Though I have been determined to give the bulls the benefit of the doubt for as long as possible (bubbles can go on far longer than most of us can think is even sane), cracks first appeared, and now there are plenty of additional outright crevices at this point.
Let’s look at a variety of things.
My working hypothesis for the moment is that the S&P 500 may be forming a large bear wedge, perhaps even replicating the one found at the top of the dot-com bubble (discussed here, for instance). And so far, the rejection of 4600 continues to support that thought:
In addition to that, I have pointed out some irresistible Wyckoff structures that—at least for the time being—seem more probably to be distribution rather than accumulation. I pointed out one such structure on the New York Composite (here) and also another for $AMC on Twitter (here).
In addition to those, $GOOGL’s price action—like the New York Composite’s—seems to be increasing in volatility, as swing highs and lows have entered a greater range as time has passed (exiting the original range from the BC and AR first above, then below, then above it again and then below it again), perhaps indicating to us that is has already been passed from strong hands to weak hands:
Likewise, $MSFT had a range, broke from it, and hasn’t even been able to reenter that range:
And if we take our S&P 500 hypothesis and draw a Wyckoff range on it (with a perfect midline), we can see that that midline is the exact rejection price for this most recent rally:
If we do continue to break down, but don’t take out the late February/early March lows, it is possible to revisit the range again one more time in the future (and that’s the crux of the bear wedge thought).
Other charts don’t look too bullish yet, either. For instance, $QQQ, though it has recaptured its primary channel from the COVID lows, it has only just barely done so and it is at the most vulnerable retracement area:
Other technicals I discussed before remain in negative configurations.
The Dow has rejected its channel altogether:
The Russell tried and all but failed to recapture its super-long trading range, and has a decidedly bearish wedge look going on here:
Hell, even Bitcoin has still failed to invalidate the big bear flag it’s in. And until it does, I see no reason for optimism. It’s a bearish structure, until it’s not. And until then, a bear flag simply points lower, and this one is so big that it points a lot lower:
None of this looks good yet.
- Though breadth has been terrific in this rally, volume has been poor (these can be symptoms of bear market rallies)
- I am amazed by the number of longtime permabears looking for a melt-up here (I have until recently even myself been open to one)
- The yield curve inversions are quite frankly just terrible news for the economy and the markets—and I have a few things more I want to say about that
On the inversion:
The general rule is: good predictor of recessions; often leads market tops.
Now, my hypothesis is that markets have probably already topped. So can I square these in good faith? I think I can, and here’s how.
- For starters, I have lived through a few of these and in the past (they happen so infrequently) people try to forget about them: previously (including the August 2019 inversion) the consensus narrative was: “Meh, it’s probably nothing.” But, as we then had the pandemic recession, people were quickly reminded just how good the inversions work.
- And so, this time, it seems to me, the consensus narrative is: “It’s probably something but not yet.” And that alone tells me everyone wants to enjoy one last melt-up, which means too many people are buyers here and therefore we could be in serious trouble sooner rather than later.
The error I think they are making here (and I alluded to this point here) is that people aren’t looking far enough back. They’re focusing on inversions from their adult lifetimes, and those inversions have led market tops, but the picture is less clear when we go back further in time. And this time is unlike all the other times, so far as I can see: while the late 70s and early 80s had inflation, stocks were radically cheaper then (with a Shiller PE ratio of about seven—we’re at 36 now).
So, at any rate, to try to make comparisons about timing the inversion here seems quite unwise to me given these Wyckoff structures and channel breakdowns and sentiment here. And hell, just the sheer speed of the inversions (the curves are crashing) should scare us a bit, and perhaps that tells us that we’re not slowly groping towards a recession (and so market can top later) but rather that we’re lunging into one (in which case the market can do whatever the hell it wants to price that in, and however fast it wants to).
I think it’s too dangerous to assume we have one last gasp. If too many people do think that, they are going to provide the last bolus of exit liquidity and I want no part in that. I think, given the sum of all the evidence, that it is safer here to assume we won’t be going sharply higher, but more likely quite the contrary.