Ralph Vince's Letter

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Dire Situation
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Dire Situation

Ralph Vince
Mar 13
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Dire Situation
ralphvince.substack.com

I've never seen markets looking sicker than they do right now. Especially with what's going on in credit and breadth. I think we're going down to about 3,400 SP500 very, very soon and very abruptly. I'm not saying this to be provocative - the future is more "provocative" than I could ever imagine.

We all know the A/D line has topped out, advancing-declining volume topped out, on-balance volume as well,  months ago. But the really big stocks that have held up this market - AMZN, GOOG, MSFT, AAPL, look ready to spill (does anyone think FB and TWTR would be down more than 50% while these monoliths wouldn’t be?)- right now, as does the (still) bellwether GM, when viewed on their weeklies.

The average investor, at year end, was as invested in stocks as he has been at any time in modern history. I keep this by two measures:

and:

Everyone was as all-in equities as they have ever been, by the end of 2021.

So far as overvaluations go - Deviation from Long-Term Trend, Tobin's Q, CAPE 10yr PE, Buffet Indicator, Price-to-Book and Price-to-Sales....all of these have been at absolutely obscene valuations before inflation hit, which made real returns (earnings/stock prices - YoY CPI) negative. Whenever this has happened post WW2, the market has gotten killed. It even happened in Aug 1987, but now it is grotesque:

and that's using the modern calculation of CPI, not the pre-1990s or pre-1980s version, which would put us about -17% here. Further, this market should have collapsed months ago based on this metric, and instead, has held up way beyond the crack it should have had months ago. It’s well-overdue.

Not only were valuations grotesque, then inflation came raging back with no end insight now, and we have this war which appears to bring an economic cold war, a dual-axis global economic polarization the effects of which we cannot yet gauge shorter-term, much less longer-term.

Short-term, Fosback’s HiLo 13-day indicator just gave another sell:

And the stuff I keep based on breadth and volume, Floorbanger, has given a serious sell in here:

with no end yet in sight based on volume (requiring a day of at least 1 bln shares on NYSE) or other washout signals (such as drop-terminus signal):

Lastly, here are two magnificent, simple, technical systems, of two different time frames (monthly and daily) which combined, have you short across the board

First, OECD leading indicators for the United States, taking only the direction of it - if up from last month, be long and if down, be short. The FRED data goes back to 1950 of which 68% of the trades have been profitable and made 5,800 S&P points (so much for there being no linkage between the economy and equities prices):

As you can see, it is short and has been since the end of June. Next, daily new 52-week lows. This is the one common denominator that occurs in all serious market drops - this number exceeds 4% of all issues traded for a single day, and you usually know the answer well before the market close on a given day. 

Going just long or short based on this simple rule at the close each day since 1965 (where my data starts) has yielded over 56,000 DJIU points. It too is short here. But the most damning things I’m seeing now come from the credit markets and these signals are completely melting down, indicating a market meltdown. The first is HYG, the High-yield ETF, which is in collapse now, and tends to lead equities

On the weekly, it is even more evident, and already below its February 2020 point:

Baa-10 yr vs its 18 month ma is now in total sell too:

Lastly, LQD/IEF, “Adam’s Apple,” named after its creator, my friend Adam Robinson, which is a fantastic market indicator, is in absolute freefall:

I expect stocks to make a very quick, liquidity-vacuum-style drop to their Feb, 2020 high point, which is also where the 200 week MA comes in, and I expect very soon:

I began this post with the claim that I've never seen markets looking sicker than they do right now. This is my fifth decade in this business, and I’ve been maintaining data and indicators for the entire time. I have nothing in my experience to compare the current, dire situation to.

Instead, I’ve had to go back in time, back into my data, and try to look at conditions in late 1929 and the lead-up to that crash.

But even that time period was nowhere near as dire looking as now. Things now appear much worse than they were in Q3 & 4, 1929 in terms of the data and conditions.

Consider car sales fell off in the summer of 1929, just as car sales have been very weak now.

Valuations are not only worse now than in 1929 by any of the major valuation metrics mentioned early in this post, but you also have incredible debt, public and private, and potential exposure in derivatives that may be worse than what we were seeing in 2007-8.

We have raging inflation now, which by September, 1929, was running year-on-year at about 0.6%, and now is raging like it hasn't been seen in forty-plus years, and from the looks of things, isn't not about to peak out in the foreseeable future (absent a market crash).

In September, 1929, Baa yields were a little over 6% (about 4% now). The ten year was just a few bps under 3.4% (it’s finally back up over 2% now) , and the discount rate was 5% (it’s 0.25% now). Stocks yielded just a touch over 3% (we are about 1/2 that now). The PE ratio at 20 by late September, 1929, had dropped to about 18 by the end of October (we are at 24 right now), despite stocks having fallen about 11% in October, 1929.

Real earnings yield was about 4.5% at the end of Sept (whereas now, we are about minus -4.5%), and inflation was essentially nonexistent. The ten year rolling real total return had reached a whopping 12.9%. Within two months it would plummet below 10% - exactly as we are seeing now.

In August, 1929, the Fed made an attempt to raise rates - just as we should likely see coming right up. Of course, there wasn’t the kind of relentless, long-term pumping by the Fed as we have been witnessing.

Nor was there a major, geopolitical re-alignment as profound as what we are witnessing, with ramifications for energy and commodities and even reserve currency status (much less an actual situation with the US potentially at war, God-forbid) as we are seeing now.

Lastly, there wasn’t a completely discredited Federal bureaucracy as we are undeniably confronted with now, whether health officials, Fed and Treasury officials. or the Administration itself, which is an embarrassment beyond anything the Coolidge or Hoover administrations exhibited.

It is delusional to think the market will remain delusional to these facts much longer.

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