General Ramblings About Markets And Another Possible Brick In The Wall Of A Stock Market Topping Process
The babbling financial commenteurs continue to remark that the individual is out of the market and that is bullish for stocks, bonds, commodities or whatnot. Well, that is wrong on so many counts. As we have noted numerous times, the individual has been out of this market for a decade. And that this environment is driven completely by finance professionals. ie, the Wall Street freak show. That the individual is out of this market is hardly constructive as is being portrayed by many on Wall Street. Those espousing this preposterous position rely too much on sentiment without understanding what sentiment really is or what fundamentals drive sentiment. Stock prices are not driven by sentiment but rather by demand. The dynamic of paying up for a price of a stock is also not driven by sentiment but by demand. Demand drives sentiment not the other way around. Wall Street was able to shovel all of that shit down investor's throats in the internet bubble scam because there was demand. Wall Street was able to shovel all of the toxic mortgages down investor's throats because there was demand. Wall Street was able to bamboozle investors into investing in commodities because there was demand. Wall Street has been able to levitate investment prices well above any type of sustainable valuation metric because of demand. All of these were driven by demand fueled by an ever increasing financial bubble not because of sentiment. Does anyone in finance or economics actually understand economics or for that matter simple demand dynamics of any type of market? This is a universally misunderstood dynamic. Remember, one of our major themes is that we are in the largest financial bubble the world has ever seen and it has been building for decades. That means underlying demand for financial instruments has been building for decades. That is why stock prices have remained overvalued for decades. Demand driven by a massive financial bubble. Any other explanation you read elsewhere - I don't care how capable the person is who is writing it or how many Nobel Prizes they own - is absolutely and completely wrong.
Remember when we wrote than sentiment was going to fail as an investment tool years before the financial markets collapsed? Guess what? It completely failed when all financial and commodity markets collapsed in 2008 and early 2009. It failed because there was a lack of demand. The lack of demand we would easily be able to anticipate if we understood fundamentals. We do. We did. Sentiment can become very negative yet prices keep falling due to a lack of demand. Just as sentiment can become bullish and stay bullish while prices shoot into the stratosphere. That is exactly what happened in 2008 and early 2009 when markets collapsed. No matter how bad sentiment got the market kept going lower because there was no demand. In other words, negative sentiment simply became more negative sentiment and fools who were rushing in were buried over and over again. We wrote as the market kept going down and people kept calling a bottom that they were all wrong. And indeed they were. There never would have been any demand until we reached some type of value point were the Federal Reserve not to open up the spigots of free money to speculators in early 2009. In other words, without the Federal Reserve opening the spigots to speculators, the market would have kept falling until stock prices reflected fundamentals. That would have been 200-450 on the S&P, which remains our downside target. Is it bullish that the individual is out of this market when considering demand? Hardly. Get your facts straight, understand monetary policy and economics and you'll never rely on this or the other types of endless rubbish perpetuated by Wall Street, financial commenteurs or market technicians.
It has probably been almost five years since we have talked about tick data. For the uninitiated, tick is the minimum upward or downward movement of a stock. Tick data simply measures how many stocks are hitting the bid in the market place. If the vast majority of stocks are closing on their up tick, then we know there are a lot of buyers be that program trading, speculators, hedge funds, mutual funds or whatnot. It's really not complicated at all. Just remember if stocks go up, the tick data rises. If stocks go down, the tick data falls. It's not really rocket science.
