“The Last Great Myth of Every Financial Euphoria”

By Elliott Wave International

Beware of the “New Normal” in the Stock Market

The January 2018 Elliott Wave Financial Forecast put it this way:

After two decades of Mania Era asset bubbles and sentiment extremes, what now seems normal to many investors is actually highly abnormal.

That’s right — many investors no longer fear asset bubbles. That is why too many will be caught off-guard when the Mania Era inevitably ends.

Many investors are not frightened by the phrases “stock market bubble,” “housing bubble” or any other type of financial bubble.

Because, by the time the talk of a bubble makes it into the news cycle, investors perceive the long rise in asset prices as the norm and “today” as “different.”

A classic Elliott Wave Theorist made the point this way:

It’s never irrational exuberance in the present, only in retrospect or in the future. To quote the White Queen, “The rule is: jam tomorrow and jam yesterday–but never jam today.”

For example, even as the bull market in stocks celebrates its 9th birthday, read these headlines:

  • There Is No Bubble: Why Stock Bears Continue To Cry Danger — Seeking Alpha, Feb. 7, 2018
  • There’s no reason to run from the stock market — CBS Moneywatch, Feb. 7, 2018
  • Stock market fall looks like a correction, not a crash — The Guardian, Feb. 6, 2018

Also think back to 2005, when housing prices were soaring and house flipping was the rage. In November of that year, the Elliott Wave Financial Forecast mentioned another fatal assumption about bubbles:

Continue reading “The Last Great Myth of Every Financial Euphoria”

A Follow-up on 3 Charts

By Tom McClellan

DJIA In a Rogue Wave
March 08, 2018

We are at a fascinating turning point in the market’s path, and it is worth reviewing some recent Chart In Focus stories to see how they turned out, and to look at what might lie ahead.  I usually refrain from doing reruns, but in each case there is new information that I find interesting, and which I have already shared with our McClellan Market Report and Daily Edition subscribers.  I hope you will find them interesting too.  So here goes.

Back on Feb. 15, I wrote about “Stock Market In a Rogue Wave”.  Rogue waves are a rare and peculiar phenomenon, both in the ocean and in other areas involving flow.  The main points are that a rogue wave borrows energy from adjacent waves to build to a much greater height than the surrounding chop.  And the height of the crest tends to be matched by the depth of the adjacent trough.  After the rogue wave goes by, the fluid returns to the nominal level, or “sea level”, which in the stock market is harder to discern.

Continue reading A Follow-up on 3 Charts

S&P 500 Sector Situation

By Callum Thomas

We often hear about what’s happening with the S&P500 – for the smarter people you hear the S&P500 is up or down X%, for the not so smart ones you hear the S&P500 is up or down XXX points (usually with some added hyperbole, etc).  But what’s often not talked about as much, is what’s going on below the surface… not down to stock level, but at the sector level.  This article sheds light on trends in sector performance and weightings that have meaningful implications for investors.

Aside from the observations around winning vs losing streaks on the sectoral performance rankings (it’s rare to see a certain sector at the top or bottom of the performance ranking table for more than a year or 2 – contrarians take note!), the change in market capitalization rankings is profound.  Around 1995, the sector weightings of the S&P500 were fairly evenly disbursed, with the top sector at the time (consumer discretionary) at 15% and the bottom (utilities) at 5%… this contrasts to now IT at the top with 25% and telecoms at the bottom with 2%.

Basically there has been a fairly steady and systematic shift in the make up of the market.  You can see this in the performance attribution chart, where the bulk of returns in the last few years has been accounted for by financials and IT.  Most people will dismiss this as just a feature of the markets, but for the passive investor, or the active allocator who opts for passive exposure, investing in equities today has become a different bet.

