Attack of the Clones – A Tech Bubble Story

Romain/ octobre 6, 2020/ Finance/ 0 comments

For two weeks, the chaotic structure of US capital markets has been dominated by clones.

First, a clone of the well-known “rescue and pump” strategy by the Trump administration. Indeed, whenever the stock market faces the risk of an imminent collapse, this administration always uses the same strategy to prevent a crash.

Their first priority is to make sure that indices do not fall below critical supports, requiring the help of the plunge protection team to deal with increasing selling pressures from funds. Then, the Fed starts to send even more dovish messages in order to provoke a short squeeze. Last, a new source of optimism is released and maintained alive until all bears capitulate.

As Sven Henrich wrote, “the longer the stimulus deal can be dragged out, the longer it serves as a put under the market”.

Well, this is what happened after the correction of 2018, and again after the spectacular crash of February and March 2020.

This strategy was revived two weeks ago as tech stocks weakness was a real threat a few weeks before the election. People may have noticed that there was always someone willing to bid whenever the market traded close to key index levels. Then, the Fed monopolized the financial media with a record number of Governors interventions, even if they had nothing new to say. And finally, “stimulus optimism” has become the new bullish catalyst.

Beyond the actions of politicians, the market has also been dominated by clones of whales willing to push the so-called gamma squeeze even higher. Indeed, the correction has not ended the call options buying frenzy. Things have got worse, as even SoftBank seems to be back in this crazy speculative game.

To summarize, the Trump administration is pursuing its bubble-friendly policy, meaning that they are voluntary feeding the market with endless positive feedback loops, reinforcing the idea that there will be always a positive outcome and inciting more people to add new speculative positions.

Of course, there is no exit plan, and it seems impossible to keep doing so for years and years. But what if their objective is just to hold the market till November 3?

The Force Awakens – The LPPLS Model

I received a lot of questions on the log-periodicity power law singularity (LPPLS) model and whether I was planning to provide an update. For those who are not familiar with that, please check “It is All About Waves – Tech Stocks and The Log-Periodicity Power Law Singularity Model” and “Halfway Between the Gutter and the Stars”.

As already explained to a few persons, it is unclear whether updating the model at this stage would make sense. Indeed, the conclusion of the previous simulations was that the Nasdaq bull run was likely to end at the beginning of September. And this is what happened. So the question should be, is the bull market still alive or have we entered bear market?

However, I have decided to run a new simulation. As you can see on the chart above, the model detects an acceleration of small-sized fluctuations. More interestingly, the conclusion remains unchanged as it still indicates that a crash may occur “any time”.

Nevertheless, I am not convinced by the quality of this last simulation, as it does not fit well with index prices after September 3. The reason is simple: the powerful upward trend of the summer may have been broken, meaning that bulls may have been mortally wounded, even if most of them have not realized that yet.

“Control, Control, You Must Learn Control” – Yoda

This would explain why the market seems to have entered a distribution phase, leading to the feeling that the Nasdaq has become a “heavy” machine despite the appetite of Robinhood users or Masayoshi Son (see chart below). Said differently, tech indices have failed to recapture the previous trend and many single names are displaying bearish divergences.

Although, the stock market has gone nowhere since early September, there has been a quiet but fierce fight between bulls and bears that may influence the future of this bubble.

So, what is coming next? We can forget about fundamentals, as they do not impact the market anymore. Only technicals and behavioral finance can help us to navigate in these unprecedented times.

As the gamma squeeze is growing, it is important to remember that any reversal would lead to a massive selling force coming from market makers. From that perspective, one should pay attention to an accumulation of patterns on the VIX index suggesting that a major volatility spike will occur soon (see Sven Henrich’s excellent chart above from Northmantrader.com).

But the Fed will save us, right? Always the same question, always the same answer. If you do believe that the stock market is a speculative bubble, than you cannot trust the “Fed put” narrative anymore, as you know that sooner or later this intersubjective belief will vanish and that the central bank will lose control.

I would not say the Fed has become the Death Star of the Empire, as it could feed a conspiracy theory. But one must admit that such a metaphor is meaningful. And I am sure that everyone remembers how this story ends.

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