I’ll have a lot more to say on market technicals and macro in the days ahead but I wanted to share a few charts documenting the absolute carnage that markets are in the midst of experiencing and highlight an underlying tragedy weaving through it all.
And please don’t take this as a “I told you so” victory lap, it is far from that. Markets have been extremely challenging in the past few weeks and prices had extended much higher than I and probably even most ardent bulls had expected. So yes, markets had gone against me and it was an arduous exercise, not only from a macro/technical view, but also from a positioning perspective.
Bubbles are the hardest. Reason leaves the building, people get sucked in, and markets appear invincible, people are gloating, bears get relentlessly mocked, and any analysis you put out gets dismissed and one can look incredibly stupid. Not easy.
But that’s the side show, the real tragedy is that you see from an analytical perspective how this will end badly and people will get hurt and so you try to reach as many people as possible to at least warn people and highlight the variant view. Not easy.
And hence I very much appreciated Guy Adami’s kind words today:
apologies should be sent to @NorthmanTrader .. it’s easy to be glib when the markets go higher.. it’s difficult to be the person trying to shine light in the face of that
— Guy Adami (@GuyAdami) February 27, 2020
And be clear, people just got hurt big time, especially as retail had just jumped hook, line and sinker into the rally. But it’s just a 10% correction, no big deal right, we’ve seen plenty of those before.
No, that’s not the issue, it’s the speed and depth of this rug pull:
The entire rally since the Fed went hog wild with liquidity in October was taken out in a matter of days. Just last week we had all time highs. Now $DJIA is below the July and September highs and at the October lows.
Which sends an ominous message: Unless buyers sold all are under water. And don’t tell me everybody sold the top. There are a lot of trapped buyers above. Four months worth of buying taken out.
THIS is why I kept warning (examples see What if, Distortion, Never go Full Retard, Chipping Away), that these liquidity runs are dangerous, they entice people to FOMO chase stocks into ungodly valuations and then they get hurt. That’s what happened in 2000, that’s what happened in 2007 and the may have just happened now.
You know it may actually be true that such valuations may not be sustainable:
Last week US markets closed at a valuation of 158.9% market cap versus GDP. pic.twitter.com/Kwm9jHFTPe
— Sven Henrich (@NorthmanTrader) February 24, 2020
And so the end destination was visible technically even in January:
— Sven Henrich (@NorthmanTrader) January 27, 2020
We know what happened. Warnings were ignored, markets went on to make even further highs and markets even more dangerous, but now, after $VIX retested its breakout, markets have reached the same destination:
And the carnage is deep, and late 2019 and early 2020 buyers got spanked badly:
And now markets are engaged in a key battle for control:
I’ll address the implications in more detail this weekend and I’ve been documenting the current technical journey a bit in the thread below this tweet:
An updated strategic market assessment following the first big correction of 2020.
Downside risk and the case for a rally trade.https://t.co/MkJji7diwp
— Sven Henrich (@NorthmanTrader) February 26, 2020
But for now I want to finish off with highlighting the real tragedy here in all this and that is that the real message will likely get lost in all this. Most likely the popular narrative will be to blame the coronavirus as the unforeseen event, nobody could have seen this coming, this was not something anyone could have prepared for.
While that’s true on the surface it completely misses the larger point: The Fed, with it liquidity operations masked all the underlying issues in the markets over the past year. We had no earnings growth in 2019, we had multiple expansion. The bond market never confirmed the reflation trade, Gold had been rallying for months signaling something was amiss. And now the Fed left itself vulnerable to not being able to deal with a real crisis and basically openly invited people to TINA chase stocks into high valuations.
The Fed gave no warning to investors, instead it cheerlead investors off the cliff. Even last week Fed officials defended valuations and saw nothing wrong with anything adding to the atmosphere of complacency.
And now everyone will blame the virus, but not the reckless chase into stocks into historic valuations to begin with.
Which is unfortunate, because that’s the real lesson, a lesson that was already learned the hard way in 2000, but many participants are now at risk of learning again:
For now we remain in the midst of a nasty correction. There will be rally opportunities and we see some of this already in the intra-day action. But be clear now: This is a major battle for control and major technical damage has been inflicted on this market. The next few weeks and months will be a complex journey. Volatility is back for now, and complacency has evaporated. Market carnage tends to do that.
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