The key takeaways from this analysis are:

Continue reading S&P 500 Sector Situation

The Wait Awaits

By Tim Knight

Hey, first, let’s do a little experiment to see if Wall Street analysts have become any better at their well-paying jobs. Let’s take, for instance, Blue Apron, and see what the boys had to say:

recom

OK. Currently not a single “sell”, and a solid ‘Hold” for the entire available history. How’s the stock doing?

slopechart_APRN

And there we have it. Conclusion: being a Wall Street “analyst” is the easiest job on the planet. Just say everything is a “Buy” (or, if it’s real toilet paper, a “Hold”) and collect a huge paycheck. Done! Some things never change.

Anyway, volatility has come back into the market, but things still seem awfully muddled now. Last week we had a very important break (on an intraday basis) in the ES, circled below. However, we had a lot of “fight back” on Friday and today (Monday). What started out as a nice weak day across the board reversed into a surge toward the horizontal drawn below. My mental “line in the sand” is about 2740 on the ES.

Continue reading The Wait Awaits

A look at the February selloff and the Quantifiable Edges CBI

By Rob Hanna

As the early February volatility explosion unfolded, it was difficult to anticipate when the selling would reach a level that the market would find a bottom (at least temporarily). The selloff exceeded historical levels based on % changes in range and volatility increases. One indicator that once again demonstrated its worth was the Quantifiable Edges Capitualtive Breadth Indicator (CBI). The CBI quickly spiked to 25 and then continued up as high as 31 in the ensuing days. I noted the initial spike here on the blog, and tweeted (@QuantEdges) updates over the following days and weeks.

One CBI-based strategy I have shown in the past involves going long the S&P 500 when the CBI spikes to 10 or higher, and then exiting the position on a return to a “neutral” CBI level of 3 or lower. The chart below shows how this approach would have worked out during the February market.

2018-03-04-1

In this case, the selling was not over, and another brief leg down would have had to be endured to take advantage of the strategy. But those that utilized the edge and showed the fortitude to hold until the CBI again turned neutral were again rewarded.

Continue reading A look at the February selloff and the Quantifiable Edges CBI

Weekly S&P 500 #ChartStorm

By Callum Thomas

Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I’ll pick a couple of themes and hammer them home with the charts, but sometimes it’s just a selection of charts that will add to your perspective and help inform your own view – whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It’s worth noting that the aim of the #ChartStorm isn’t necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.

So here’s the another S&P 500 #ChartStorm write-up!

1. VIX Futures Curve Indicator: First up is a look at the VXV vs VIX (i.e. 3-month VIX futures price vs the spot VIX).  The reason this is a useful and interesting indicator is that when it undertakes extreme movements to the downside i.e. the VIX spikes beyond the futures price, it can present a kind of oversold or buying signal.  This is because it basically implies that options traders are bidding up implied volatility i.e. they are more fearful vs futures traders. Of course with the benefit of hindsight, fear is sometimes rational and sometimes irrational.

Bottom line: The VXV vs VIX indicator remains in fear/oversold mode.

Continue reading Weekly S&P 500 #ChartStorm

The Two Janets and the Perfect Storm Ahead

By David Stockman

The Bloomberg news crawler this morning is heralding the heart of our thesis: Namely, that “flush with cash from the tax cut”, US companies are heading for a “stock buyback binge of historic proportions”.

This isn’t a “told you so” point. It’s dramatic proof that corporate America has been absolutely corrupted by the Fed’s long-running regime of Bubble Finance. Undoubtedly, the C-suites view the asinine Trump/GOP tax cut not as a green light to invest and build for the long haul, but as manna from heaven to pump their faltering share prices in the here and now.

And we do mean a gift just in the nick of time. The giant Bernanke/Yellen financial bubble is finally springing cracks everywhere, putting corporate share prices and executive stock option packages squarely in harms’ way.

So what could be more timely and efficacious than an enhanced, government debt-financed wave of stock buybacks to rejuvenate the speculative juices on Wall Street and embolden the robo-machines and punters for another round of buy-the-dip?

