FTX MODE

History will say the pandemic was the biggest bull trap in history...

Wall Street's top ranked strategist has now proclaimed "the rally is over": 

"Wilson recommends investors stay defensively positioned in healthcare, utilities, and consumer staples stocks"

"Challenger job cuts and ADP data suggests the rate of change is worsening. Challenger job cuts saw a notable pickup on a 3-month rate of change, while ADP data was broadly negative except for leisure and hospitality,"

Removing the big swings from the ADP report caused by 20 million panic layoffs and 20 million panic new hires, gives a clearer picture of the 2022 trend which is now clearly down. 

This latest market rally was the weakest rally of the year for every index except the Dow which is overweight energy and defensive stocks. Investors are totally unconcerned by the fact that the Dow is a late cycle index. For the Nasdaq, the rally was a total dud.

Here we see on the weekly chart, the Nasdaq merely backtested the 200 week moving average. The % of stocks above the 200 DAY moving average rose only because the 200 dma (not shown) has fallen. 

For those who remember Y2K, this pattern of late cycle Dow outperformance was seen back then as well. It was a very dangerous mirage as the bear market accelerated. 

The short-covering bonanza was even bigger for overseas investors, particularly in Europe and China. These have been the most shorted markets of 2022, therefore hedge funds just gave back the majority of their gains for the year.

This chart of the World ex-U.S. compares this Q4 rally to the ones in 2017 and 2019. This one is of the same magnitude in a fraction of the time. It's important to note the 2018 year-end decline due to Fed rate hikes. 

Investors are entering December positioned the OPPOSITE of 2018:

Unlike the stock market, the bond market is signaling major Fed policy error. For some reason, only bonds are capable of looking beyond the linear horizon to predict that the Fed is about to break markets. 

Here we see the 30 year bond ETF is rising at the fastest pace since February 2020. The arrows show the path of deflation followed in 2020. 

What comes next I call "FTX Mode", meaning wholesale liquidation of entire asset classes. Where it will begin and end is anyone's guess, but we can speculate that it will likely take place in ARK ETFs and other Tech funds that only nominally participated in the rally.

Capitulation at this late stage of the game will be interesting to say the least. 

 

In summary, contrary to popular belief, deflation will NOT be good for stocks. That will be the final lesson for those who never learned their lesson from Y2K and the housing crash - when official recession declaration came only AFTER gamblers were already buried.

And it was backdated a year.