It has been a long time since I wrote my last piece about the market. And as I am not a specialist of the bond market, I will stick to the equities and the “stocks only go up” narrative.
One of the major events of the past days has been the sudden crash of the volume on call options, after more than one year of increasing gamma squeeze, as more and more investors were heavily betting on short-term OTM calls forcing market makers to keep buying stocks or indices to hedge their books. While SoftBank admited that they were involved in that scheme, individuals have been also pretty active, feeding the so-called “Nasdaq whale.”
The fact the YOLO army is buying less calls does not necessarily mean that the market has turned bearish on US tech, as evidenced by the fact that the put to call ratio remains extremely low. Said differently, it’s all about people quitting the speculative game on calls, and some surveys suggest that many Americans plan to spend their checks doing “normal things” like travelling or whatsoever.
Somehow, the launch of the Buzz ETF at the beginning of March may have signaled the top of the retail mania. Ironically, it was also the day when Dave Portnoy appeared on TV with a suit.
Of course, the real reason might be different. And perhaps, the GameStop and AMC events of January played a significant role in that brutal change of sentiment. Indeed, a recent survey by Bankrate.com and YouGov shows that nearly 50% of Americans now say the stock market is “rigged against individual investors.” That should explain why Jim Cramer is begging people to stay in the market on his Twitter account today.
I have learned to be careful about calling the top and to stay humble. I ran several simulations based on the LPPLS model in 2020, which gave me very interesting results, but only for short-term trading strategies, and not from a long-term investment perspective.
However, we should all bear in mind that the US equity market is doomed to fail on the long run. I have created a thread on Twitter to list all the extravagant things we hear everyday about stocks, cryptos, or NFTs, and the level of madness is impressive.
It is interesting to look at a logarithmic chart of the Nasdaq 100 index (NDX), to realize how crazy the past few years have been in terms of performance. As you can see, it has displayed a straight line since 2010. As it is a logarithm function of the actual level, it means that the index has moved exponentially over that period, which is definitely not an healthy move.
More interestingly, there has even been a breakout after March 2020, as the log curve has moved faster than the previous trend line, implying monster returns. The same thing occurred during the dotcom bubble, as tech stocks went far above the log trend line from 1998 to 2000. I am not saying that such a pattern signals an imminent reversal, but we are talking about extreme variations that should lead to caution among participants.
Besides, as already suggested before, the Nasdaq is technically displaying various signs of weakness, such as bearish divergences. Therefore, either there is a big catalyst that invalidates those signals, or it will be difficult for US tech indices to avoid a correction (or more) that would not be a surprise given the extreme disconnect between valuations and fundamentals.
As explained in a previous post (see Perseverance), it is complicated for American authorities to accept the idea that stocks can go down significantly, since it would mean that many households would be much poorer than already thought. But that would reflect the economic truth, as you cannot get infinite wealth expansion, without organic GDP growth. Otherwise, you only rely on monetary illusion, and history shows that it is not supposed to end well.
Of course, everyone has been expecting a reaction of the Fed and other central banks to create the conditions for a strong market rebound. In fact, many people have called a short squeeze for the past weeks (on treasuries, tech and growth stocks, etc.). However, the more investors expect something, the lower the probability of occurrence. Short squeezes are more likely to take place when fear is everywhere.
I am not saying that Powell does not still have the possibility to send the Nasdaq back to all time high. But remember that they cannot fuel the “everything bubble” forever without increasing distortions elsewhere in the system, and somehow, this idea can be seen another statement of the second law of thermodynamics.
There have been many canaries in the coal mine recently, such as the spectacular WallStreetBets drama, the ongoing silver squeeze, the crypto mania, or heavy speculation on commodities and rates. By launching infinite QE, the US have also unleashed a monster that has just begun to threaten the whole US dollar system.
It is true that Powell can stick to the official narrative, and keep sending even more dovish messages to markets. But that will lead to even more problematic side effects.
Therefore, the key question for all of us is, what is the critical point beyond which it becomes impossible to stop the big avalanche that many people have expected for years?