Massive Top Forming

The speculators keep buying calls.  Even on down days.  It is uncommon to see such low put/call ratios.  It is even more rare to see such low put/call ratios on down days.  The speculation on further upside continues even when markets are going down.  Not only are the put/call ratios extremely low, they are also accompanied by massive options volume, which you usually only see during sharp drops in the market. 

The last time when you saw such consistently low put/call ratios was in 2000. Chart of Nasdaq in 2000.  Analog would fit with the post bubble stage right now.

My SPX projection for the coming months.  Consolidation period could be shorter than my projection, and waterfall decline could start in July.  But with phase 4 coronavirus stimulus bill under negotiation in July, and likely get to passed by late July.  This probably keeps bulls' hopes up and delay the waterfall. 

Jay Powell tried to pump up the markets even more yesterday, talking dovish, saying that he's not even thinking about thinking about raising rates.  The guy has turned into a market cheerleader, and will remain dovish till he gets replaced, with another dove.  Expectations are through the roof for Fed backstops of the market, thus the selloff on the news despite his dovish tone.  And today, with the Fed out of the way, you see what happens to the market.  Straight down in overnight session.

The bulls were counting on Powell to boost the markets even more, and he tried, and it still didn't happen.  We rallied hard into the April 29 FOMC meeting and sold off hard for the next 2 days, dropping 150 SPX points.  We rallied hard into the June 10 FOMC meeting and we are selling off hard.  Another 150 point SPX drop would take SPX to 3080. 

The Fed meme is hardwired into the brains of the bulls.  They refuse to sell ahead of FOMC meetings, expecting more goodies from Powell.  And for the 2nd time in a row, we are selling the news of Powell's dovish talk. 

The Fed is irrelevant now until they start buying stocks.  I believe before they go to negative rates, they will buy stocks.  Here is the progression for the Fed as it ramps up more and more monetary stimulus: 

1. Cut to zero.
2. QE (buy UST and MBS).
3. Buy corporate and muni bonds, including junk. 
4. Yield curve control to keep rates low w/o need for brute force bond buying (coming soon). 
5. Buy equity ETFs. 
6. Increase size of purchases of everything. 
7. Negative interest rates.

The knuckleheads know only one thing, and that is to print their way out of problems, and they have no nuance.  They are trying to prevent inevitable bankruptcies of nonviable businesses and are only creating zombies. Japan is the trailblazer when it comes to central bank policies.  The Fed is following the BOJ playbook to a T.  And they will get worse results, because at least Japan has a current account surplus and don't rely on foreign investors to buy up their sovereign debt.

All the money printing will just speed up the dollar losing reserve currency status, and just watch, as investors will flock towards assets to hedge against the coming inflation.  After the waterfall decline, commodities and gold should do really well.  Real estate prices will go higher.  The death of commercial real estate is overexaggerated.  There are many things that favor shopping at physical stores rather than online:  food, clothing, furniture, bed, home appliances, etc.  And physical stores can also serve as a form of advertising for online sales. 

The MMT policies which have started under Trump will only get bolder, as Pelosi and the Democrats are hell bent on spending even more than Trump and they won't be able to raise enough taxes to pay for it.  The US, like Japan, will not be able to raise taxes without causing a recession.  Which means they won't raise taxes.  They will test the limits of the dollar's credibility.  This will force other central banks to either go to even more extreme negative rates or blow out their government budgets like the U.S. is doing to keep their currencies from getting too strong.

Sure, all the liquidity that the Fed is pumping out has to go somewhere.  But there is nothing that mandates that the money flow to the stock market.  It could just as well stay in cash or go to the bond market, or even real estate. If Biden wins and raises corporate tax rates and closes tax loopholes, that could be the final trigger for the mass flight from equities into other assets. 

Right now, it looks like all the polls show a resounding Biden victory over Trump in November and a likely sweep of both the House and Senate.  That will give Democrats the green light to pursue universal basic income, massive spending on everything from infrastructure, welfare, and pork projects.  Deficits could stay around $3-5 trillion annually for a few years.  Those looking at the 2008-2016 playbook are forgetting that Obama froze government spending with sequestration, raised taxes, and drastically reduced the budget deficit from its 2009 peak levels.  That's not happening again because no one cares about deficits anymore.  The lobbyists who call the shots could care less if the national debt went to $100 trillion, they are there to extract as much money from government as possible. 

We are getting a post-Fed gap down, on no news.  At these high levels, where the air is thin, prices drop for no reason but because once the momentum buyers disappear, the value buyers have no interest in buying here.  As we've seen countless times after the March bottom, these are savage markets.  Even a 48 hour selloff can chop off an arm and a leg.  Think home run, not single.  Staying short.