Even this morning, the market fought hard to hold support for the first few hours. But if you followed the playbook in the Pre-Market Outlook, it was a rewarding day. And there is little doubt that the 18-month peak has arrived, with the only remaining question being how far down we will go before the decline is finished.
As mentioned over the past few days, the 200-day moving average is a typical target for the 18-month cycle trough, usually followed by a retest. The correction then ends with a somewhat scary capitulation – a dastardly down day that may trigger exchange circuit breakers on heavy volume. Only time will tell. Of course, there may be nothing normal or typical in the current circumstances.
Perhaps the most disturbing aspect of this initial stage of the downdraft is that there was nowhere to hide (except cold hard cash and a slight blip higher in the Energy ETF). U.S. Treasuries – normally THE haven during a stock market decline – were off significantly today. The inverse of the U.S. Treasury sell-off is that interest rates actually rose on the day – a most unusual circumstance in such a steep stock market decline. The U.S. Dollar rallied – perhaps driven by the attractiveness to foreigners of higher U.S. interest rates and a flight to safety.
The inverse stock/bond behavior is a shout-out to our old friend, WWSHD (When What Should Happen Doesn’t). If stocks decline, interest rates should fall, making the U.S. Dollar less attractive. The counter-scenario at hand might portend a deeper (as opposed to shallower) trough ahead of us.
For now, the put/call ratio and volatility index both closed a bit overdone on the fear side. We should get a short-covering bounce in the morning off the 50-day line on the S&P 500, also the former channel top line. It is hard to believe that we already got to the 50-day line today. As you know, that was my ultimate target if we broke support this morning, but I thought it would take a few sessions to get there.
Typically – or perhaps better stated – ideally, the market would rally a bit here and give us the penultimate shorting opportunity on a long, third wave down in Elliott Wave terminology. We shall see.
In the meantime, there are more stocks to short in this decline than I have money to short them. We will start with the pumped-up popular stocks with no earnings. We can work it from there.
By the way, at one point tonight, Bitcoin was off nearly $10,000. Apparently, Elon Musk decided that Bitcoin was bad and no longer acceptable to Tesla because it had too large of a carbon footprint. Of course, this was after Tesla recently sold their Bitcoin for a $1 billion profit. How about a “green” donation, Elon? Apparently, Bitcoin tripped hard on the news.
One more quick point, if you would kindly indulge another small rant. The Fed released a paper last week discussing the dangers of the asset bubble underway. In a series of Fed governor speeches over the past week, the Fed has been jawboning the market down.
Any notion that the Fed will save this market, then, is sadly misplaced. They want it to fall. If it falls, the ensuing calamity will likely temper inflation, and the Fed won’t necessarily need to raise rates and bankrupt the U.S. Treasury.
Wall Street having already been alerted, the Fed can now lay the problem off on the 8 million new retail traders in the market since last year. Wall Street will cheerfully introduce the newbies to the concept of “south” now that they only understand “north.” If that is not enough, the Fed can consign losses to all the “buy and hold” 401(k) plans out there. You know, “invest for the long-term.” Perhaps stated another way “stay in until we get out.”
A good stock market walloping also should scare the little people into spending less and maybe getting a job for the meager serf wages offered. Maybe the wages can even fall further, with the ongoing, massive, illegal immigration. They need jobs too!
By the way, how many baby boomers are about to retire? The number is historic, you say? What is it the young people text to each other these days, “Laugh out Loud?” Do you see how this works?
Ahh, the World Economic Forum’s Great Reset – “You will own nothing, but you will be happy.”
For now, it’s Davos or bust. These are, indeed, extraordinary times.
A.F. Thornton