The Moment Of Fear Is Approaching

This society has become extremely lazy about managing risk at peak valuations. A lethal combination for capital...

What this market has lacked for the majority of the past decade is fear. That is about to change. Those who don't see it coming will be on the side of panic and wealth implosion. Those who do see it coming will be on the side of opportunity. Going forward, there will be no return on ignorance.

In Fooled by Randomness Nassim Taleb describes a novice trader who finds early success in a bull market. This trader, beguiled by the broad based uptrend, starts to believe he's a genius speculator and therefore he doubles down on every bet. Then the risk cycle ends and he explodes spectacularly. What Taleb described is pretty much everyone in this market right now. How Taleb gets from that idiot to the concept of an unforeseeable Black Swan event is something only a PhD statistician could explain. The likelihood of a market crash occurring on any random single day is de minimis. The likelihood of a market crash over a prolonged period of record speculation, is INEVITABLE. Which is the opposite of unforeseeable. 

Central banks have sponsored excessively promiscuous behaviour in markets. Complacency reigns supreme. In April margin debt hit a new record high. Perma bulls inform us that margin debt tracks the stock market and therefore it's a trailing indicator. However, history informs us that it's not the absolute level of margin debt that matters, it's the rate of change that predicts market tops.

MW: Margin Debt Tracks the Market

  

What we see above about margin debt is that it "tracks" the market directionally, but not at the same rate of change. 

To best see this divergence we can divide the S&P by the level of margin debt.

What we notice is that the S&P's levered performance peaked in early 2020 as margin debt was declining. However, in the past year, margin debt accelerated even faster than the market. Which means this past year was a very expensive borrowed illusion:

Despite only a moderate decline in the market these past few weeks, the Rydex asset allocation ratio is plummeting as the "reflation" investment hypothesis turns back into a pumpkin:

The major earnings story of the past week was Retail earnings which "exceeded" expectations despite being lower than 2019 figures.

May 21st, 2021

Retail Earnings To Moderate Going Forward:

"Department stores and apparel retailers should see continued growth through 2021, although Fitch expects overall sales to remain below 2019 levels"

Autos and parts are coming in for a reality check

This new permanent plateau of delusion is running on glue fumes:

What's my point?

My point is that auto-pilot mode is ending. This driverless market is racing off a cliff. Up until now intelligence has been a hindrance in markets. There has been no ROI - return on intelligence. There has only been an unprecedented return on ignorance. Going forward that will change. There will be a lot of questions and ZERO answers. Soon trading against the crowd will be the only viable strategy. Those who don't think for themselves will be at the continuing monetization of dedicated con men. 

Until they finally realize, their strategy of ignorance was a dead end. 

The de-regulation of Finance will soon be regarded as the biggest mistake in market history. However, that realization will arrive far too late for the vast majority of true believers in unfettered corruption.