1929 Redux
מעודכן
I have been waiting for the moment where my confidence was high enough to say the top was in for most of 2021. The relentless grind upwards has kept providing moments that "could be the one", but all have been quickly bounced before any real technical damage could be done. Hence, we went almost a year from the last 5% SPX correction until now. This will be long-winded, because, well, this is as much a high timeframe macro fundamentals call as it is a technical one.
I called for the intergenerational top in January 2020 on SPX and NDX. The short trades I drew on those charts stayed below their stops heading into the pandemic crash, and that crash brought them to my 2nd TP target (of 3). I had not expected this crash to happen in a one-month straight-line crash, expecting instead a normal bear market for US equities lasting 1-2 years, but the pandemic was a genuine black swan catalyst.
My logic on that call was fairly straightforward - my indicators showed us looking like the 2000 top, a repo crisis in 2019 had the Fed pouring money into a what seemed like a leaking bucket, and valuations relative to GDP had matched 2000 levels almost precisely. TSLA and AAPL had gone parabolic out of nothing in a way that was deeply disconnected from fundamentals since that October 2019 intervention. It seems quaint now, but the "stonks only go up" meme had become prominent and fear-euphoria metrics were showing the most euphoric market since 2000.
...and then I've been wrong ever since and missed the longest, fastest bull rally in the history of US equities. Mea culpa. It turns out that it was actually possible for monetary and fiscal stimulus to plug the dam. The amounts involved were historically unprecedented, and they successfully stabilized the system. I'd argue that this is for the better of humanity too, given that an economic crash inside of the pandemic likely means immensely more death and suffering than if we timeshift the brunt of economic carnage until we're past COVID-19; though there's plenty of reason to be aghast at how little shared sacrifice was asked of and is still not being asked of elites relative to everyone else.
With hindsight, it was a substantial disadvantage that my background before ever touching trading was in graduate-level bioscience, meaning I actually understood how the pandemic was playing out, that it would likely last much longer than anyone but pretty much the scientists themselves was saying, and that governments were failing to get it under control by reopening too early. Thus, I was broadly correct about what happened in the real world while the market continued to trade a parallel universe consensus that everything was sunshine and rainbows.
I am too young to have my own memories of trading in 1998-2000 was like, and that's the only thing that appears comparable to the post-pandemic market structure. Fundamentals, at least at the macro level, completely stopped mattering, or really, they became inversely correlated as anyone who traded their disbelief on that basis got squeezed. Bears, and with them, all tethering to reality itself, have gotten drowned in liquidity. Leverage via the options market has gone frank parabolic. US equities inflows in the past year have totaled more than the net inflow of everything from the 2009 bottom to before that window combined. Meme stocks have gotten bid up purely because they can be, and then the inflows from index ETFs have sustained those bubbles. NKLA, a company where the CEO is outright indicted for fraud at this point, retains a 55B market cap because it's in the Russel 2000. The percentage increase in NDX bottom to top from 2009 to now is now a larger parabola in percentage terms than the one which led to the 2000 crash. Valuations have run well past 2000 levels and are now at 1929 levels.
We took a 2000-level tech bubble... and ran it up into a 1929-level total market bubble.
Meanwhile, the engine of growth for the past 30 years or so, essentially since the Nikkei topped out in 1989, has been the modernization of China. A country of 1.2B people has gone from being a mostly poverty-stricken agricultural society to the standard of living of Mexico - part of the global middle class but not a "high-income", "developed" country, a bimodal country with cities of developed-world wealth alongside rural areas that are very very poor, and a country whose further progress is heavily restrained by corrupt governance.
...and the China bubble is now popping right now in front of our eyes. That has become the probable catalyst for the end of this "supercycle" - its real estate sector is 30% of its GDP, amounts to a giant piggybank of unfinished, unlivable, ghost city buildings so poorly-constructed that they frequently just topple over. Its high-yield bond market is comprised primarily of debt from that sector. If this was going to stop at Evergrande, the system would absorb it just fine, but it's already not stopping there. China has been in a slow-motion financial crisis for several years now if you've been paying attention to the thinly-covered news about it, and the dam has finally broken. Much of this junk real estate debt is USD-denominated and ultimately, the CCP can't keep the party going any longer if it wants to, so it's now setting precedents whereby foreign bondholders get stiffed while domestic bondholders get the breadcrumbs that can be salvaged.
