Ever since the Federal Reserve launched ‘Not QE’ and President Trump ramped up tweets and comments of an imminent trade deal since October (or in one tweet, a fake trade deal), the S&P500 has had zero pullbacks, simply, it has gone vertical.
International Financing Review (IFR News) has said, “What is most striking about the rally is the lack of any correction despite plenty of concerns that a 2-3% drop is just around the corner.”
Refinitiv data shows that in the last 35 sessions, the S&P500 has gone without a 0.5% correction to the downside.
“You have to go back all the way to Nov 2017 to see an environment where the lack of correction was greater than the current setup. Back then the S&P500 did not fall by more than 0.5% in a single day for 50 consecutive days. But don’t take our word for it, just look at the chart below that takes us back to June 2010 to see the extraordinary nature of the price action,” IFR said.
President Trump’s “trade optimism” and the printing press at the Federal Reserve have also pushed a narrative that the global economy is going to rebound in the coming months, and a huge upswing will be seen across the world. Much of that is fantasy, as China’s credit impulse continues to roll over, and the global economy continues to decelerate, without China, there can be no massive upswing in the global economy. Though we don’t discount the idea, there could be stabilization; still, that would produce disappointment.
All this excitement of possible trade deals, central bank liquidity, and the prospects of a massive upswing in the global economy in early 2020 have forced consecutive record shorts in the futures for VIX non-commercial spec positioning, with the latest print of -218,362 the highest on record.
While nothing lasts forever, there are obviously imbalances that are building in markets that have been created on weak narratives, such as “trade optimism” and a global recovery – if for whatever reason one of those narratives breaks down, then perhaps, as Charles Hugh Smith via OfTwoMinds blog, explains: markets are in blowoff tops.
We all know what happens next…