Here’s My Thinking Here

It’s frustrating for me to have untold legions of people criticize me for being bullish here—cautious, to be sure, but yes, generally bullish—but I continue to believe this is only a correction. Now, part of that comes with the territory of having a big account, and putting myself out there, and I accept that. But I don’t easily tolerate emotional people screeching at me, making the flawed assumption that I’m being bullish just because. I have reasons, and I’ve elaborated on many of them recently, but I thought I would bring some of the thoughts together to defend my position to some degree, so that folks know that I am—for all of my many failings—actually attempting to be rational here.

  1. We know that markets, historically, can tolerate rate hikes well, often for quite some time before a bull market ends. And we haven’t actually even seen hikes yet.
  2. We have no 10Y/2Y yield curve inversion here (though it’s moving in that direction), and even if we did, it would mean little to us here today as markets tend to top (on average) six months after such an inversion.
  3. Much of this recent selling has been news-related. Historically, news-related selloffs are almost always reversed.
  4. Historically, wars are, as awful as it is, often not as bearish for equities as we might want to presume. And it’s not even clear yet to what extent we might classify this geopolitical event as “a war,” nor to what extent the U.S. will be involved.
  5. Bear markets are most often associated with recessions. And presently, the economy is still growing, though its rate of change of growth is slowing. Now of course many, many individual names have had outright bear markets, but as far as whole indices, it’s not something we typically see without also seeing recessions.
  6. Bear markets often start on peak euphoria, and frankly, most of the sentiment data seems to point to the opposite: that since the COVID crash low in particular, sentiment has been especially bearish.

I have more, but you get the idea here. I’m not simply shooting from the hip. I am acknowledging that none of this stuff points to a market top. And thus, so far as I can conclude in advance, this appears to be merely a correction. And now that raises a new question: how big and how long? Extremely hard for me to say.

I know that the vast majority of corrections in stock market history take on the appearance of a 3-swing structure of some kind.

And so, even at the January 24th low, I could see a 3-swing move on the S&P 500, like this:

SPX

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Here’s a Thought for You on High Yield Debt and What I Think It’s Not Telling Us to Do Yet

So, I look at lots of risk signals, and I love watching $JNK. Toward the top of the market, I was warning of caution partly because of how high yield debt was performing relative to equities (e.g., here, here). And that turned out to be prudent as we sort of fell apart. But as we continued to fall, and as we’ve entered this range, I’m not entirely concerned now because of many things I’ve discussed before (e,g, here, here). And that is despite junk bonds continuing to look like total trash here.

So here’s the thinking on this:

  • I have a lot of signals that look ok
  • Junk bonds look completely awful

What am I to do? Am I to assume that junk bonds are telling the truth and that everything else is misleading us? Or am I to conclude that the majority of evidence points to not such a bad risk off environment (no crash, no bear market—at least not yet)? And if the latter, then how do I explain junk bonds?

And so here is how I am going to try to explain that. You see, as a refresher—and to save you a ticker lookup—$JNK does look like total shit here:

JNK

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Why I Am Not Yet Too Concerned Here

I know that the market, based on a variety of metrics, seems expensive, and I know that after such a long bull market, a bear market would seem like it’s overdue, but these things are not very good predictors of whether we’re actually entering a bear market or not because these have both been true for a very long time now and it would hardly be surprising to see them continue to go on for some time still.

I also know that there are narratives at hand: the Fed isn’t our friend here now and there are geopolitical events menacing us. And yet, with these, too, they are not terrific predictors of whether we’re entering a bear market either. As I’ve pointed out before, the market doesn’t simply collapse the moment the Fed raises rates. And even if the market had a history of doing so (it doesn’t), they haven’t even yet raised rates. And: Russia hasn’t yet invaded the Ukraine. And so what are we to make of this? The market weakness seems to me to be fear generated by anticipation. Bad things happening is a good reason to evade risk. But thinking about bad things that might happen and haven’t yet happened may not be a good reason to evade risk. Now, what sort of person evades risk at the mere thought of bad things? I suppose it would be emotional market participants. Folks prone to panic. And those are precisely the sorts of folks who sell bottoms (and who buy tops when they get too excited at highs).

