Sven Henrich via Northman Trader

Once again they took all the pain away. What looked like the beginning of a larger market correction, amid renewed reductions in global growth outlooks, was again aborted in its tracks by renewed panic interventions by central banks, namely the PBOC which injected vast amounts of liquidity, cut rates and banned short selling as the Fed continued on its track of massive repo liquidity injections and continued treasury bill buying and voila: New market highs.

The net effect was so violent that the previous week’s sell-off was forgotten by Monday morning, by Tuesday $NDX made new highs again, by Wednesday $SPX made a new all time close highs and by Thursday $DJIA, $SPX and $NDX all made new all time highs with most of the market gains for the week driven by magic overnight gap ups and marked by tight intra-day ranges. Nothing matters or so it seems.

The liquidity wave continues to dominate the market action, yet the warning signs keep mounting, the distortions keep expanding in a market that is dominated by a handful of stocks that control the index price action via historically unprecedented market cap expansion while the broader market shows marked weakness beneath,.

Yields again croaked, not confirming any notion of reflation with the 10 year closing at 1.58%, banks didn’t make new highs, neither did small caps, or transports, the laggers keep lagging.

A narrowing of leadership, vast price extensions above key moving averages, and negative divergences on new highs leading to a pullback below previous highs raising the possibility of a double top.

Are central banks and their interventions leading investors off a cliff I asked this week, as sentiment indicates desperation to buy every conceivable dip abandoning all sense of risk. Yet corporate insiders are selling strength and asset managers did not buy the rally to new highs, rather continued to reduce long exposure signaling that not all are in the ‘pile in at all cost’ camp.

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Indeed Mohamed El-Erian, who previously urged investors to resist the temptation to buy this dip, put out another warning out on Friday:

Confidence is high, as it is in every market bubble, confidence that investors all can get off the train in time. So far this confidence continues to be validated as markets are continuing to avoid any damage that the fundamental global economy would indicate while valuations remain historically stretched and central bank liquidity injections continue to control the price action.

Yet did this vertical surge in equity prices last week put in conditions for a larger sell-off still to come? Indeed did the rejection of new highs amid building negative divergences signal something more sinister? Or will the distortions in markets run unabated forever ignoring all risks?

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