Saturday, December 11, 2021


Either bulls are right and they just bought the dip prior to a new breakout high. Or they're wrong and they just tightened the noose for the biggest high/low crash in history...

In this era, wrong is right. And the masses question none of it. 

This week was the mirror image of last week's crash - A face ripping rally higher. Last week hedge funds panicked when the newly re-instated Powell came out swinging and hinted that an accelerated taper was coming. It was a reverse "gamma" squeeze, meaning put options drove the market lower as market makers shorted stock to hedge their side of the trade. The low of the week was Friday (opex). Then when the VIX hit 35 hedge funds saw their P&L spike so they all dumped their hedges en masse fueling a gamma squeeze higher as the market makers bought back stock to unwind their hedges. The high of the week was Friday (opex). It was a round trip to nowhere, however, it seems to have escaped everyone's attention that in the meantime the double taper risk has increased while market divergences have reached a record extreme, particularly in Tech stocks. The net result is that going into potential accelerated taper, hedge funds are no longer hedged and BTFD chimps are doubled down.

The table stakes are Millennial margin call.

Normally in this type of market, growth stocks are out of favour due to the fact that the Fed is pulling rate hikes forward. The rising discount rate means that long duration assets are valued lower. Which is certainly the case for the vast majority of growth stocks. However, at the same time, the declining market liquidity is sending a handful of late stage mega caps into the stratosphere led by Apple. Recall that back on Dec. 1st, Apple warned its suppliers that demand for iPhone 13 is slowing. The stock tanked for one day and then subsequently ramped +13%. The stock is approaching $3 trillion in valuation which is the annual output of the German economy. Of course none of it makes the slighest amount of sense - that a slowing growth mega cap Tech stock would be driving the entire market higher at a time when growth stocks are going out of favour. Which is why several times this week the number of Nasdaq stocks BELOW the 200 dma at an S&P all time high, reached a twenty year record. With the largest divergence on Friday:

Which is why I call this situation "fatal inequality", because the markets are now as fragile as the underlying economy. They exhibit an over-reliance on a handful of ultra-overvalued mega caps while the rest of the market is crashing.

Zooming out, we see that Nasdaq breadth has deteriorated going into this "double taper" event, while positioning is the second highest in recent history (IMX index). Investors who were told that monetary policy is the primary reason to own stocks, are now doubling down on the removal of monetary stimulus. I've said all along that continuous monetary bailouts would lead investors to onboard too much risk, due to moral hazard. But I never predicted they would double down on the REMOVAL of Fed stimulus. 


But won't cyclicals benefit from the rotation out of growth stocks? They certainly did in Y2K. However this time cyclicals are also record over-valued. Meaning there is no real concept of "value" anymore. There is only "value momentum", which is an oxymoron. There is no such thing in the real world. 

Here we see the S&P retail ETF vis-a-vis retail sales. Both ginned up by Fed policy and the trickle down fake wealth effect.

In summary, the world awaits the THIRD Fed policy error in the past six years - each one three years apart and arriving in December.

A holiday tradition. However, this time sans safety net. 

And really, who can we thank for that?

The people who ignore FATAL INEQUALITY and just assume everyone is enjoying the benefits of Ponzi schemes.