility" passive ETF fetish actually created higher volatility. But don't take my word for it:

"Trading in ETFs designed to buy less volatile stocks, known as minimum volatility ETFs, are suggesting a trend more ominous right now: There's no place in the market that's safe to hide"

This inevitable outcome was already long since predicted of course:

July, 2017:

Flows from active to passive funds increased to nearly $500 billion in the first half of 2017.

"From an aggregate point of view it is frightening. It means that at one point you will not have the active end in the market to stabilize it. You would have just the passive guys getting into herd mentality,"

Investors into passive funds can choose risk strategies allowing them to sell out completely if their investment drops by a certain amount, and this can cause a cascade effect, where small market moves are amplified if passive funds automatically sell off assets."

What he is referring to are stop losses at the 200 day moving average, just as there were in 2015. First off, they didn't work that well, since the S&P was plunged below the 200 day. Secondly we see that two weeks ago was really just the warm-up. Thirdly, volatility is going to be a tad elevated. 

Now we know why Skynet hates the 200 day:

Well, at least some people got the memo that "passive" investing is a disaster wanting to happen.

All One Panic Collapse

Recession stocks are pointing to recession. So gamblers have been exiting dividend-paying stocks to seek the safety of companies with no revenue. Why? Because what has been MIA from the casino for two years straight is the slightest amount of fear or panic:

Most people don't believe that Social Mood drives markets. Which is the reason it works. The same people get conned over and over again - selling at the lows and buying at the highs. Someone should figure out why that keeps happening, because Wall Street thinks they're an ATM machine.

I wasn't going to write today since today was an exact replica of the past three days - gap and run higher, close on the lows.

In other words, multiple daily key reversals in a row. Which is called "three black crows". And it's not generally considered bullish. The 50 day is key resistance:

Getting back to Social Mood, what was missing from the recent mini crash was any sense of panic. Quite the opposite, gamblers took the opportunity to sell the highest quality stocks to rotate into their favourite junk names. 

Think rotation from Johnson & Johnson into Netflix. JnJ used to be a very reliable indicator that the party was over. I suggest that it still is:

Here is where it gets interesting. I noticed that BitCasino is now lined up with the S&P 500. As we see it peaked before the S&P, cratered, rallied, up down all around. Until now, they are both aligned. To the downside.

This is what Prechter means when he says that "Risk is all one market". Social Mood entices gamblers into any risk asset or Ponzi fraud that will take their money. Which means that on the way up, risk assets have low correlation - each has its own cycle of slow, medium, fast melt-up. However, on the way down, they have a correlation of one. Apparently margin clerks are not that discriminating when it comes to liquidating accounts into a down market. This last leg down in Bitcoin was correlated to the S&P, as was the counter-trend rally:

All of which is the long way of saying that the impending "retest" won't be a retest at all, it will be a panic out of junk by overleveraged speculators. The last junk that happens to be holding up the casino.

The fake reflation trade is imploding deja vu of last March and more importantly December 2015:

These are the riskiest stocks in the casino. And yet, the latest "correction" didn't even break the uptrend:

There is no momentum in momentum anymore

Wednesday, February 21, 2018

Letting It Ride On The Tax Cut

The Croupier-in-chief and his gambling acolytes are not bright enough to figure out there's no such thing as *free* money. This will complete the education they missed while partying at college...

Today the casino melted up into the FOMC meeting minutes, tagged +300 on the Dow, and then cratered to the lows of the day -166 Dow. If Daneric's wave count is correct, then today's key reversal of fortune began the third wave down at all degrees of trend. Which assumes that the fifth wave melt-up rally in January was a manic blow-off top in every asset class known to man. Which of course it was...

Donny's tax cut came into effect February 1st, the day the wheels came off the bus. As long as the 200 dma holds, this should all be fine. Otherwise, it's game over man...

I've variously compared this juncture to 2014 for its deflationary brick wall. 2008 for the end-of-cycle Fedplosion. 2015 for the smash crash. Y2K for the tech bubble. 1987 for the mega crash. And 1929 for the depression that followed. This will be the sum of all of the above.

Here is where it gets interesting. The casino just fell -10% and rallied back to the .618 fibo retracement line. Which is what happened both in 2015 and 1987. So, what is it going to be, door #1 or door #2?

But first, a typical bedtime story from the car salesmen who have herded the sheeple into record risk at the end of the cycle:

"Until recently, the U.S. stock market had been the gift which keeps on giving. Investors loved the compelling simplicity of record highs, which handsomely rewarded them as the market trekked higher without a pause.

