BY SVEN HENRICH
As $SPX is trying for a new high here and $ES futures are retesting the highs from November 9th I thought I may chime in with a few thoughts here. Firstly, in general the bull price target outlined in October has barely been penetrated, but it may well be in the days ahead as again optimism on all fronts is permeating the landscape, vaccine optimism stimulus optimism, more central bank intervention optimism and of course December seasonality optimism.
After all only the years 2000 and 2018 have seen sizable downside in December and generally December is up.
But above all: Greed is back. On every front at a time of the highest market valuations in history with not a sign of fear or concern in sight and to my eye this continues to breed vast danger for markets.
But eyes wide open. A bubble bursting will only be known in hindsight not in advance, but we can certainly assess risk versus reward.
So let me highlight some issues I see.
Firstly as aforementioned greed, it is here:
I’m not selling until it hits 105. pic.twitter.com/c3QTlBZCmw
— Sven Henrich (@NorthmanTrader) November 25, 2020
All joking aside the greed indicator is back to similar levels as it was at the beginning of the year:
This coinciding at a time when global stocks are apparently pursuing a similar vertical path as they did following the tax cuts in 2017 into the 2018 correction that ensued:
Except this time around greed, as additionally measured in positioning and sentiment, is reaching a uniformity of positioning and consensus either at rarely or at never before seen levels.
Everything is vertical and one way. Examples:
Call options volume:
Everything is a single crowded trade in one direction. The US dollar shorts:
Accompanied by record low levels in protection seeking and extreme bullish positioning of asset managers:
We have nothing to fear but the lack of fear.
November closes with the lowest monthly close on the options equity put/call ratio and the most bullish monthly long positioning on the asset manager index. pic.twitter.com/unn1FTyP3g
— Sven Henrich (@NorthmanTrader) November 30, 2020
And then of course the vertical action in some individual stocks, namely the $TSLA saga:
— Sven Henrich (@NorthmanTrader) November 30, 2020
Forced indexing by Dec 21st over $500B added in one swath, the stock has jumped 10 fold in 2020. A religion on its own. None of this has anything to do with fundamentals. A market trading at its highest price to sales ratio ever and of course the widest disconnect from the economy ever.
But keep buying stocks cause central banks keep printing is the Wall Street mantra:
And debt doesn’t matter:
So it might be fairly stated a lot of what we are currently seeing is entirely incompatible with history. The hype is tremendous as literally everybody is long, hyping for ever higher prices, protection doesn’t exist and charts are tremendously extended.
I’ve cited market cap to GDP before as key indicator and what we’re witnessing is an asset appreciation machine never seen or sustained before:
— Sven Henrich (@NorthmanTrader) November 28, 2020
And it’s not only the US but it is a global phenomenon:
Totally crazy! Global stock mktcap on course to historic $100tn mark. Gained another $2.1tn this week as string of pos vaccine news continues to overwhelm the here-and-now or rising virus cases & suppressed econ activity. All stocks now worth $98.7tn, equal to 112% of global GDP. pic.twitter.com/mIwwFf6hIS
— Holger Zschaepitz (@Schuldensuehner) November 29, 2020
Value for nothing. Valuations not backed by an economic foundation. And we know the answer why, ungodly sums of liquidity brought about by the most extreme expansion in money supply and money printing and balance sheet expansion in history:
And all this has brought about not only unseen valuations but also chart structures we haven’t seen before, namely all these open gaps:
70%-80% of all open gaps fill, that’s just simple history. Now it’s either different this time or it’s not.
Take all the points above and recognize: We simply have no history for this. None. The apologists will keep telling you it’s all consequence free. The interventions, the valuations, the debt expansions. All of it. And they say it all justifies the valuation expansions. And implicitly they presume all this wealth going to the wealthiest of society alone is also consequence free:
I happen to disagree on all fronts, but my eyes are also wide open and so should everybody’s eyes be for insane bubbles can get even more insane and popped bubbles will only be recognized after the fact and one can be right on the basic premise but get killed in fading it as the bubble explodes higher before it bursts.
The craziest and dumbest bubble I know of (besides 1929) was the Nasdaq bubble of 2000:
I want to highlight the chart as a warning and as a potential guide.
Note the relentless ramp in November of 1999 following some corrective action in September and October. Every 5 EMA tag was bought. There was a 2 day dip into the end of November. All sound familiar so far?
Then anther brutal ramp in December which is the scenario that now everybody presumes to unfold into year end. Why? Year end seasonality and nothing but puts around us. The Fed put, the vaccine put, the stimulus put, the you name it put.
Then the chart shows a sizable decline in early January. Why? Tax loss selling. When people have a lot of gains in stocks they typically don’t want to sell until the next tax year. And that’s what happened there and the chart saw its 50MA reconnect and that produced another massive rally into the March top.
So be clear, that’s a script we could be facing here despite it all being nonsensical for the year 2000 then saw the biggest disconnect between stocks and and the economy then. 150% and it all fell apart:
My warning here then: One could’ve been totally right in December of 1999, but being right on the macro doesn’t mean the timing is correct, so I want to highlight all this from a risk perspective.
One could also note the 2016 script following the election of Trump, that too saw a relentless ramp in November and then more follow through in December:
But then note the tag of the 200MA during the election.
This time here we’re not anywhere near the 200MA:
And of course we didn’t have any of the open gap action that we have now, nor the valuations we are seeing now. But we got greed, lots of it, and massive complacency.
So I maintain given how signals, chart extensions, gaps and pushes above the monthly Bollinger bands are aligning ( never mind valuations, complacency etc.) strength offers an opportunity to sell, but the momentum must be respected. Frankly it all looks to me that central banks are losing control over the bubble they have created and they are afraid of popping it for fear of the consequences. And I can understand why. The economy remains fragile and the population, largely not showered by free money stock market gains, is struggling with real life:
That $120B a month in bond buying by the Fed is really helping. t.co/VWePQWFKq4
— Sven Henrich (@NorthmanTrader) December 1, 2020
The big market bubbles of the past had several common characteristics and I submit we are seeing all of them now: A massive valuation disconnect between asset prices and the economy, relentless asset price appreciation, extreme high forward multiples and price to sales ratios, a fervent belief that prices will go ever higher, incessant FOMO chasing and greed, little desire for downside protection, and heavy retail participation willing to pay any price or valuation in the belief prices/valuations are either justified or don’t matter irrespective of fundamentals. And greed and confirmation of successful returns breeds a sense of invincibility.
I know, everybody was a genius during the 2000 bubble. Until they weren’t.
Momentum must be respected, but losing sight of the bigger context can be highly dangerous for bubbles can pop at any time for any reason, the trigger only to be attached after the fact. And this asset valuation bubble, driven by unprecedented liquidity injections and riding a wave of multiple expansion pure following 2 years of either zero earnings growth (2019) and negative earnings growth (2020) is the biggest bubble we have seen yet. Perhaps none of this matter this December, but know every new high pushes the disconnect equation to ever higher and unsustainable extremes. And for that reason I, as perhaps one of the only voices out there, suggest caution.
Greed comes before the fall.