Thursday, March 11, 2021

FOMC: Fear Of Missing Crash

The dumb money has only one thing going for them - printed money and a lifelong commitment to pursuing effortless wealth...

Recall what Hugh Hendry said about Disney markets and those who place their faith in them:

"The enlightened chose the red pill, and so 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; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed"

Any questions?

It's that time again, when all of the big central banks are reporting their money printing plans for the future. Today it was the ECB's turn to surprise investors with a bigger money printing plan than expected. 

So far, this week is the exact inverse of last week. Last week the market was crashing from Monday to Thursday and then it rebounded Friday which set off this week's rally. In retrospect, last week was a bear trap. This has been the biggest five day rally since Biden was elected four months ago:

This is where it gets interesting.

Last March, Tech stocks became multi-year oversold and then bounced on a Friday. This current rally off of one year oversold conditions is the analog of last year's rally with a couple of minor differences. First off, this decline was larger in % terms than last year. And this rally has so far been one day longer and has reached a more overbought level (lower pane). However, clearly relative to the all time high, this year is a weaker retracement:

Moving on to the Nasdaq 100, we see a similar picture from last year. However, we see that down volume on the Nasdaq was epic this year meaning that dollar volume is already far greater than it was in all of March last year. And yet so far the price damage is far less than the full extent of last year's decline:

Of course, what is driving the Dow and S&P to new highs are cyclical stocks which are the INVERSE of last March.

Cyclicals are multi-decade overbought (top pane). A routine retracement back to the 200 dma is now a deep bear market away.

We learned this week that only six stocks out of 30 account for all of the Dow's gains year to date. Because the Dow is price weighted versus market cap weighted, Goldman Sachs alone accounts for 36% of the gains. 

Only four stocks confirmed the Dow's all time high on Thursday:

Europe is now leading this global headfake rally, however we have reason to believe this latest fiscal stimulus rally is running on the same glue fumes as the Trump tax cut rally:

Outside of Europe, the global market that is most interesting is China where deja vu of 2015, Chinese policy-makers are doing everything possible to prevent a meltdown. Back in 2015, they banned short selling, they halted the market for days at a time, then they banned institutions from selling. Nothing worked. The total loss was -60% and the rest of the world was accidentally imploded. 

A cautionary tale for those Millennials who assume central banks are invincible.

"Chinese stocks fell more deeply into correction territory despite state-backed funds, known as the "national team," intervening to ensure stability"

The Chinese stock market has dropped sharply from recent record highs over concerns that equities are overvalued and exposed to the impact of rising US bond yields."

What was it that imploded global stocks in 2015 and 2018? Rising U.S. interest rates: