How to assess risk in a risk free world? Stocks are relentlessly bid up like taped bananas on a wall with charts taking on banana like shapes: Inverted, pointing relentlessly north. “Melt-up time” is the theme and sentiment de jour.
Trapped central banks keep carpet bombing markets with liquidity and the ever present trade carrot is dangled on a daily basis especially as soon as markets drop.
We saw some of this this week following an 850 point drop in the $DJIA which immediately prompted renewed trade optimism headlines.
Global risk factors such as mounting corporate debt are ignored as are now steepening yield curves coming from inversion, non confirmation signals such as weakening transports, negative divergences, vast technical extensions, and lack of evidence of accelerating growth.
None have mattered so far as the simple matter of fact is this:
To sum it all up: The world is trapped because economies and growth remain 100% dependent on central banks growing their balance sheets.
2018 was the only year of net reduction in liquidity and it was a disaster.
Hence the renewed panic print attack. pic.twitter.com/IP6pmFpgng
— Sven Henrich (@NorthmanTrader) December 8, 2019
But there is risk of quantitative failure and the latest rounds of stimulus not producing much other than temporary asset price inflation.
Few appear to be selling right now save for the occasional down day here and there, the drive to buy each tiny dip and chase ever higher prices remain the predominant aspect of the market structure and many are wanting to hold off until January to lock in any gains cognizant of the yearly tax window.
Still, last week was a warning. The bid can disappear suddenly and it requires massive amounts of liquidity and jawboning to keep the bid going. That in itself should give pause. This circus like atmosphere is what it takes.
Be clear: Melt-ups are dangerous, they defy reason, sense and prudence. Markets historically don’t top during December and with global liquidity continuing to flush through the system the run may well continue into 2020 especially if a trade deal actually does get concluded.
Tops are processes and so is selling and selling is hard, very hard.
So why bother making a sell case? Because nobody is and in my opinion a balancing view is needed as risks, while currently ignored as they were in 2007, are building and these risks can be found in the charts.
For further background and a run through what the charts are saying please see this week’s video below (and yes I need to get a better mic and will for 2020, so hang in there):