The End Has No End

Romain/ août 27, 2020/ Finance/ 0 comments

“It’s about a society on its way down. And as it falls, it keeps telling itself: ‘So far so good… So far so good… So far so good.’ It’s not how you fall that matters. It’s how you land.”

La Haine

Equity markets have been overvalued since 2015, but the “whatever it takes” narrative has grown and fueled one of the most spectacular manias the world has ever seen. One of the reasons why The Swarm Blog was launched was to document the bubble and to warn people about how all of this is likely to end.

Bears Capitulation

It seems that we have just entered the final stage of the bubble as bears are capitulating. Indeed, the level of short interest has fallen to a record low level. Meanwhile, institutional investors are reducing their cash holdings in order to minimize the relative risk to indices like S&P 500 or Nasdaq.

From a long-term perspective, the market has just reached the parabolic phase, meaning that Nasdaq, and stocks such as Apple or Tesla, are going vertical. The last time we saw such a radical move on US equities was in 2000. But the “whatever it takes” bubble is scarier, as its scale is three times bigger.

What could go wrong since the Fed has our backs?

I have already explained that the so-called “Fed put” is not the expression of a natural law (see The Fed Put Narrative Era). It is mainly an intersubjective belief that can vanish anytime.

A speculative bubble is an endogenous process driven by an overwhelmingly dominant narrative. In other words, no external trigger is needed to end the bull run.

Do not expect people around you to believe that this is possible, but this is exactly what happened for US stocks in 1929 and 2000, for bitcoin in 2017, and for China A shares in 2015. One can learn a lot studying history.

Avalanche Zone

As we may be entering the final phase of the bubble, it is interesting to note divergence signals on US stock market. Is a VIX spike coming? Maybe. This is what technicals are indicating (see Sven Henrich’s chart below).

Thus, it’s time to run the Log-Periodicity Power Law Singularity (LPPLS) model again. If you remember well, this model comes from econophysics research, and was designed to detect speculative bubbles and predict the critical time (i.e. the date of termination of the bubble and transition in a new regime). For more information about it, please check It is All About Waves – Tech Stocks and The Log-Periodicity Power Law Singularity Model.

At the beginning of July, it suggested that the boom would terminate by the end of the summer (i.e. mid-September). Today, as tech stocks have accelerated, the model indicates that the bubble may burst anytime.

Even if it is a theoretical exercise, it is worth noting that the conclusion is consistent with VIX technicals and with the fact that bearish participants are capitulating.

If the “whatever it takes” narrative is broken, no one will be able to stop the avalanche. Including Jerome Powell.

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