Controlled Impact Demonstration, Nasa, 1988
In this issue:
Potential (very) short term bounce due for equities and FX v DXY
Some (too much?) bear porn
Flaunting my bias
Seasonals reminder
This week’s Reddit question:
“Why is the stock market crashing?”
~ a 2023 Redditor ~
It’s not crashing
This question pops up whenever there is some weakness after several months of strength. It’s another way of saying: ‘I’ve only traded for a few months’.
When someone who has been trading for a decade or so asks this question, then we’re looking for a serious answer.
But…..they wouldn’t ask that question.
When the market is crashing, it’s obvious to the world. At that point, who cares why it is crashing? Hint: in the end, it’s always liquidity….and the crash starts when there’s a bunch of people arguing that ‘liquidity doesn’t matter.’
The questions that a trader should be asking then are, ‘When do I close out my short?’ and, ‘When do I buy this?’
What is the market doing?
As suggested in my last post here, seasonals were set to turn as we headed into August and there were some nice short setups. Added to this the fact that equity markets had been heading higher for months and there was an increasingly bullish narrative, and we’ve got a nice reason for profit taking and an opportunity for traders to get short.
So far, the market is reacting to that dynamic, and it’s nothing to write home about.
Is the weakness over?
Russell 2k - poetically did turn at the 2000 mark. I almost wrote, ‘sometimes trades are easy.’ But anyone reading this blog will have noticed I’ve been quietly doing nothing for months until the stars aligned and I got to pull the trigger. Months of waiting for a split-second-pay-off that may not work out. Trades are never easy.
This Russell 2k trade has now reached an obvious place for a bounce. Several MAs coming in, an area of possible short-term support and yesterday was a relatively heavy down day. I’ll be closing half of this trade out today.
I’m then looking for a light bounce to sell into again. Seasonals still favour another run lower and there’s a chance that this weakness is just getting started.
Other areas of the market support the plan for lightening up on short-term bearish trades. The USD has been a beneficiary of equity weakness and has lost some momentum.
DXY daily - looking sluggish around the 2022 close, which brought a heavy reaction on the last visit.
Many FX pairs are hitting into potential support - AUDUSD daily here.
Here’s my biased view
However, let’s get bearish goggles on for a second (googles?).
And this is a biased point of view—humans aren’t capable of anything else. The sad thing is, even if we know the bias, we can’t do anything about it!
The most obvious one affecting me just now is due to the market turning just where I thought it would. This is giving me too much confidence, a bit of arrogance, and it’s making me more bearish. Look at me—in my last post, I was tentatively suggesting that seasonals were lining up a little short. In this one, now that the market has ‘turned’ (has it really?), I’m going to suggest a ‘proper’ bear market is forming!
Anyway, here’s one for the bears:
The S&P on a monthly chart. Cast your eyes back to the 2008-09 and 2000-03 bear markets. Now look at the 2020 bear market, and this one. Bear markets by definition, but technically they haven’t left a scratch.
There just hasn’t been enough pain.
This lack of a ‘true bear’ is even more evident elsewhere.
European equities. The pain of the major bears of the early 21st century have yet to be felt.
Same for the UK FTSE
My repeated message since 2020 has been that there will not be a new secular bull market until the kings and queens of the last secular bull are dethroned. There are some very interesting patterns lining up…..
Apple monthly - pop and drop?
Tesla monthly - failing at a H&S pattern
Google monthly - can’t get above the 2022 breakdown
Microsoft monthly- double top?
The list goes on. When the top 9 stocks of the S&P make up 30% of the market cap and those same companies make up around 45% (!) of the NASDAQ, it doesn’t matter what else is happening. If they can’t get it up, what chance does anything else have?!
What’s the trade?
Now, these imbalances can go on for a long time (they already have), so this is not a timing tool. I will continue to play seasonals and patience as my edge. But until these megacaps are brought back down to earth, I’ll keep in mind that any rallies are built on sand.
If August has been weak, then September should be even weaker, so I like fading any short-term end-of-month bounces in equities and FX v USD.
Seasonals reminder. September is both a time to look for shorts (early on) and start buying extreme weakness later in the month.
Aside from seasonals and the other reasons noted above that setup the current equity weakness, bond market moves are the catalyst. They are very much in a rock and a hard place. Yields keep going up and inflation is going to become a real problem. Yields reverse and come down, and it shows that economic strength is declining.
By the time Central Banks stop their hiking cycles, they will have already broken something. That time is marching ever closer. To save this post from getting as long in the tooth as this secular bull is, let’s talk yields in the Risk Index on Sunday.
So, why is the stock market crashing?
It ain’t, but you never know; things could be setting up for some proper pain in 2024.
Have a different opinion? Want to talk through a point some more? Pop in a comment below and let’s chat.
Be patient and trade well.