Defaults on this massive pool of USD-denominated debt is where the system is now finally breaking, since we've managed to defer the pain from the pandemic. Being the global reserve currency means that your money supply is, well, global - however safe US domestic debt may be, there's more USD-denominated bond debt being issued abroad than there is domestically and it is of far more dubious quality.
Google Trends for the keyword "inflation" blew up earlier this year. As per usual, the crowd is wrong, or at best, late to the party. Inflation has been running modestly hot in the US and EU by the standards of post-2008, and people appear to have completely forgotten what "normal" was before then. Over the past 2 years, it hasn't done much more cumulatively than make up for the weakness in first few months of the pandemic. If you've read this far and this paragraph seems wrong to you, then what I'll say to that is that the way most complaints about "inflation" miss the boat is by misunderstanding what the word is actually measuring and either cherrypicking things that have clearly gone up in what is a broad index with many things that change little and some that are quietly going down, or they're looking at "asset price inflation" and missing the point that this is specifically not something that conventional "inflation" measures at all. That low inflation has slowly juiced all asset prices which feels like "inflation" of asset prices is a difference between a technical and colloquial definition.
Thus, I'm calling for a deflationary bust at a time when this appears to be contrarian to, well, most everyone.
I've listed several targets on SPX and NDX taken from weekly and monthly charts using my ACAT indicator. I think the top is in, given the action of the past few weeks, but I've included a bit of wiggle-room for double-top if consolidation drags out a couple more months. I'd like to think I've patiently waited long enough and found a serious change in character in this market, but if I haven't, risk of further parabolic blowoff means macro bears would need to cut the loss quickly to live to try again another day.
The effect of passive flows on this market has been to accelerate the moves, so I've drawn this as a shorter duration bear market than might otherwise be the historical expectation, but if I'm correct, and this is 1929 / 1989 Nikkei, then basically people will get eaten buying the dip several times and this will end only when sentiment that the market is a guaranteed thing so long as you buy-and-hold is no longer church doctrine. Crashes on this scale have typically taken decades to retake the highs.
You should expect regulation to curb excesses and that will cap the insanity - because markets like this get this insane due to clear examples of fraud and abuse. So we'll respond to things like whatever the hell games TSLA has been playing with its accounting after it blows up Enron-style, and it will be the correct thing to do because the fundamental problem with "stonks only go up" is that a lot of why the economy feels perpetually poor to so many ordinary people is that we're allocating capital to Ponzi schemes instead of actual not-fraud, real world mathematically-sound and often not-sexy businesses that can sustainably employ people with steadily rising wages over decades.
I called for the intergenerational top in January 2020 on SPX and NDX. The short trades I drew on those charts stayed below their stops heading into the pandemic crash, and that crash brought them to my 2nd TP target (of 3). I had not expected this crash to happen in a one-month straight-line crash, expecting instead a normal bear market for US equities lasting 1-2 years, but the pandemic was a genuine black swan catalyst.
My logic on that call was fairly straightforward - my indicators showed us looking like the 2000 top, a repo crisis in 2019 had the Fed pouring money into a what seemed like a leaking bucket, and valuations relative to GDP had matched 2000 levels almost precisely. TSLA and AAPL had gone parabolic out of nothing in a way that was deeply disconnected from fundamentals since that October 2019 intervention. It seems quaint now, but the "stonks only go up" meme had become prominent and fear-euphoria metrics were showing the most euphoric market since 2000.
...and then I've been wrong ever since and missed the longest, fastest bull rally in the history of US equities. Mea culpa. It turns out that it was actually possible for monetary and fiscal stimulus to plug the dam. The amounts involved were historically unprecedented, and they successfully stabilized the system. I'd argue that this is for the better of humanity too, given that an economic crash inside of the pandemic likely means immensely more death and suffering than if we timeshift the brunt of economic carnage until we're past COVID-19; though there's plenty of reason to be aghast at how little shared sacrifice was asked of and is still not being asked of elites relative to everyone else.
With hindsight, it was a substantial disadvantage that my background before ever touching trading was in graduate-level bioscience, meaning I actually understood how the pandemic was playing out, that it would likely last much longer than anyone but pretty much the scientists themselves was saying, and that governments were failing to get it under control by reopening too early. Thus, I was broadly correct about what happened in the real world while the market continued to trade a parallel universe consensus that everything was sunshine and rainbows.
