We have now reached the lethal juncture predicted by hedge fund manager Hugh Hendry - the stock market is now inversely correlated to the economy. The worse the reality of the economy becomes, the greater the anticipation of imminent dramatic bailout...
The UK has both the worst performing economy in the G20 and the best performing stock market in the world.
Where to begin...
Worst week for stonks since December. First down week for the Nasdaq in 2023.
This week, Gallup surveyed Americans and found that the greatest percentage feel their finances have imploded year over year since 2009:
In the same week we got that news, Fed futures have started to price in a 6% Fed rate by September. But then we found out that may be "too low".
No one questions this insanity. Monetary policy operates on a lagged basis, so traders will learn far too late the Fed has already over-tightened on interest rates. Their balance sheet is a whole other story. No one questions that at the current rate of run-off the Fed balance sheet will take FOUR YEARS to return to the pre-pandemic level. Meanwhile, interest rates are 3x higher than pre-pandemic.
Below, I call this the moral hazard death spiral:
Investors keep front-running Fed bailout, and therefore the Fed must keep raising interest rates imploding the economy. Monetary policy is lagged, therefore the dunces at large don't question it.
Consider that at a 6% target rate, we now have the highest bullish sentiment since the market's all time high in December 2021.
I ask the bulls, why did you wait for 6% to get so bullish?
What was wrong with 3%?
But many ask, why would this death spiral all of a sudden end now? Why can't death spirals last forever?
That's a good question - Can the market keep stair stepping lower or does it reach an acceleration point and explode?
For that we must rely upon Elliott Wave Theory, so here's the short lesson on EWT: Basically, the fundamental tenet of EWT is that markets are driven by emotions - greed and fear. Sure there other factors involved in market performance, however, at the extremes greed and fear are the dominant forces.
Many people believe that as long as retirement investors keep ploughing money into stocks regardless of valuation, then the market will just keep going higher. Like a Ponzi scheme in over-drive. There's only problem with that theory, it didn't work in 2022. 401k investors remained on auto-pilot and the market went down -20% at the lows.
EWT is not complicated, and it's not financial voodoo as most fundamentalists call it. On the other hand, guessing where corporate profits will be a year from now when the majority of corporations have suspended forward guidance due to "lack of visibility", is a fool's errand of the highest order, hence it's standard practice. It gets far less reliable when the market is negatively correlated to the economy.
Therefore, according to EWT, we look for indications that speculative froth is running high. On crack. And about to implode. And then we look for technical confirmation in the form of pattern recognition. Which is something that today's technicians assiduously avoid. Why make it so easy? Why not leave room for imagination and speculation?
Do we have any indication that speculative froth is running high?
"A speculative frenzy after Fed Chairman Jerome Powell spoke last week helped drive record trading in call options Thursday"
But the record volume in call options on stocks last week may also be the sign of a medium-term peak in speculative behavior"
RECORD speculative frenzy. CHECK.
Next, we look around for some technical indicators that point to momentum rolling over.
For example, Microsoft peaked three years ago THIS WEEK ahead of the pandemic. And we see it made a massive reversal this week as well:
Emerging Markets are sticking to the annual rollover schedule that has been in place since 2018:
In summary, if you believe Jim Cramer, you are doomed.
And, you deserve your certain fate.
That is Darwin's Law and it's the only way we will raise societal IQ.
