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FOMO… By Executive Order: It’s Time For A Reality Check
Some quick takes here on events of the day:
The lunatics are running the asylum and they pretend to be the sane ones.
The Fed is not letting up on their liquidity machine and be clear: Every single outlook they’ve issued since inception of the program has been false. First it was temporary, then it got bigger, then it was there to meet year end requirements, and now already they’re moving the ball again.
And so here we get to see the Fed two step in one set of headlines:
“Fed’s Clarida says economy in good place, does see inflation rising to 2%. Clarida says Fed’s repo operations could continue at least through April.”
An economy that’s in a good place does not need hundreds of billion of dollars in central bank balance sheet expansion and certainly not $70B, $80B, $90B, $100B of repo every day or whatever the run rate is on any given day.
Reality is the Fed is forced to do repo or overnight rates go out of control, and if that were to last for more than a few days the economy would suddenly not be in a “good place”. The house is not on fire as long as I keep dousing it with water. But it’s in a good place.
And of course the big lie is that they have it all under control. If they had it under control they wouldn’t have to keep moving the goalpost:
The Fed’s BS dance:
1. Repo is just a temporary thingy for a couple of weeks.
2. Oops, let’s raise it to $120B
3. Oops, let’s do it through January
4. Oops, let’s do it through AprilDon’t believe a word they say.
Don’t believe me? Check their dot plots for the past 10 years.
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No, the Fed’s liquidity injections are blowing the biggest asset bubble ever. But it’s not only the Fed doing the pumping here, this is multi front pump operation.
The pumper in chief today:
Sure, you can laugh it off as a typo, although I don’t know how you miss-type 401k as 409K as the 1 and the 9 are on opposite ends of the keyboard.
But that’s not even the issue with this tweet. It’s the glaring hype and pump.
Raoul Pal had a good take on it:
The irresponsiblity of this, telling the average person to take more risks this late in the cycle is simply staggering, regardless of what the markets do. To make them think a 50% return is low lacks any fiduciary responsibility. This is worse than the Greenspan housing comments. https://twitter.com/realDonaldTrump/status/1215285845336502272 …
257 people are talking about this
FOMO by executive order I called it.
But of course the entire premise of the tweet is false on top of that. 401k’s are not up 50%.
Fact is, over the past 2 years here’s your larger index performance since the January 2018 highs:
Unless your 401k is in a few select stocks and $NDX exclusively you’re not anywhere near 50%, or 70%, 80%, 90%. Complete misleading hype and misinformation. Not even the almighty $NDX is up 50% since then. And the 2019 performance is completely meaningless. People did not liquidate their 401k’s at the September 2018 highs and then bought back in at the December 2018 lows, that’s not how this works. So there was a 20% drawdown first.
But I guess we have an election to win and anything is fair game. Just get people to chase a bubble.
And speaking of election: Next week we got the “historic signing’ of a phase one trade deal with China. Also complete hype.
Not only has no one seen what’s in it, but President Xi is not only not showing up, his name won’t even be on the document:
Ministry didn’t confirm if Liu will head to DC as Special Envoy to President Xi. Xi not expected to have his name on the trade agreement – which in a Chinese context gives Xi distance in case issues arise after the deal.
25 people are talking about this
If you think that sounds like the makings of the biggest deal ever I have some 409K’s to sell you.
Reality check: The Chinese are covering their butts. So when you see the headlines next week keep a keen eye on any supposed details if they are even made public.
No, it’s all a big pump scheme on markets and it’s perpetuating a massive asset bubble:
We’re witnessing the biggest market pump scheme in history.
1. Fed liquidity
2. Trump
3. Buybacks
4. Passive allocations, ETFsEver more money chasing less supply of shares, ever more concentrated market cap in fewer stocks, ever more disconnected from the economic basis. https://twitter.com/Schuldensuehner/status/1215303531042934784 …
264 people are talking about this
Not only are a few stocks controlling much of the market cap equation that keeps getting larger and larger, now we hear via Bloomberg that only a handful of asset managers control ever more ownership of key stocks:
Index funds controlling corporate America, just like the founders had intended.
I jest of course, but you get the message: Everybody is long, the few are getting ever larger and the Fed and Trump are both doing their parts in disconnecting asset prices ever further from underlying economic reality. We’re building an inverted pyramid here with the majority of the weight on top of the pyramid and everybody sitting up there enjoying the view but with no exit plan on how to get back down.
The economy is in a good place. Now try it without repo and balance sheet expansion. Just try it. I dare ya.
