Welcome to Fabulous Wall Street

Romain/ novembre 26, 2020/ Finance/ 0 comments

A few days ago, Jim Cramer said: “It’s the most speculative market I’ve ever seen. You can’t lose in that market. It’s like a slot machine that always pays out. I’ve not seen this in my career.”

And Jim is right. As central banks have been fueling moral hazard for more than twenty years, capital markets have become a giant casino where every gambler is expected to win whatever happens in the real economy.

Sovereign debt crisis? Bullish. Chinese slowdown? Bullish. Brexit? Bullish. Trump’s win? Bullish. Trade war? Bullish. Global pandemic? Bullish. Trump’s defeat? Bullish. Trump refusing to concede defeat? Bullish. In other words, everything is awesome!

Perhaps the Fed and the ECB should ask authorities to ban “blasphemous” books like The Intelligent InvestorIrrational ExuberanceThe Great Crash 1929, or Why Stock Markets Crash. That would make more sense.

Somehow, watching charts and financial statements makes me feel like Raoul Duke in Fear and Loathing in Las Vegas.

No Happy Ending

However, we all know how this circus will end. In tears.

Of course, some smart players might make a profit. But the main winner will always be the casino (i.e. Wall Street), and most wannabee investors are doomed to fail.

One may argue that “even if it makes sense to go short, no one can tell when the market will crash.” Fortunately, we have the log-periodicity power law singularity (LPPLS) model to increase the probability of bearish strategies, detecting imminent ruptures of euphoric dynamics (see It is All About Waves and It is All About Fractals).

Each rupture leads at least to a correction, and some of them to spectacular bear markets (e.g. bitcoin 2017, China A shares 2015).

The LPPLS model correctly anticipated the September 3 rupture on the Nasdaq. Then, the short-term acceleration of early October was also detected, such as the October 13 rupture.

More interestingly, those two index ruptures were characterized by ruptures on several hype individual stocks. For instance, Tesla at the end of August, and Peloton at middle of October.

This is probably the biggest bubble the world has ever seen. The speculative mania is so powerful that despite those endogenous ruptures that were correctly timed thanks to the LPPLS model, the market has not crashed. In fact, the Nasdaq has been consolidating since September 3. Besides, some stocks have managed to breakout and make new highs (e.g. Tesla).

However, despite positive news on the vaccine side, the fundamental picture of this market has not changed. It is still driven by the “stocks only go up” narrative. Thus, many things have gone vertical again (e.g. bitcoin, Tesla)., sometimes driven by massive bets on short term call options. Said differently, most participants (including professionals) are gambling, betting on new highs without being able to explain why, and the market remains highly vulnerable to anything bad.

Remember that a bubble is an endogenous bubble that can pop without any external reason. From that perspective, it is worth noting that the LPPLS model indicates that new ruptures are about to occur very soon.

The most spectacular one might be bitcoin’s rupture which may have already started.

Don’t Be a Thanksgiving Turkey

What about the stock market? The problem is that almost everyone is bullish in the system, with record low levels of short interest and put/call ratio, and massive inflows in equity ETFs and funds. Thus, the market is very vulnerable to any large selling order.

What’s more, there could be negative external news flow in the near term. First, the covid-19 wave in the US and Europe is postponing expectations in terms of economic recovery. Second, one should be cautious at this stage about vaccines announcement.

Last but not least, it looks like the Trump administration has decided to undermine the next administration “by lighting too many fires to put an”. On the geopolitical side but also on the domestic side, as Steven Mnuchin declined to extend several emergency loan programs.

In addition to that, we learnt yesterday that “several participants [of the FOMC] expressed concerns that a significant expansion in asset holdings could have unintended consequences.” The same persons who said one month ago that they did not see any bubble.

Weird, isn’t it? It is probably to early to conclude that something has changed, but one should consider the possibility that the Trump put ended recently, with possible consequences on capital markets (see Is the Trump Put Expiration Date Approaching?), as Ivana Trump already warned that her ex-husband is “not a good loser”.

We may be surprised again, and even before the end of 2020.

As for now, I just want to wish a happy Thanksgiving to every American.

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