The mid-term elections came and went as expected. Impending gridlock is widely considered to be bullish for stocks, which is the theory I debunked in my last blog post. Bulls are now citing the exact same historical market statistics they data mined back in 2018 to rationalize a year-end rally. The latest CPI shows that inflation is beginning to roll over, albeit very slowly. Back in 2018, the CPI was 1.7%, today it's 7.7%. Fed futures predict there will be another full 1% of rate hikes between now and March. All of which makes this set-up far more lethal than the one that imploded markets back in 2018. Nevertheless, gamblers are wasting no time going ALL IN on expectations of a big year-end rally. Today is the biggest rally since December 2018 which took place AFTER the Fed pivoted. In other words, bulls are doubling down on collapse.
The operating theory behind a pivot rally is that once the Fed stops raising rates, gamblers have a period of time to enjoy one last melt-up rally before the wheels come off the bus due to rate hikes. It never enters their minds that the melt-up already occurred and now they are sitting in a bull trap.
The year-end melt-up was a bust in both 2007 and 2008 but never mind those inconvenient facts.
Another risk factor that raised its head this week is the renewed collapse of the Crypto Ponzi sector. Recall that Bitcoin had been seeing the lowest volatility of the year recently, then it headfake rallied last week, prior to imploding lower this week. Something called an "FTX" had been buying up all of the other collapsed Crypto Ponzi schemes earlier this year when it too caught the collapse contagion. It turns out that combining multiple Ponzi schemes into one big one does not diversify risk. Echoes of the lesson NOT learned during the subprime disaster circa 2007, when Goldman Sachs would package up toxic subprime mortgages from all corners of the country and package them as AAA rated securities. No one on Wall Street thought it was a bad idea. Bear in mind, today's Crypto-loving Wall Street analysts were all playing Halo in the 8th grade back in 2007.
So how could they know that all of this is 100% idiotic?
A necessary and sufficient condition for final collapse.
Option skew is the lowest since 2008:
In summary, this is either a year-end Wall Street bonus rally, or the biggest bull trap in history. In technical terms, the quality of this rally is dog shit - my own proprietary definition. This is merely the latest short-covering rally now running on glue fumes. Led of course by the Nasdaq which is on the way to becoming totally bidless. This latest overbought notion of an impending Fed pivot being once again pure fantasy.
One year ago the Fed warned investors that risky assets were set to implode. They specifically mentioned Crypto Ponzi schemes. So trapped gamblers have ignored their warnings for a full year now.
Nov. 8th, 2021:
“Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate"
"The central bank also said stablecoins pose an emerging threat, that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorated dramatically, and that “difficult-to-predict” volatility similar to this year’s meme-stock frenzy could become more frequent as social media increasingly influences trading"