Mark Cook, a professional trader who won some national trading competitions a few decades ago made tick data famous with some of his algorithms. But back in 2008 before financial markets crashed, we uniquely wrote "We are witnessing the true potential for some type of disaster....We have not seen this type of environment since the Great Depression." Around that time Mark Cook was calling for a new bull market. I think we see what tick data is capable of if not interpreted properly. If Cook held through the collapse, he probably is foraging for grubs in the city sewer system like Wall Street would be without taxpayer bailouts. Qualitative interpretations are most often more important than quantitative interpretations. In other words, there is little incontrovertible truth, even in science, and therefore the world truly is a very subjective place most often very open to the correct interpretation - something not taken into consideration by Wall Street's erroneous new quantitative finance savants. A perfect example is tick data. If Mark Cook and I were looking at the same data back in 2008 and he was calling a new bull market and I was calling for a possible collapse, then there was something wrong with someone's models or the qualitative interpretation of them or both. We see this dynamic at work again today with many financial savants claiming this crisis has passed and that stocks represent a great buy. Two massive lies. Why would we expect an accurate qualitative interpretation from the same yammering clowns who never saw the freight train coming down the track in the first place?
This brings up a timely point. The environment today is eerily similar to that of times past including 1987 and then in 2008 before financial markets collapsed. In 2007 and 2008 nearly everyone on Wall Street, and for that matter in society, thought the Federal Reserve was going to save the stock market, Wall Street, the economy, every other nation's economy, save Jesus Christ from persecution and save the Dalai Lama from the Chinese communists. My point is there is an incredible amount of lax behavior and ramped up risk-taking in all financial markets around the globe. All of this done by people proven to be completely financially illiterate and incompetent. The status quo and many bears now believe this perception of Federal Reserve free money will keep any future crises from developing or impacting financial markets.
In this environment of incredibly low intraday volatility and very weak volume, I would say we can probably assume most of today's equity market buyers are very short term or very uncommitted to long term holdings. In other words, gamblers or speculators of some sort. Most likely much of this dynamic driven by the rise of the machines as in the Terminator movie. ie Computer trading. What a surprise.
Mark Cook, a professional trader who won some national trading competitions a few decades ago made tick data famous with some of his algorithms. But back in 2008 before financial markets crashed, we uniquely wrote "We are witnessing the true potential for some type of disaster....We have not seen this type of environment since the Great Depression." Around that time Mark Cook was calling for a new bull market. I think we see what tick data is capable of if not interpreted properly. If Cook held through the collapse, he probably is foraging for grubs in the city sewer system like Wall Street would be without taxpayer bailouts. Qualitative interpretations are most often more important than quantitative interpretations. In other words, there is little incontrovertible truth, even in science, and therefore the world truly is a very subjective place most often very open to the correct interpretation - something not taken into consideration by Wall Street's erroneous new quantitative finance savants. A perfect example is tick data. If Mark Cook and I were looking at the same data back in 2008 and he was calling a new bull market and I was calling for a possible collapse, then there was something wrong with someone's models or the qualitative interpretation of them or both. We see this dynamic at work again today with many financial savants claiming this crisis has passed and that stocks represent a great buy. Two massive lies. Why would we expect an accurate qualitative interpretation from the same yammering clowns who never saw the freight train coming down the track in the first place?
This brings up a timely point. The environment today is eerily similar to that of times past including 1987 and then in 2008 before financial markets collapsed. In 2007 and 2008 nearly everyone on Wall Street, and for that matter in society, thought the Federal Reserve was going to save the stock market, Wall Street, the economy, every other nation's economy, save Jesus Christ from persecution and save the Dalai Lama from the Chinese communists. My point is there is an incredible amount of lax behavior and ramped up risk-taking in all financial markets around the globe. All of this done by people proven to be completely financially illiterate and incompetent. The status quo and many bears now believe this perception of Federal Reserve free money will keep any future crises from developing or impacting financial markets.
We said the Fed couldn't save the economy before the collapse and I'll say it again. The Federal Reserve is not going to save the world from the next crisis. If life were so simple that a bureaucracy could impose it's will on nature or the economy or all of humanity, we could all just sit back in front of our favorite Orwellian television show and enjoy the leisurely life courtesy of the Federal Reserve. Why worry? Why work? Why not repent of our sins and turn our lives over to the Federal Reserve, our savior? Just watch our money multiply in financial markets while we get something for nothing in a new economic paradigm which includes no useful concept of work. Well, what most people still don't seem to understand is this has been our economic model for nearly two decades. If the world were so simple the Roman Empire would not have collapsed, the Soviet Union would still exist, we would have been able to avert the Great Depression and Nazi Germany never would have come to power in response to economic and banking calamities to name a few. There are many solutions to this crisis but none of them involve bailing out Wall Street, pushing money around for a living or listening to those who push money around for a living.
