And possible crash this week
Sunday, 23 January, 2022
Published irregularly, as conditions dictate.
The cryptos are seeing a bit of a bounce this morning. The Dow on IB is up nearly 50 points. Nevertheless, the Friday close felt the most like that of Friday, October 16, of any day in the 35 years plus since then. Breadth is sick and has been for months. The economy is sick and falling over. The unrelenting speculative fever of the past 22 months seems to have finally broken.
I would expect the market to crash, and hard, for at least a double-digit loss on Monday (perhaps even tripping the circuit breaker at 20% down on the day, where trading ceases for the day), but that would be talking my book, and I am too much of a pessimist to believe that. If I didn’t have a position on, I would readily believe it, but being that such a drop would work in my favor, I’m inclined to expect the opposite.
Nevertheless, redemptions have to have poured in over the weekend, margin calls being issued. levered ETFs having to move a lot of stock if they haven’t already, and programs that use crude measures like the 200 day to pour in sell orders at tomorrow’s big session open. Who knows what troubles are bubbling up under the surface in the (levered) derivatives markets, and I suspect there are some whales in big trouble making panicked deals over this weekend.
And if I recall correctly, Monday, October 19, 1987 saw the market trade up a little (we had a small secondary system that went long on Friday we were able to get out of with a profit). Things aren’t as liquid under the surface now as they were back then, and in the course of an hour things can do what would have taken a day or a week back then.
If the meltdown does not happen tomorrow, it’s certainly chambered to happen in the next week or two.
As I have been saying recently, the percentage of new lows to the total issues traded is a number which, when it exceeds 5%, you have to go with either being out of your long or being short:
As you can see graphically, above, the level of new lows we are now witnessing exceeds anything of the past 22 months by a significant margin. This is not a typical post-pandemic dip.
New lows are the input to the “Floorbanger” signal. Suffering through the short side of this persistent, post-pandemic runnup has caused me to go back and examine the data over the course of y time in the business, dating back to 1980. “What is the common denominator in the data that would tell me we may be in a a serious drop, for every major drop, with a decent degree of accuracy.”
And those combined conditions constitute a ”Floorbanger” signal, whose history appears as:
Zooming in to the last eight years:
We are clearly in one of those periods. In fact, this current period being trickier than past ones. having been given some serious headfakes through November and December last. I believe we are now, given the growth in new lows, in the final throes before the meltdown.
Further, meltdowns end with two conditions which, historically, need to be met - neither of which is in play (yet).
First, weekly volume, both in SPY ETF. SVXY ETF, and the other big ETFs should be excessive, as well as big board and Nasdaq volume. None of these were excessive last week (although it was a shortened week, it doesn’t matter in terms of the analysis). Secondly, VIX futures backwardation (which is unpolluted by arbitrage - consider it sentiment expressed by those with skins in the game) must be inverted at the long end. Usually, this means the contract 4 months out trading at a higher level than the contract 7 months out):
We aren’t there, aren’t done with this drop, by any of these metrics.
We know we are in a period of insane sentiment, to a degree never before seen in US history. We know we are at valuation levels that exceed all other bubbles, save for 2000 by a few metrics (like CAPE) but by most others, far exceed that of the 2000 tech bubble. We know we have irresponsibility at the helm of not just the Fed, but a Federal government which too has “printed” trillion and released them (debt which will never be retired is, in effect, printed money out of thin air that the taxpaying public must pay the interest on), irresponsibility and corruption exemplified in the defections of “insider-trading” Fed Governor’s Clarida, Rosengren, Kaplan, personified by the clueless, witless, squishy Powell, and iconified in the dottering, diapered, thug-cum-politician, imposter President pimping his money-printing-to-donor-payola designs, in a manner that will make Herbert Hoover’s inept response to the 1929 crash appear as the gold standard for a response to a pending financial collapse.
Nothing can save this. This is a monster-in-the-making and I would expect the moment we have a day characterized by an apoplectic response from the investing public, one of audible gasps at the quotes, we will see the Fed or other big-money entities (sovereign wealth funds?) move in an attempt to shore things up.
This may have worked in 1987, but it will fail this time. The scale of what is coming down is to big and it will, after a few days reprieve (if that much) fail as did the efforts of Charles Mitchell, Chairman of National City Bank and Charles Lamont head J.P. Morgan, sought to put together, with several others including Richard Whitney, VP of the NYSE, in the midst of the 1929 crash, to inject enough cash and make their efforts public enough to try to stem it. Unlike Greenspan’s turning on the spigots in 1987, their attempts failed. I assume, given the scale of matters at hand, any such attempts this time may appear positive at first, and likely fail very shortly thereafter.
The coming drop should be incredibly rapid, panic-laden, lasting a day or two (if not an hour or two. We are in uncharted territory given the “circuit breakers,” which will only inhibit liquidity, as well as the machines, which will only help propel prices down). Then, with the guide of history, some sort of rebound, likely on news of a “savior rescue,” as just expressed, which should ultimately fail.
When we get the volume and VIX futures signal, we should see a bounce or consolidation, but I suspect this will transpire at much lower levels, and too early to tell how long this will last for or how high it may bounce. I suspect we either get the smash before Wednesday, and if not, then with Wednesday’s decision news. If we get it in the first part of the week, I would look for Wednesday, Thursday to be mollifying for the drop.
More as the week unfolds.