MAC10
- 12 hours ago
Crash Risk. HIGH.
For the past three days the market rallied in the morning and imploded in the afternoon, which is classic bear market action. This current set-up has the potential to become the fastest crash in history from an all time high, because both cyclicals AND Tech stocks are currently overbought at the exact same time. As I showed on Twitter, the Nasdaq (McClellan) oscillator is the most overbought it has been at an all time high since July 2011 which directly preceded the August debt ceiling crash. In addition, the recent widely observed Russell 2000 outperformance is similar in magnitude to both March 2001 and September 2008. Both signals preceded recession and market crash. However, the Russell also outperformed back in November 2016 and 2020 immediately after the last two presidential elections. The difference is that in those latter two instances, Tech was oversold whereas now it is extreme overbought. More recently the Russell small caps also melted up into the November 2021 high when everyone said that small caps always outperform during rate hikes. So this time they flipped the script and are now saying that small caps will outperform during rate cuts. What we see is that small caps did not fare well during rate hikes and only a fool would believe they will outperform during rate cuts. However, back in Y2K the small caps did outperform on a relative basis and still the S&P 500 lost -50%.
Under the surface of the major indices the crash risk is due to the ascendant Trump narrative imploding the incumbent AI super bubble narrative. The AI trade is a play on secular Tech outperformance in a deflationary economy. The Trump election narrative is a play on cyclical outperformance in a reflationary economy. Every other day one sector leads while the other implodes. However, the S&P 500 is going down every day now regardless. In addition, the Yen is finally starting to rally off of massively oversold lows while carry traders are record leaning short. Which means that overnight S&P futures risk is extremely high.
Then there is the isssue of seasonality and liquidity. This is the lowest liquidity period of the entire year, because it combines summer holiday volumes with the stock buyback blackout. Next week will begin the busiest period of earnings season which continues into early August. Here we see that during the last earnings season, the biggest market drop took place during the Tech earnings period which was bracketed by Netflix and Apple. And Netflix just reported last night. Also note the collapse in new NDX highs (lower pane) which is reminiscent of 2021.
Which brings up the whole issue of Trump's stance on Taiwan which he does not deem to be of strategic important to the U.S. Those comments this past week imploded the leading global semiconductor supplier Taiwan Semiconductor and caused reverberations across the entire sector. It's not just Trump, the Biden administration is piling on China as well, threatening to levy harsh export restrictions on the entire semiconductor sector. Both candidates are competing to see who can implode China first and in the process they are taking down the AI super bubble,
Lastly, there is the issue of positioning. The recent failed assasssination of Trump caused hedge fund managers to go ALL IN stocks on the belief that Trump's re-election is now a lock. They appear to be front-running the perceived election rally that occurred in 2017. So entering this low liquidity period they've covered their short positions. One chart I posted on Twitter shows that the ISEE call/put index has never been higher than it is right now.
Bullish? You betcha.
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