I am too young to have my own memories of trading in 1998-2000 was like, and that's the only thing that appears comparable to the post-pandemic market structure. Fundamentals, at least at the macro level, completely stopped mattering, or really, they became inversely correlated as anyone who traded their disbelief on that basis got squeezed. Bears, and with them, all tethering to reality itself, have gotten drowned in liquidity. Leverage via the options market has gone frank parabolic. US equities inflows in the past year have totaled more than the net inflow of everything from the 2009 bottom to before that window combined. Meme stocks have gotten bid up purely because they can be, and then the inflows from index ETFs have sustained those bubbles. NKLA, a company where the CEO is outright indicted for fraud at this point, retains a 55B market cap because it's in the Russel 2000. The percentage increase in NDX bottom to top from 2009 to now is now a larger parabola in percentage terms than the one which led to the 2000 crash. Valuations have run well past 2000 levels and are now at 1929 levels.
We took a 2000-level tech bubble... and ran it up into a 1929-level total market bubble.
Meanwhile, the engine of growth for the past 30 years or so, essentially since the Nikkei topped out in 1989, has been the modernization of China. A country of 1.2B people has gone from being a mostly poverty-stricken agricultural society to the standard of living of Mexico - part of the global middle class but not a "high-income", "developed" country, a bimodal country with cities of developed-world wealth alongside rural areas that are very very poor, and a country whose further progress is heavily restrained by corrupt governance.
...and the China bubble is now popping right now in front of our eyes. That has become the probable catalyst for the end of this "supercycle" - its real estate sector is 30% of its GDP, amounts to a giant piggybank of unfinished, unlivable, ghost city buildings so poorly-constructed that they frequently just topple over. Its high-yield bond market is comprised primarily of debt from that sector. If this was going to stop at Evergrande, the system would absorb it just fine, but it's already not stopping there. China has been in a slow-motion financial crisis for several years now if you've been paying attention to the thinly-covered news about it, and the dam has finally broken. Much of this junk real estate debt is USD-denominated and ultimately, the CCP can't keep the party going any longer if it wants to, so it's now setting precedents whereby foreign bondholders get stiffed while domestic bondholders get the breadcrumbs that can be salvaged.
Defaults on this massive pool of USD-denominated debt is where the system is now finally breaking, since we've managed to defer the pain from the pandemic. Being the global reserve currency means that your money supply is, well, global - however safe US domestic debt may be, there's more USD-denominated bond debt being issued abroad than there is domestically and it is of far more dubious quality.
Google Trends for the keyword "inflation" blew up earlier this year. As per usual, the crowd is wrong, or at best, late to the party. Inflation has been running modestly hot in the US and EU by the standards of post-2008, and people appear to have completely forgotten what "normal" was before then. Over the past 2 years, it hasn't done much more cumulatively than make up for the weakness in first few months of the pandemic. If you've read this far and this paragraph seems wrong to you, then what I'll say to that is that the way most complaints about "inflation" miss the boat is by misunderstanding what the word is actually measuring and either cherrypicking things that have clearly gone up in what is a broad index with many things that change little and some that are quietly going down, or they're looking at "asset price inflation" and missing the point that this is specifically not something that conventional "inflation" measures at all. That low inflation has slowly juiced all asset prices which feels like "inflation" of asset prices is a difference between a technical and colloquial definition.
Thus, I'm calling for a deflationary bust at a time when this appears to be contrarian to, well, most everyone.
I've listed several targets on SPX and NDX taken from weekly and monthly charts using my ACAT indicator. I think the top is in, given the action of the past few weeks, but I've included a bit of wiggle-room for double-top if consolidation drags out a couple more months. I'd like to think I've patiently waited long enough and found a serious change in character in this market, but if I haven't, risk of further parabolic blowoff means macro bears would need to cut the loss quickly to live to try again another day.
The effect of passive flows on this market has been to accelerate the moves, so I've drawn this as a shorter duration bear market than might otherwise be the historical expectation, but if I'm correct, and this is 1929 / 1989 Nikkei, then basically people will get eaten buying the dip several times and this will end only when sentiment that the market is a guaranteed thing so long as you buy-and-hold is no longer church doctrine. Crashes on this scale have typically taken decades to retake the highs.
You should expect regulation to curb excesses and that will cap the insanity - because markets like this get this insane due to clear examples of fraud and abuse. So we'll respond to things like whatever the hell games TSLA has been playing with its accounting after it blows up Enron-style, and it will be the correct thing to do because the fundamental problem with "stonks only go up" is that a lot of why the economy feels perpetually poor to so many ordinary people is that we're allocating capital to Ponzi schemes instead of actual not-fraud, real world mathematically-sound and often not-sexy businesses that can sustainably employ people with steadily rising wages over decades.