That no one thinks the market can collapse again or even retest old lows or make new lows shows a vast and substantial misunderstanding of the countless dynamics which drive financial markets and the scale of this crisis. It's so boringly rote and ignorant to claim the Federal Reserve is going to crank up the printing presses and that will save financial markets. First off, that's not how the Federal Reserve currently works, that's not how financial markets work and even were this the case, it's highly unlikely to happen since it has not happened yet. Such a move would damage the very markets and firms the Federal Reserve is trying to save. It may help you are me but it would not help the people benefiting from the status quo. And those are the people the Federal Reserve is concerned with saving.
That no one thinks the market can collapse again or even retest old lows or make new lows shows a vast and substantial misunderstanding of the countless dynamics which drive financial markets and the scale of this crisis. It's so boringly rote and ignorant to claim the Federal Reserve is going to crank up the printing presses and that will save financial markets. First off, that's not how the Federal Reserve currently works, that's not how financial markets work and even were this the case, it's highly unlikely to happen since it has not happened yet. Such a move would damage the very markets and firms the Federal Reserve is trying to save. It may help you are me but it would not help the people benefiting from the status quo. And those are the people the Federal Reserve is concerned with saving.
We have already shown the volume cycle count algorithm being very overbought some weeks ago. This is another data point confirming this most recent rally off of the mild correction has resulted in an extreme amount of enthusiasm. I suspect we will look back and see some of that enthusiasm is hot money being repatriated into U.S. stocks as some in the financial community finally realize what we have been writing about for years. That is, emerging markets are in for what will likely be collapse after collapse after collapse.
Below is an algorithm calculated using tick data laid on top of the S&P for viewing purposes. We have now reached the second highest algorithm reading in the last twenty years. The highest reading is also shown on the chart right before the market collapse in 2008. Is this bad news? Well, that depends. We aren't making substantial new highs. The economy is not recovering. China is raising its banking reserve requirements, the economy is not throwing off any excess cash flow to fund more Wall Street Ponzi schemes, just about every measure of Wall Street bullish activity (not sentiment but actual activity) is off the charts, all of Wall Street is levered to the hilt again and the dollar is once again very strong. If you understand why the dollar is strong, you should be worried for that reason alone. And it isn't just because the yuan, ruble and most other currencies are terrible comparative to the dollar, although they most certainly are. It's because money is being sucked out of the global economy at an alarming rate. A very ominous eventuality for financial markets and global trade. Well, and Wall Street idiots. Oh, and all of this is happening without making a substantial new stock market high. I don't count 5 or 10 or even 50 S&P points higher than any prior high as anything other than a statistically insignificant event with so many incredible risks in the global economy.
On the below graphic the tick algorithm is in blue. In red, I have included upper and lower volatility bands which highlight statistical out-of-bound occurrences of this algorithm's movement. In other words, excessive readings to the upside and downside lie outside of the volatility bands. I personally wouldn't want to be jumping all over this market or any financial market for that matter. There are countless dynamics which could lead to a substantial correction, a new protracted down leg lasting months or even years or even a market collapse. While I don't see any of those as imminent (yet), the enthusiasm for financial stupidity remains at multi-decade highs. And I'll say it again. This market is more expensive than was the market in 1929, a statement we have made countless times over the last five years. Even though the market is now substantially lower than its peak, valuations are still well beyond 1929 and in fact are insane. Forget about price to earnings ratios. That is for yammering idiots like Jim Cramer. Remember, the price to earnings ratio went from 12 or whatever it was before the 2008 crash to over 100 after the crash. Price to earnings ratios are to be only used for toilet paper.
