I just want to organize a few thoughts this weekend. And I would like to say something obvious, something that should go without saying, but I want to make sure some folks aren’t upset.
I have been open to bullish outcomes for much of this year. Why? Well, it’s because I’ve lived through rate hike cycles before, and usually they’re not quite this bad (in fact this is by far the worst in history). And I also know that, historically, “technical” bear markets are just as common as long-lasting bear markets that go much deeper. And in April in particular, sentiment deteriorated so sharply that I became alive to the possibility that we may have been much closer to a bottom than I had at first believed possible. And so I wanted to remain open to that possibility—that the bottom could be at hand. Now I am changing my mind here in the short-term, but it’s almost entirely due to technical reasons. There are structures forming in the markets that are almost certainly very bearish. And I want to respond to those. So, I’m not trying to be edgy, or cute, or flip-floppy; I’m simply acknowledging that bear flags are bear flags until they are not. And many of these are well-defined. In fact, all year, one thing we have lacked is really good bearish structure on the way down. And now we have them, so we should pay special attention.
There’s a vocal crowd on Twitter that likes to say: “Weren’t you just bullish a month ago? [screech],” and I never quite know what to say in response to that. Sure, I was looking for rallies in an oversold market—and I was open to a major low forming at any time (because of the reasons discussed above)—but the quality of this rally in particular is poor, and I sense a lot of risk as a result, and I’m allowed to change my mind as new information emerges. And I don’t see why that’s so controversial, or why that merits becoming the center of discussion. I’ve really become weary of the “bull vs. bear” labelling and accusations and garbage posts like that. And I want to warn you, I’ve been simply blocking people who persist in that mode of conduct. I just don’t have time to slog through all of that crap. Most of you who are coming here to read this article aren’t doing that sort of thing, but I wanted to mention it, just in case.
Now, my thesis has been:
- The “inflation” scare is causing a lot of the havoc, and I had technical reasons to believe inflation was going to revert—it wasn’t just wishful thinking.
- And the thought was: if oil comes crashing down, and yields drop, then these are signals that the Fed may pivot.
And, since then: yields have turned (initially) and oil has puked (some). But, I’m not totally happy yet:
- Bonds and oil (and the dollar) may not yet be going entirely where I want them to. I will discuss these below.
- There is nothing yet—even remotely—dovish in the Fed’s language to date.
And so:
- Inflation may be a real problem for a while longer still, and we may not be as near a Fed pivot as I had hoped.
- [IMPORTANT] Furthermore—and I have expressed this thought elsewhere—we may need to stop thinking of this in terms of a naive anticipation of a pivot: if we are de facto at war with Russia, the Fed may be weaponizing the markets to destroy Putin. And one wouldn’t want to stand in front of that. Crashing demand and prices—in particular those of commodities—will harm Putin more than all the HIMARS we can muster. They can ruin him without firing a single shot, and they know it.
- And maybe this is why I am seeing so many bear flags.
Sound good? Good. Let’s look at some charts.
Bear in mind the “logic.” If the Fed is going to pivot, we need inflation to revert. But, that comes with it two other additional outcomes: even if inflation does revert, that does not guarantee the Fed will pivot, and inflation may not even revert in the first place. In other words: inflation reverting is the necessary but not sufficient condition for a Fed pivot. Oil puking and bonds rallying are signs of inflation reverting, but without a pivot, we will also see oil puking and bonds rallying in a deflationary bust, too.
So, with oil, I have expected the basic structure to be a distribution top. And if that’s right, and if this is a 1-2-1-2-1-2 in pink, then orange, then green, then we’re set up for a big waterfall here:
If that’s even true, that could mean the Fed will pivot, or hint at a pivot, or whatever, and we’re good. But it could also mean that we’re going to have a sharp bout of deflation, with some strong market illiquidity. It’s also possible that this is a re-accumulation—and not a distribution—in which case this can start to move up again. We won’t know for sure until we leave the range. And if we go up again, we’re certainly not going to get a Fed pivot here.
And with yields, similar story. The initial decline off the high was good, but late last week we rallied strongly, recovering 50% of the drop. Have we given up the long-term breakout (that brief spike above the trend line) or not? It’s unknown. What if we recapture that trend line? What we don’t know is whether the long bond bull market is over or not. Obviously, if it is, we’re not getting a pivot. And furthermore, even if bonds do strengthen sharply here (and yields fall sharply from here), that can also happen in a market liquidation break.
And finally, with the dollar, this one looks the least productive (for equity bulls). We have this big breakout, and all we’ve gotten is a single, potentially bearish daily candle. That’s it. If this keeps strengthening—and it might—this will only continue to stress equities.
Structures in risk assets do not look very good here. I have already discussed Apple (here), Tesla (here), Microsoft (here) and the Nasdaq 100 (here). Let’s look at a couple of others.
$GOOGL is forming a bearish wedge. It’s a shitty structure to see form at the low. It’s possible that this is a temporary low, but it’s almost certainly not the low. And if we see weakness right away, this is an awful structure, as the size of it would imply quite a steep move lower. If this breaks down, it can go to $1,700 somewhat quickly. Now I don’t know that it will, I’m just saying that seeing things like this everywhere is not very exciting.
And let’s look at $AMZN. A similar picture. Consolidating like this under trend looks like shit on a stick. It’s not particularly what I would like to see at a bottom. This has the potential to take us into the 70s.
This is all just bearish potential. I’m just saying that all of these stacking up like this makes me nervous. Can everything just blast off to the moon from here? Sure. But seeing all of this consolidation everywhere after the steep declines we’ve had can simply produce further steep declines.
And perhaps worst of all is Bitcoin. The last bear flag broke down and gave us every inch of its measured move. And if that happens again from this bear flag, you can see the problem (it’s in log scale, so it looks dramatic, but it is dramatic):
If this breaks down, we’re obviously in a liquidity crisis.
So, in sum, I’ve given the bulls the benefit of the doubt, because that’s a fair thing to do. But with all this structure, and with the uncertainty about a Fed pivot, and with the geopolitical risks we face at the moment, we could be in serious trouble. We could crash. I can’t guarantee that we will, but there’s enough lined up here to justify a crash if we are going to. And so we should be alert.
Good luck, let’s see what happens.
One thought on “Some Weekend Thoughts Before the Abyss: Bear Porn Edition”