Continue reading The Two Janets and the Perfect Storm Ahead

The Return of Volatility, Part 2

By Callum Thomas

A few weeks ago I wrote an article called “The Return of Volatility” in the midst of the February stock market correction. I highlighted the prospects of a change in market regime from one of ultra low volatility to a period of higher volatility.  My view remains that we will likely see a sustained period of higher volatility for stocks, but due to a number of positive dynamics it may well be more similar to the late 1990’s than the pre-financial crisis period.  In other words, rising volatility with rising stocks.

Now that’s just looking at one asset class – stocks, or specifically the S&P500.  But what about other asset classes?  Curiously, this period of ultra low volatility for equities has been mirrored across the major asset classes. The second chart in this report shows how realized volatility for the US dollar (the DXY), Commodities (GSCI Commodities Index), and the US 10-Year Government Bond Yield has dropped to very low levels. In fact there seems to have been a synchronization in volatility across asset classes.

But as I outlined in the presentation “Monetary Policy and Asset Allocation” as the global economic cycle matures, the tides are turning for global monetary policy.  This is going to be a key driver of higher volatility across asset classes in the months and years to come.  Monetary policy (traditional and extraordinary policy tools) was a force for volatility suppression over the past 10 years, and now that is changing.

The key points on the transition to a higher volatility regime are:

Continue reading The Return of Volatility, Part 2

It’s the Fed, Yanking The Punchbowl

By Tom McClellan

Federal reserve holdings of Treasury and MBS debt
March 02, 2018

We were having a perfectly nice low-volatility uptrend until Jan. 26, and everyone was happy.  Since then, the inverse VIX ETN known as XIV has blown up (a great case of a “burning LOH” marker), and traders are starting to remember that stock prices actually can go down.  So why now?

As with most bear markets and recessions, the blame goes to the Federal Reserve, which decided last year that it would start unwinding all of the QE buying of T-Bonds and Mortgage Backed Securities (MBS) that it had bought up from 2009-14.  Last year, the Federal Reserve under Janet Yellen announced plans to start liquidating those bond and MBS holdings, starting at a rate of $10 billion per month in Q4 of 2017, and ramping up that rate by an additional $10 billion in every quarter to follow.  So the target rate of sales for Q1 2018 is $20 billion per month, and it is supposed to ramp up to $30 billion per month in Q2, then $40 billion per month in Q3, eventually peaking at a $50 billion per month rate in Q4 and beyond.

Continue reading It’s the Fed, Yanking The Punchbowl

The Albatross Of Debt: Why The Fed’s Wall Street Based Steering Gear No Longer Drives The Main Street Jalopy, Part 6

By David Stockman

The heart of the Fed’s monetary central planning regime is the falsification of financial asset prices. At the end of the day, however, that extracts a huge price in terms of diminished main street prosperity and dangerous financial system instability.

Of course, they are pleased to describe this in more antiseptic terms such as financial accommodation or shifting risk and term premia. For example, when they employ QE to suppress the yield on the 10-year UST (i.e. reduce the term premium), the aim is to lower mortgage rates and thereby stimulate higher levels of housing construction.

Likewise, the Fed heads also claim that another reason for suppressing the risk free rate on US Treasuries via QE was to induce investors to move further out the risk curve into corporates and even junk, thereby purportedly boosting availability and reducing the carry cost of debt financed corporate investments in plant, equipment and technology.

Continue reading The Albatross Of Debt: Why The Fed’s Wall Street Based Steering Gear No Longer Drives The Main Street Jalopy, Part 6

The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 4

By David Stockman

The Donald seems to think that the 37% gain in the stock market between election day and the January 26th high was all about him, and in one sense that’s true.

Donald Trump is all about delusional and so are the casino punters. They keep buying what the robo-machines are buying, which, in turn, persist in feasting on the dip because it’s there and because it’s worked like a charm for nine years running.

So doing, the punters have become downright reckless. After all, the market was already sky high last January—-trading at 23X earnings on the S&P 500 and resting precariously on a record $554 billion of margin debt . Yet in order to load up on even more of these ultra risky shares, punters have since added $112 billion to their already staggering margin accounts, thereby helping to propel the S&P index to a truly ludicrous 27X by the end of January 2o18.

Continue reading The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 4