הערה
End of last week was monthly options expiration. Market climbed straight-line on Thursday to roughly where I had my daily ACAT mean from September’s downtrend. VIX got absolutely demolished in the process.On Friday it passed that mean for another green day… but the Russel diverged downwards and VIX held against further decline.
It’s possible that this means the downtrend is broken and my timing on this idea ends up being precisely wrong, but this does look a lot like OPEX noise. So I think today (Monday after OPEX) is now disproportionately important. This morning, futures are modestly red, inside of the 15 minute LOXP ACAT distribution with a mean currently at 4420. For me to be correct on my top call, this post-OPEX week basically needs to show that with a bunch of options pressure released, there’s no serious bullish steam to continue.
I don’t think we can do much else than trend down or melt up for one historical last parabolic excess. Sentiment is euphoric as the fundamentals are actively eroding in real time.
הערה
We retested ATH during this VIX expiration day and couldn't break higher repeatedly.Futures now trending down a bit heading into London open.
It's obviously premature to start declaring victory as a bear but this at least looks promising.
הערה
I gave about 1% of extra space on SPX past ATH when I posted this. For the same of argument, we can call it 4590-4600. Heading into the cash session, we're on the verge of stopping out this trade. Short-term trend makes it look nearly a done deal at this point, with the last best chance for that to change being this morning's cash open/session.Yesterday TSLA rallied 12% as Hertz, which was bought for 4.2B a few months ago by 2 private equity funds announced a purchase of 100k TSLA vehicles for 4.2B over the next decade. That 12% rally was a larger change in market cap than *the entire market cap of the rental car industry combined*. It also, of course, flies in the face of the one of the core theses for why TSLA should have an outside valuation by admitting that there are no FSD robotaxis about to change the paradigm of how people use cars.
It's frustrating to be a bear at this stage. This is the logic you're up against - like, it's just blatantly an unsustainable bubble.
At the same time, the sooner you break the habit of thinking markets are rational and value things based on normal/useful/fair conceptualizations of merit, the less you're going to lose by being too early and the more of a warchest you'll have left to execute when the market finally agrees that you've been correct all-along.
הערה
We may seriously have come right up to the line on the stop for my trade here and potentially reversed. VIX was up despite rising SPX and it sort of ran into a brick wall in the cash session. NDX made a near precise double top.I drew this chart on SPX which went a bit higher than other /ES or SPY, so pedantically one could argue this trade just died. Personally, I normally chart and trade off /ES but simply stuck this idea on the main symbol, and NDX isn't borderline, so from where I'm sitting this idea is still going.
Staring at ACAT on middling timeframes, basically if we're still trending up, we'd expect futures to bounce from right about here tonight at ~4560s to continue uptrend. I'm always nervous about overstating small pullbacks like this which "look correct" for my idea because it's so easy for them to be low timeframe noise, but, well, at least for one last night after my trade barely stayed in, it does "look correct".
הערה
tradingview.com/chart/DKdIbtRZ/HELLO
$7-8B of SPY traded in afterhours dark pool prints in series of round 1M share block.
This is almost 2% of SPY. There are only a half dozen institutions holding that much in the first place. At this size, it's basically the biggest banks and the biggest electronic trading/MM firms that can potentially be on either side of these trades. Nobody else is large enough.
It's hard to know from the outside what it actually means - but it's highly unusual and it's a genuinely huge amount that changed hands today.
Obviously, I speculate that it's indicative of extreme market behavior and in line with my high timeframe top call. Regardless of what I think, I'm surprised that I haven't seen much chatter about this yet in places like Fintwit.
הערה
Price is just barely taking out my stop at this point, but so far in such a weak way that I’m willing to keep the trade on with the stop moved 20 points further to the 4610-4620 range (on /ES)This is usually a bad idea in trading, but there’s too much reason to think that it’s worth taking modestly more risk here. I will put my foot down though and only do this once. We go up and take it, and I close the trade idea as stopped out.
הערה
It's looking a lot like I had the unfortunate timing of being just 1 month and 1 final rally too early.Bears should be religious about risk management but we sit today on the threshold of rolling liquidations and a breakdown that can make up for all the frustration of the past year and a half. What I'm personally looking for and placing trades on are things that will tend to trend with less chop along the way, because that's where the best R:R and winrate can be found.