My word here: Stay cautious and critical. This is an environment of hype and non sustainability. But for now the mantra appears the same as in every bubble: Buy until you die.
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Hedge Fund Hotel: $2 Billion A Day Keeps The Punters In Pay
In our new risk free market, party like it’s 1999 environment with imbalances running wild and S&P 500 price targets being raised almost daily it may be silly to speak of any corrective activity to come in stocks. After all the Fed looks to continue printing until June.
Yet extreme one sided market actions have consequences and those can be found in the technicals and in history.
Hence I wanted to take a closer look at $AAPL today, by far the biggest behemoth in the US market universe now having run over 100% since the January 2019 lows, adding over $500B in market cap. Be it buybacks, be it the Fed, be it 5G hopes, be it the benefits of passive indexing, be it all of these factors in some combination, they all have contributed to the single largest market cap expansion in an individual stock in a single year in history.
Due to its size the stock has also been the single largest contributor to index gains, predominantly in the $NDX where $AAPL has contributed nearly 20% to the index’s gain alone:
49 people are talking about this
Too big to fail indeed. With 5 stocks alone now controlling 50% of the $NDX gain in 2019 alone any of these stocks facing a technical correction could well dampen investor expectations looking for further market gains in 2020.
After all we live in a world where 2 companies have a market cap exceeding the entire market cap of Germany, only the 4th largest economy in the world:
Just to put things into perspective: Combined mkt cap of #Apple and #Microsoft $250bn higher than the entire mkt cap of the German stock market.
578 people are talking about this
So let’s look at the technicals here and the readings it has produced.
Let’s start with a basic daily chart:
Following the 2018 rout $AAPL bottomed in early 2019 when it issued a revenue warning. It build a rising wedge which peaked in early May on a negative divergence and a larger correction ensued. This correction ended in June when, like the broader market, it began to rally on Jay Powell’s ‘ready for rate cuts’ comments. Into the summer and fall it produced marginal new highs on the Fed’s rate cuts, but then, like the rest of the market, the stock went on a tear in Q4 as the Fed went wild on balance sheet expansion and repo. In process it has formed a very large channel and has now reached the top of this channel along with vast overbought readings on the RSI and a negative divergence.
How steep this channel really is can be appreciated when viewed through the lens of a weekly chart:
Here we can note a weekly RSI reading above 85. Historically speaking these kind of RSI readings have produced either a larger correction or a smaller pullback. These readings themselves are not indicative of a major top although they can lead to one.
More often high RSI readings have led to a pullback to the .236 fib or .382 fib before another rally then produced a new high on a negative divergence which then leads to a much larger correction of size. Recent examples:
But in context of the massive size of this rally even a pullback to the .236 fib would constitute a larger move lower.
The monthly chart also reveals a larger channel which $AAPL has just reached and looks to be slightly extending above:
Note here though that a large negative divergence already exists, between the 2018 and the 2019 highs. This leaves room to the interpretation that $AAPL is at risk of making a larger top perhaps even in Q1 of 2020.
How much further can $AAPL extend higher at this stage? Risk reward is screaming massive caution here. Why? Because $AAPL is not only pressing against key trend lines, but the stock is far extended above key Bollinger bands, extension of which history shows are not sustainable.
Here’s the monthly linear view which highlights the point quite clearly:
Past extensions above the monthly Bollinger bands have produced rejections, some leading to new highs, some not. The last example being 2018 which led to a massive correction.
But it’s the quarterly chart which reveals a more concerning historical perspective:
Since 2007 $AAPL has poked hard above its quarterly Bollinger band, four times prior to this occasion. In each case it ended up producing a move to the quarterly 15 MA. That’s a four in four track record. The quarterly 15MA is currently at $167 and is rising and will be higher in 2020, but that’s the appointment $AAPL has based on history.
What this chart also shows is that these quarterly pokes above the Bollinger band can take 2-3 quarters, in 2012 it was 4 quarters. Given the earlier chart history it suggests $AAPL can see a sizable pullback in Q1, then race off to make new highs still, but then face the technical judgement of history.
Bottomline: Chasing $AAPL here on the long side is extremely dangerous. Rather it is likely to see a sizable pullback early in Q1 2020 ($236-$250 based on fibs) hence selling strength may be the right call. That first larger pullback may then offer a long trade opportunity for another potential run higher, but then $AAPL may be at risk of a much larger correction or even bear market later into 2020 and 2021. Given its size and contribution to the overall market and index performance $AAPL will be key to watch next year.
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