Wednesday, July 15, 2020

Prepare For Systemic Meltdown

Artificial intelligence is set to explode. Human and machine alike...

Another prediction I made during the March implosion that was delayed, but not denied, was machine meltdown. Notwithstanding multiple overnight limit down futures sessions, and a few day session trading halts, Skynet managed to keep from exploding. My prediction now, along with gambler panic calls for wholesale Skynet meltdown.

Since March, the likelihood has increased 10x for the following reasons.

1) As JP Morgan points out, eMini futures liquidity has subsequently collapsed. In addition, summer is the lowest liquidity of the year, and earnings season means stock buyback blackout.

2) The well-documented stay-at-home gambling frenzy means that the market is massively over-leveraged to idiots. Novice investors have piled into the same handful of Robinhood stocks leaving them vulnerable to panic. Margin works great on the way up - as prices increase, the amount of margin buying power increases funding even more buying. On the way down however, the virtuous circle goes in reverse - lower prices beget more selling as margin buying power collapses. 

3) Then of course there is the well documented Mega Cap Tech overweight risk. Back in January, the Tech overweight was already "unprecedented". However, since the March mayhem, Tech overweight has only increased dramatically, due to the outperformance of the Nasdaq.

As of today's close we see the Nasdaq up 18% on the year, the S&P breakeven, the NYSE Composite down -12%, and the average U.S. stock down -17%. There is a 35% gap between the cap weighted Nasdaq and the average stock.

In other words, the dumb money bubble grew much bigger since March. 

It's this chasmic breadth divergence that will ensure this crash is far more severe than the one in March. There are no more perceived "safe havens" from COVID lockdown. The Stay-at-home bubble has run its course. 

This chart shows that the NYSE composite peaked five weeks ago, and so far the Nasdaq peaked Monday. The past three days have seen a massive rotation out of Tech into cyclicals. I believe this rotation is only getting started. Not to say that cyclicals are safe on an absolute basis, only that they will outperform on a relative crash basis. Unlike the February top, this top features a Tech bubble implosion in conjunction with a broader market about to implode in third wave down at ALL degrees of trend.

To further confirm this interpretation, here we see that the call/put ratio hit a record high TWICE in this rally. Once five weeks ago when the NYSE peaked, and again this week with the Nasdaq blow-off top.

What about the "fundamentals?". Once again, I almost left out the Madoff-like Magic 8 ball predictions that are driving today's mass insanity. 

We currently face an unknowable future economy currently operating on maximum stimulus and about to lose the majority of fiscal stimulus by the end of this month. Despite depressionary unemployment. Future earnings are totally unknown to 80% of CEOs, by their own admission. The other 20% are liars. Cycle high corporate defaults are taking place how soon is NOW. The post-COVID economic re-opening operation is a globally uncoordinated clusterfuck on an epic scale. Anyone buying stocks now amid all of these risks is merely a Wall Street useful idiot. 

In summary, massively complacent novice gamblers are piled into the same junk stocks in a casino held aloft by a handful of trillion dollar mega caps. Liquidity has collapsed and global policy-makers squandered their ammo to create this bubble.

What comes next will make the March debacle seem like a picnic by comparison.

This will be a global clusterfuck on a biblical scale.