Then in January the Dow experienced its biggest one-day drop ever. The subsequent recovery since has made for an extremely volatile investing climate, reinforcing the belief for many that this bull market has finally reached the end of its golden era. Hogwash"

In other words, he starts off by admitting that the market just performed an historically unprecedented levitation trick. But then he concludes with "And they lived happily ever after".

Comparing now versus 1987 and 2015, the first thing we notice is that in 1987, the casino had not yet pierced the 200 day. In other words, then as now, gamblers had been "handsomely rewarded as the market trekked higher without a pause". However, when the rally off of the initial dive stalled at the 50 day, the casino exploded when it hit the 200 day:

Below, 2015, using S&P instead of Dow, same idea. Here we see that the initial crash took place below the 200 day. In other words, in both 1987 and 2015, the 200 day was combustible. Nevertheless, in 2015 the market successfully double bottomed on the retest. 

The real recession stocks (Consumer Staples) have already tapped out. So, the next rotation is back to bonds...

China is back online, so should be an interesting next 48 hours...

This portends badly for happily ever after...

Entering The Lehman Moment. Yes Again...

Reflation is a serial hoax foisted on proven dimwits by proven psychopaths. Higher bond yields were the last chance to sell, inconveniently mistaken as the last chance to buy...

"The yield on the two-year Treasury note hit 2.282 percent Tuesday evening, its highest level since Sept. 19, 2008."

Trump represents the vacation from reality at the end of the ten year vacation from reality. A well deserved trip, compliments of mega-buffoonery. Stock gamblers may as well enjoy the vacation, because there is no way back...

Trump's tax cut which drove higher bond yields, combined with the obligatory attendant belief that this expansion will last forever, has meant that not only is a crash inevitable, but it has also meant that buy and holders will be overloaded with the junkiest stocks going into recession.

In other words, this will be a crash, followed by panic, followed by a much bigger crash.

The problem is no longer higher rates, it's lower rates, which will mean recession...

"U.S. stocks briefly entered correction territory earlier this month after concerns of rising inflation sent interest rates surging."

"On Wednesday, the benchmark 10-year U.S. note yield and the short-term two-year yield traded near multiyear highs."

"While rising long-term rates will ultimately become a negative for profits and multiples, we do not see current levels as a reason to de-risk and sell equities" 

"Lower rates will just mean that profits are returning to zero. So don't worry yet, you have time to bid up your stocks"

Here we see forward reflation expectations (red), and the stock/bond ratio (black). U.S. reflation expectations have been falling since 2008, due to imported poverty. This current reflationary bounce is a farce relative to the last three. Meanwhile, now the stock/bond ratio is stratospheric meaning there is no way that reflation can roll over here, without exploding the stock market. Because it would mean that bonds are massively underpriced and stocks are massively overpriced. The rebalancing will make two weeks ago seem like a picnic. 

Notice the difference now versus 2008 when the stock/bond ratio had already priced in recession ahead of time:

While we wait for the FOMC meeeting minutes, I will put up this bonus chart showing the big three Central Bank meeting dates for 2017-now:

When was the last time the S&P failed at the 50 day?

August  16th, 2017:

Tuesday, February 20, 2018

The Jobless Consumer Shrugged

All nations rise and fall based upon their junk ideologies. The definition of insanity is trusting the same psychopaths over and over again, each time expecting a different result...

The jobless consumer is the mythical Ayn Randian protagonist and beneficiary of all *Free* trade agreements. This incredible individual is able to withstand serial job/income "right sizing" and boom/bust cycles while maintaining his/her prior spending, merely by borrowing themselves into oblivion. It's the dumbest fucking idea ever conceived, but then again look who we're dealing with.

Today, Walmart confirmed that the jobless consumer is tapped out. It appears that Trump's tax cut "plink" and collapsing personal savings rate were not enough to offset rising interest rates at the end of the credit cycle. Who knew? Not one economist, we know that much. 

Any questions?

Of course, this news from Walmart only confirms what we learned last week from the Commerce Department. Wherein, retail sales implausibly missed all expectations, posting their biggest decline in 11 months.

As usual, gamblers are seeking the safe haven of 300 P/E Amazon, the only retailer not expected to turn a real profit - during their 25-year "monopolistic grace period" during which time they are destroying the rest of the retail sector. Regulators used to call that predatory competition. Unfortunately the regulators left the building when the adults departed this farce decades ago. 

Unfortunately, there is one fly in the ointment:

Hiding in 300 P/E stocks at the end of the risk cycle is a bad idea. Don't ask me how I know...