Saturday, February 1, 2020

Blue Monday

Buffoonish over-confidence defines the reign of Trump and buffoonish over-confidence is what will end it. Today's morons paid for this vacation from reality with their own retirement. I hope it was worth it...

As the world's most realistic, aka. "bearish" blogger, the burden of truth remains on me to document history in real-time. As always, I leave it to the MAGA circle jerk to explain why pandemic is a buying opportunity in Disney markets. Those readers who long ago wrote me off as too bearish, will be the ones filling their drawers during this dislocation. As always, I am massively long brick shitting volatility. We all have a role to play in the MAGA Kingdom...






The worst crashes in U.S. history were all on a Monday. This is not a prediction, merely an observation. In this post, I will review all of the major crashes and discuss similarities and differences to this super crash scenario. I would be remiss if I did not reiterate that this is BY FAR the most lethal set-up in U.S. history. Never before has there been this wide a gap between fantasy and reality. And for that we can thank the supreme abuser of fiscal and monetary stimulus gimmicks to rig elections.

The MAGA Kingdom is Disney markets on steroids:
"The enlightened are convinced that they understand everything which has become illusory about today's markets...They know that today's central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom...Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed"





First off, as I said at the top, Monday was the biggest percent down day in October 1929 and October 1987, August 2015, and February 2018. Which is why the former three events are called "Black Monday":



"Black Monday is the name given to stock market crashes that occurred on three different Mondays. They are October 19, 1987; October 28, 1929; and the market correction of August 24, 2015."


The last time stocks crashed on a Monday was two years ago February 5th, 2018 aka. VixPlosion 1.0. As I described in detail on Thursday, the set-up is essentially identical. Same timeframe, same melt-up overbought condition, same post-FOMC short-covering. However, this time markets are much weaker. The global economy is much weaker as well. 

The average global stock is already in third wave down.

In other words, history will say that Black Monday 2018 WAS the beginning of a global sell-off. Wave "1" down. Regardless of what happens on this Monday, this selloff in progress is kicking off third wave down. Which will be far more extreme:






In retrospect, market historians will say that the 2019 rally was merely a Tech bubble that left the majority of the market behind. Banks, Transports, Autos, Retail, Materials, and Industrials ex-defense, never confirmed the all time highs.

For those who were not around during Y2K, the bursting of the Tech bubble twenty years ago, was brutal. The Tech sector was down -80% in two years.







Notice, I haven't even mentioned the Coronavirus or pandemic. Why? Because market crashes are more a function of investor positioning ahead of the event as they are of underlying events. In other words, an underlying event that is well anticipated and hedged ahead of time will likely not lead to a crash. Whereas mass complacency WILL create a crash. As I showed yesterday, we are seeing extreme speculation AND mass complacency. No sign of selling capitulation. Mark Hulbert recently said the same thing, the Coronavirus is the proximate catalyst for an inevitable selloff due to speculators being way over their skis on risk. Recall, there was NO catalyst for the selloff two years ago. The market just peaked and crashed. This guy from Marketwatch says the same thing about this set-up:

“We certainly did not predict the Coronavirus, but it may prove to be the catalyst to tip this market that is trading at truly historic valuation levels after a record long U.S. economic expansion,” he told clients in a note this week. “Median EV-to-sales for the S&P 500, based on our work recently reached an insane, euphoric level of 3.6 times, two times than the tech bubble peak.”


Which is why it's important to differentiate between one time crashes and long-term selloffs. Not all crashes lead to ongoing declines and not all major declines begin with crashes. The Lehman selloff had no single days that could be called an out-of-control crash. Which is why that selloff went on for months and ended -55% at the lows. An outright crash would have likely brought a bottom much sooner. The lethal scenario of course was 1929 - a massive crash, a multi-month rally, and then relentless bear market -90% over two years. However, what we will see below is that ALL crashes have been at least short-term lows for markets. Because they involve extreme volatility, panic and capitulation that  leads to a bounce of varying duration. In other words, if the market opened higher on Monday, that would not be the sign of a bottom.

VixPlosion 2018 and smash crash 2015 were quite similar. Both were near-term bottoms that lasted several months. And then larger declines ensued. In both cases, the major vol spike lasted two days.

Here we see VixPlosion 1.0:
Volatility peaked on the Tuesday, however, the market bottomed on the Friday later that week. Then there was a retest in April on much lower volatility. The rally lasted through December 2015 (not shown), and then the larger selloff ensued.





1987 is the most famous recent market crash in U.S. history. It was also a great buying opportunity.

The market peaked in August, declined, rallied back to the 50 dma and then rolled over. The market crashed -20% on Monday, the biggest one day percent loss in U.S. history. The market bottomed on Tuesday. VIX hit 150. The successful retest came six weeks later on nominal volatility. One year later, the market was making new all time highs. 





And of course, I described 1929 above. The lethal scenario. Crash. Headfake rally. Massive decline.






Which gets us to now.

If we take an amalgamation of the above scenarios, my personal prediction would be massive crash and dislocation lasting at least one week. ETF stop losses. Margin calls. Extreme volatility. Then, at some point, central banks will panic, driving an extreme vertical rally. Followed by economic implosion as investor confidence plummets. In other words, the 1929 scenario.  

The structural differences between now and these prior crashes are the over-reliance on computers, now responsible for an unprecedented 80% of trading volume. The machines can in no way handle the extreme level of selling pressure they are about to endure from Tech RISK OFF. And then of course there are the ETF stop losses which caused major problems in the 2015 selloff. ETF allocations have only grown in magnitude since that crash.  



"There is some reason to believe algos cause volatility, especially when trading thins and the humans overseeing them vanish"

The impact in fast-moving markets can be outsized if the models rapidly push prices towards existing buy/sell order levels, trip them and trigger other orders."


When the 50 dma (blue line) broke during VixPlosion 1.0, the VIX exploded. The market bounced right at the 50 day on Friday (yesterday) in the last fifteen minutes of trading. 

Any questions?






From a political standpoint, Trump's re-election odds will plummet. Sanders and Warren will rise in the polls. Investment advisors will implore everyone to maintain confidence in Disney markets, but what's left of the smart money will hit the central bank bid, knowing it's their last chance to get out of Trump Casino.

At that point, today's Idiocracy will learn the hard way the difference between the economy and the stock market, as corporate profits implode. Central bank asset levitation gimmicks will do nothing for the economy with interest rates already at record lows. The dumb money will be left holding the bag.

Today's morons have paid for this year vacation from reality with their own retirement.


Position accordingly. 









In summary, by the end even the biggest dunce will figure out that Donald Trump is not their saviour. Quite the exact opposite.

Historians will never believe there was a society as dumb as this one.