We're still early enough in the trend that I think there's a lot of opportunity to short equities, but late enough that I'd prefer the futures / micro futures over options strategies.
One of my key lessons learned from the COVID crash was that if you pay attention to a wide variety of asset classes, you can catch early trends with low choppiness and get in before they become the talk of FinTwit. Back then, each month it was something different that moved - forex, ag futures, energy futures each got turns.
Treasury futures moved faster and straighter than equities in Feb 2020, and made their move in 2 weeks while equities took 4. I'm paying close attention there. A corollary is that junk bond ETFs fell sharply, and such a move is not currently priced into their options chains.
One other big short opportunity comes to mind: TSLA. The white whale that has eaten so many shorts in the past few years. The fact of the matter is that it can't hide from a crash, and the tide going out has a not-unsubstantial chance at revealing accounting fraud/abuse that tanks it Wirecard-style. I like deep OTM put spreads there with 3-6 months to be correct. I think you want to play for double digit R:R on that trade with the understanding that this scenario is underpriced relative to EV but still will fail to pay off most of the time.
הערה
I think in light of today's bloodbath, it's worth giving this an update to say that my comment at the beginning of December has been mostly correct. My blurb about this being the time to try shorting TSLA with a 3-6 mo timeframe is still in the air. We haven't gotten one clear moment where the market has all "looked down" at the same time, but we've clearly installed a downtrend up through the D timeframe with mean reversion to long-term trend implied on the W.SPX had one last rally back to highs over Xmas but the rest of the market hit its absolute peak in November.
There was a moment back in Nov-Dec where the VIX futures curve went into full backwardation for a day - something that had happened only 4 times since the post-2001 recovery, and the market has been mostly correct in those instances to predict that the market was on the verge of a lot more pain. It was around that time that the Fed finally threw in the towel on trying to wait out transitory inflation and started talking very hawkish.
World events have happened in the intervening months, but I'd argue that we were priced for absolute perfection that was pretty much impossible anyway, on a backdrop of the Chinese real estate bubble finally popping and the window closing on either loose major central bank policy or major new fiscal spending. Where was further liquidity to run up assets supposed to be coming from? It already had taken an annual flow into US equities larger than the prior entire net flow since 2009 to grind SPX up through most of 2021.
...so it was always going to be something, somewhere in the world that wasn't going to play out as perfectly as had been priced in.
That we got a war of conquest in Europe with related sanctions alongside further major COVID waves... well, I guess I would call those only loosely causal. The main casual factor was simply that prices got too disconnected from reality.
With the exceptions of exactly Black Monday and the 1mo 2021 COVID crash, and on the other end at 3 years for 1921, every bear market in US equities history has taken ~1-2 years to fall from peak to trough. One could make a rational argument that markets might make these overall moves faster on average now in the digital era than historically, but we have a low sample size for that.
I would say my main question right now is "which W trend does NQ stop at?" ~10 k is the mean for the uptrend that we bounced in 2020 and represents a shorter and faster expansion since 2017. ~6500 is the predicted mean for entire uptrend since 2009 and at -60% would be fairly consistent with other US equities bubble pops. Both would be good inflection points for at least a bear market rally.
When you start to game out what would have to happen to break down ~6500, well, we should be able to point to something concrete that's starting to break in the financial system by then. It's certainly on the table. We hit 1929 / Nikkei 1989 absurdity in the post-pandemic parabola.
Bubble popping patterns are unusually harsh and reliable in overall shape - because the end stage of bubbles is the point when new retail who've never seriously followed markets get in last, such that when things pop, it's their first rodeo and they collectively react pretty much the same way previously generations of humans reacted to the same scenario. Doesn't mean you get to be lazy when you trade them, but it does mean that if you're disciplined enough about risk management to survive the elevated short-run volatility, that there is a buffet of alpha to eat from.
Anecdotally, the non-trader mostly-passive retail I know in my life are still talking about buying dips and telling each other that QQQ is "on sale". Retail has been buying the dips so far in a big way. Sentiment has a long way to go.
My volatility-based indicators are available for sale at SharkCharts.live
Feel free to reach out to me with any questions; more information is available on the SharkCharts website and the SharkCharts discord discord.gg/YVpTeSK
Feel free to reach out to me with any questions; more information is available on the SharkCharts website and the SharkCharts discord discord.gg/YVpTeSK
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