I want to point out a few things that tell me a story that I think is plausible here. Let’s look at the S&P.

  • At the green arrow splash, we saw evidence of heavy institutional selling
  • At the red arrow whirlpool to hell, we saw evidence of record retail liquidation (to the tune of over a trillion dollars)
  • Immediately after that (orange arrow), and ever since, we’ve seen record Dark Index prints

ES

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So How Bad Are Things? Weekend Market Update

Alrighty, there are a lot of things I want to discuss, so I’ll just dive right in. We’re seeing some delicious selling, and so we need to ask: Is this it? And if not, then how serious is it? And I will try to address those in this article.

First, Is this it?. I don’t know yet, to be blunt. And as much of me that wants this to be it (because I am bearish by nature), I am not yet convinced that it is it. And I will present some evidence that questions whether this is really it.


Bitcoin

Now, for the Great Liquidity Thermometer, I have been warning that it risked failure and with it equity markets (e.g., here). The frustrating part has been that Bitcoin often leads, and I’ve been watching it closely for signs that it would give up that head and shoulders pattern neckline before equities took a bath, but it held on to that level for as long as humanly possibly before finally taking a bath concurrently with equities.

At any rate, it’s given given us something more of an actual plunge—finally—but now how does that plunge look? Well, on the one hand, we have no idea yet if it’s finished. It could still be well within the move. If it is, we will want to see much lower prices still, as the H&S pattern’s measured move is somewhere deep down around $12-22K. And yet, I will note two features of the plunge so far.

The first feature is the volume profile. Bitcoin’s little plunge so far has taken it (unsurprisingly) to a POC (point of control, red line, the price at which the greatest volume has traded in this timeframe) and it has a huge volume node it will need to work through in order to go lower:

BTC

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Forgive Me for Doing This to You

Now, I know it seems like I throw a lot of ideas around, and it’s because we’re in a giant triangle—I believe—(that’s where the upcoming “B-Wave” comes from) and it’s a volatile structure, full of uncertainty and I have to try to navigate through it on almost a day-by-day basis. And though I use many “risk signals” to help me to guide my counts, since we’re not in a trending market, I may seem like I’m flip-flopping around a lot, and while I am in a sense, it’s not been a bad strategy, as I’ve caught the basic motions of the market fairly well, though timing precise bottoms and tops is always most difficult.

What I’m going to do here is lay out an alternative that has just come to mind today based on many things I watch. I’m going to walk through all the steps so that you can see it’s been reasoned out and is not simply a whim.

Now, I’ve been bearish here, and that’s paid off, as we just gave back a big chunk of that rally in a single bite. I adopted a bearish tone on the 28th because some of my risk signals were winking at me, and we went exactly sideways and then got this nice flush. But maybe that’s all my risks signals were pointing to, for all I know.

I’ve acknowledged the possibility for us to make another push up but something helpful has happened today. There are two instruments that have been especially challenging for me: Bitcoin and the Nasdaq 100.

With Bitcoin, I first thought it was going to rally, and when it didn’t, I expected it to fail. And while today is sort of a good start, it’s not been quite what I was expecting and it’s given me a big clue. In this chart below (from a prior post), I expected a fairly significant 5-wave impulse from minor (green) B to minor (green) C.

BTC

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The Great “Bull” Case

I am open to a big pivot here. In “The Great Bear Case,” I began pointing to the mounting and troubling signs in the markets and I added thoughts here, and here (and in a few other places as well). That wasn’t all for naught as we soon entered a terrific corrective period. Those signals pointed to a topping process and in such an expensive market, we must remain open to the possibility that any particular top isn’t just a top but rather the top. And so I was open to that. So what’s changed?

Well, for starters, this is what I wanted to see. A real expansion of range to the downside. I think I even referred to that as a “murderous expansion of range” at one point. Doing so would allow us to interpret the move down as a genuine impulse, from which we would have no doubt about what was coming. But we never got it. I set conditions and they weren’t met.

