If Things Get Smashed Here
10% or more on any day this week
We are still in this selloff…..right inthe middle of it, and there has been NO capitulation yet, by volume or VIX futures term structure. It’s still in the selloff.
Reviewing the big pillars:
Employment - strong, and needs no mention. However, it is now into the zone where it can flip to a sell very quickly, and markets and conditions are unbelievably mercurial the past two years now. I expect employment will be a lagging indicator for a while.
Economic - Strong still, solid retail sales last month, weaker after inflation, but still solid. International trade still very solid. Industrial production solid, though nowhere near the strength displayed by equities the past two years, At some point, equities will reconcile to Industrial Production and not vice versa.
Valuations - obscene, grotesque bubble has started to deflate. This is historic, biblical in fact in scope, and by many metrics a bubble bigger than any seen in modern history, and puffed up. The current Fed, Treasury officials and Administration will be considered absolutely inept by history, likely far worse than Hoover’s administration.
Sentiment - a genuine hydra at this time. Short-term measures like AAII weekly sentiment are in bottoming territory as are many options measures. However, none to this is reflected in VIX futures term structure, which is the main, market-driven indication to keep our eyes on here. The other side of the coin is that the public has been entirely sucked into the '“everything bubble.” Commercial real estate is finished, and now with 30 yr mortgages > 4% (given that half the mortgages in America are < 4%) residential is finished here too. Crypto topped in November with stocks, and has been correlated — all risk assets moving lockstep as would be expected, everyone all in and still looking to BTFD.
Technicals - All peaked out months ago - A/D line, up/down volume, on-balance volume, all have peaked months ago, some, like up/down volume for NYSE, having peaked last June. Further, the data coming out from FINRA are margin account balances is damning for the market here, as is Real (CPI-adjusted) earnings as a percent of stock price (which is negative, and deeply so, and this is hyper critical).
Credit markets - have finally turned very sour. Not only is the yield curve flattening (and today’s rise in oil should serve to further flatten still) but, more importantly for equities, credit quality spreads are expanding rapidly - and this is critical and cannot be ignored. The most reliable of these is an indicator of the difference between Moddy’s Baa bonds and the ten year constant, and the difference looked at when it crosses its 18 month moving average:
As mentioned in the previous letter. HYG etf to the big indexes is decidedly negative, as is LQD/IEF, the “Adam’s Apple” indicator, which is now in freefall with no support below:
With the daily range of the S&P500 cash running in excess of 2% / day now, new lows running in excess of 4% most days, we are clearly in a serious selloff of which no signs of capitulation have registered. When they do, we’ll cover it. Here are past days that show us the capitulation has occurred (sometimes these can be a few days late):
The slightest push here should really get things rolling. The market is trading in qild swings here, characteristic of what we see when a major player or several are in big trouble, and this thing could avalanche now.
Now, should we see a day this week - it could even be today, that sells of by more than 10% on a single day then I would expect the Fed or some other macro-entity (sovereign wealth funds) or a coordination of central banks and other macro-entities to make a high-profile announcement of support for the markets. This would be something like we saw October 19, 1987 where Greenspan turned on the spigots of liquidity and slashed rates, the market finding support. But I believe - given the magnitude of this bubble (total market cap still over 50 trillion USD), that such attempts will work only for a day or a few days, but will ultimately fail, similar to what was seen in the October 1929 crash when JP Morgan, National City Bank, et. al., sought to reassure the markets and inject cash buying stocks. Such a attempt this time will be a prime opportunity to sell into, if you’ve missed the boat on the initial drop going on at this time.
More as conditions develop.