So let's look at another confirming data point of the tick algorithm. What I believe is possibly a rampant blow off in risky behavior contributing to the possibility of a building top. That is the Nasdaq Transportation Index or NTI. The NTI is far more representative of three dynamics versus the Dow Transports. One, it is much more representative of commerce specifically in the United States. And two, it is substantially more speculative being the companies are much smaller and riskier companies tied closely to the credit cycle and to economic activity. And three, unlike the Dow Transports, this index is actually representative of companies which are actually tied to industrial output.
Below is an algorithm calculated using tick data laid on top of the S&P for viewing purposes. We have now reached the second highest algorithm reading in the last twenty years. The highest reading is also shown on the chart right before the market collapse in 2008. Is this bad news? Well, that depends. We aren't making substantial new highs. The economy is not recovering. China is raising its banking reserve requirements, the economy is not throwing off any excess cash flow to fund more Wall Street Ponzi schemes, just about every measure of Wall Street bullish activity (not sentiment but actual activity) is off the charts, all of Wall Street is levered to the hilt again and the dollar is once again very strong. If you understand why the dollar is strong, you should be worried for that reason alone. And it isn't just because the yuan, ruble and most other currencies are terrible comparative to the dollar, although they most certainly are. It's because money is being sucked out of the global economy at an alarming rate. A very ominous eventuality for financial markets and global trade. Well, and Wall Street idiots. Oh, and all of this is happening without making a substantial new stock market high. I don't count 5 or 10 or even 50 S&P points higher than any prior high as anything other than a statistically insignificant event with so many incredible risks in the global economy.
On the below graphic the tick algorithm is in blue. In red, I have included upper and lower volatility bands which highlight statistical out-of-bound occurrences of this algorithm's movement. In other words, excessive readings to the upside and downside lie outside of the volatility bands. I personally wouldn't want to be jumping all over this market or any financial market for that matter. There are countless dynamics which could lead to a substantial correction, a new protracted down leg lasting months or even years or even a market collapse. While I don't see any of those as imminent (yet), the enthusiasm for financial stupidity remains at multi-decade highs. And I'll say it again. This market is more expensive than was the market in 1929, a statement we have made countless times over the last five years. Even though the market is now substantially lower than its peak, valuations are still well beyond 1929 and in fact are insane. Forget about price to earnings ratios. That is for yammering idiots like Jim Cramer. Remember, the price to earnings ratio went from 12 or whatever it was before the 2008 crash to over 100 after the crash. Price to earnings ratios are to be only used for toilet paper.
So let's look at another confirming data point of the tick algorithm. What I believe is possibly a rampant blow off in risky behavior contributing to the possibility of a building top. That is the Nasdaq Transportation Index or NTI. The NTI is far more representative of three dynamics versus the Dow Transports. One, it is much more representative of commerce specifically in the United States. And two, it is substantially more speculative being the companies are much smaller and riskier companies tied closely to the credit cycle and to economic activity. And three, unlike the Dow Transports, this index is actually representative of companies which are actually tied to industrial output.
Before this most recent rally which started a month or so ago, the NTI had not made any ground higher for ten months. That's right. It was at April of 2009 levels. So it had effectively seen less than a two month rally off of the March 2009 lows. This type of very, very, very low volatility moonshot higher we see in the index is indicative of massive speculation being all consumed by buyers. This dynamic has been now going on for well over a month in this and other speculative indices. That includes the general small cap indices. This is not a reflection of an earnings-driven recovery or any other fundamentals-driven dynamic any more than credit default swaps or any other Wall Street shenanigans reflect anything other than casino behavior. This rally is producing a 300% per annum return if it continues at that pace. That's preposterous. And it won't continue at this pace for a multitude of fundamental reasons. This is all a game involving the transfer of wealth from society to a handful of scamsters.
You might as well enjoy the scam because you are the mark.
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