These are the most powerful gap downs. When no one knows why it's going down. And in premarket, of all times. Usually you are getting the no news moves higher in premarket, not this. Don't ask, don't tell.
For the first time in months, I am seeing signs of buyer exhaustion as the Russell 2000 continues lower while the S&P continues higher. The Russell finally couldn't keep it together and cracked on Tuesday, going down 1%. A 1% move in any US stock indices is considered a big move now. We are in that kind of low volatility grind.
This week, the calm in the S&P has masked a Eurostoxx that is starting to lag, even with a weaker euro, continued lagging breadth in the US indices, as the leadership is becoming thinner. And now this, a gap down for no reason.
By the way, isn't tax reform supposed to be that great catalyst for another move higher? Well, clearly the market doesn't think that there will be any significant growth boost from the package, as bonds rallied after last week's announcement, even as the S&P was grinding higher. The flattening yield curve, as the 5-30 spread has gone below 80 bps, shows skepticism about future growth, as well as the ample liquidity out there in fixed income. The money has to go somewhere. And usually its either stocks and bonds. And with stocks at these levels, there is a lot of money that needs to go to bonds to make a more balanced asset allocation.
The equity fund flows are also flashing a warning sign, as October had heavy inflows. It is feeling like the topping process has begun, and we should have a hard time rallying much more from here. The only fly in the ointment is seasonal positive time period of November and December, which is amplified by the incentives to postpone capital gains due to possible tax cuts for 2018. So while the topping process has probably begun, it should take a few months before we go down the mountain. The bear suit has gathered enough dust, I will have to dust it off and put it on soon.
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2 comments:
I think most people can agree that the market will top out sometime next year. Question is how much higher will it go and what time next year will be the best time to short.
The next question then becomes how low will the market go before making a bottom. Last two tops coincided with major expansionary periods followed by 2 years of recession. Typical boom bust cycle. Given that last two tops nearly retraced back all of the run to make that top, will this coming top actually take us all the way down to levels made in 02, 03 and 09?
That will truly be a spectacle if that were to happen, and I doubt multiples can get that low given that companies now have more cash, more revenue, more earnings and there is way more liquidity then before.
I feel that if the market tops out next year and we have a recession in 2019 and 2020, we can retrace down to the tops made in 2002,2003 and 2007 if we have a severe enough recession.
What tells me that we are not at a top right now is the nasdaq. S&P looks top heavy right now but the nasdaq still has a ways to go before making that classic matterhorn top. AMZN, FB, AAPL, these tech bubble piece of shits still have a long way to go. Then there is bitcoin, the mother of all speculative vehicles.
Speculation has to die before we have a top, and for bitcoin, it almost feels like we are just getting started.
I don't think we can assume anything about the market topping next year. I agree, thats most likely scenario, but I definitely don't think its a lock. Based on previous instances where you had extreme valuations, overbullish sentiment, and a tightening Fed, yes, we should top out within 6 months. Also, we shouldn't go much higher from current levels given the aforementioned conditions.
I don't expect a move down to SPX 1600 or lower, just because of the overflowing liqudity. In 2002 and 2008, you didn't have the torrents of liqudity sloshing around in the financial system like you do now. So at worst, I expect a move down to SPX 1800, where the value buyers will come out in droves.
Overall, its a good time to prepare a list of stocks to short for the coming bear market. Or simply, just short ES or NQ, or go long Treasuries.
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