Furthermore, Twitter has provided me with an invaluable insight into participant sentiment. And in the early stages of the decline, I was full on bear-tard and got so much pushback. It was delicious. It gave me confidence that people were, in fact, hyper bullish there and that we would continue the decline (and we did). But in the last two drops (in which we barely made new lows) a huge swing in sentiment happened and people (so it seems to me) swerved wildly to the other extreme. Everyone is one foot out the door. Markets just don’t top that way. And now that I’m announcing my renewed bullishness publicly, again, I’m getting tremendous pushback. What we need to see is a huge impulse down in which everyone sighs with relief and says, “That’s the much needed correction we’ve been waiting for.” That’s when it’s all over. And that’s not here. Not even close.

Let’s do some charts.

I first noted that $QQQ formed a high-probability triangle here and that’s still good. And that leads us to the problem of what to do with $ES, which is difficult to count here. I had been viewing the move as a leading diagonal, but Friday messed things up:

  1. The green arrow low should have been the overthrow low, the final leg of the structure
  2. But if so, we should have exited the structure in a much larger wave two and the orange arrow high is much too small for that to be the case
  3. But it would have to be since we made a new red arrow low

ES

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The Arguments for Reflation and Deflation: A Look at the Dollar, Gold, Uranium and Oil

At around the beginning of the year, I identified three fundamental “narratives” that would govern the general outlook of the market:

  1. That deflationary forces could prevail at any moment. This was the most bearish outlook, and it meant that one would chronically want to look for a major top at any moment.
  2. That the markets would price in reflation—but falsely so—for quite some time (months or more). This was a “let’s play along for awhile” outlook, and it meant that one would allow the market to act like it was going to come out of this whole mess in one piece, but knowing that the first option above would eventually take over.
  3. That somehow they actually did throw enough money (or “reserves” even, if you like) at the system that somehow we would enter a period of genuine growth. This was the most bullish outlook, and it meant that we were actually in the early stages of a multi-year bull market.

Last year I had been insisting on the first, but eventually I learned my lesson and accepted that either of the two other alternatives had some real grit. I have been toying with those latter two options ever since, letting those govern my general counts, and it’s been lovely. But, I think 3 is very unlikely now and I think 2 has probably played itself out, leaving us left with number 1.

What I want to do in this article is show how reflation versus deflation could manifest itself on the charts of the dollar, gold, uranium and oil.

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What I’m Seeing Here

Sorry to keep being the party pooper, but I’m still seeing lots of risk off warnings here. I know, I know, it gets tiresome, but, these are the kinds of signals that saved me in early 2020. My big mistake was not listening to these signals when they all reversed in the summer after the COVID crash, so I must listen to them here. I was in denial then given the lockdowns.

I will just run through them as a list here:

1. $BTC continues to slide. While, yesterday, everyone was celebrating its reaching a prior area of support (orange line) and calling the lows “in,” today it broke again and now  threatens to lose that support.

BTC

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Some Random Additional Evidence

Adding some thoughts to the post from earlier. I had some of these jotted down, and forgot to add some of them. But, I think they’re also worth considering, so I will just run through them quickly here.


Volatility

It is a bit ominous that the $VIX will not give up this green trend line beneath it. The fact that we have been unable to, despite the magnificent rally we just had is telling. I was expecting a big rally (much later in time) that would crack this trend line, bringing us into a volatility regime change. That was part of my bull thesis. Instead, we got the tremendous rally early, but no volatility regime change. That makes me think this might now go higher.

VIX

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The Great Bear Case

The gamma squeeze, “cubic function” look to the last rally has given me great pause. I have spent a good deal of time thinking about it. I have shared my basic conclusions about it with you already, namely, that it may very well turn out to have been a finishing move, rather than a beginning move (I’ve discussed that here, for instance). But I am now increasingly concerned (excited?) that it may have been the finishing move.

And in fact, in answer to the question “Why on Earth did we go up like that?” I think the answer is essentially this: I think that was the total, utter, final capitulation of the bears.

I am going to run through a whole bunch of things in this article, just laying out pieces of evidence and observations. It is not my intention to sell you on the bear case; rather it’s a truth-telling expedition, in my opinion. I believe strongly in the bear case here, and I will share what I believe is the truth of the market. But it’s not my intention to persuade you, rather, to express what I feel is true.

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