Monday, March 23, 2020

SPX and INDU: Devil's Advocate

[NOTE:  If you recently registered for the forum and completed all the steps, please be aware that we have had a TON of new sign-ups lately, so I am a bit behind on getting new accounts approved.  Thanks for your patience!]

About two years ago, I penned a piece titled:  The Acrobats: Why the Central-Bank-Driven "Prosperity" MUST Eventually End.  In that piece I wrote that we were not expecting the bull market to end anytime soon and that we should (quote): "partake of the punchbowl for as long as the party is still going."

But my piece was intended as a response to those who had come to believe the Fed was invincible, and that the Fed could thus prevent all future bear markets.  So I also listed two reasons why the bull market would, inevitably, eventually end.

I want to reprint the second portion of that response here today:

Reason number two is that everything moves in cycles of endless change.  You've heard me say this before, but consider this:  Change, in a very real sense, is exactly what creates our perception of time. Without change, time effectively ceases to exist.

Imagine if all movement in the Universe, down to the subatomic level, were to completely stop right where it is at this exact moment.  If that were to happen, then the Universe would be "frozen in time."  Time itself would cease to exist.  Stopping change from occurring would stop time from advancing.

Time is fundamental to the nature of reality.  Change is fundamental to the nature of time.  So change itself is likewise fundamental to the very nature of reality.

The Central Banks may appear all-powerful, but they are not capable of altering the nature of reality.

So, even if they could cheat the system as often as they wanted (which, as we just established, they can't), then eventually the fundamental nature of reality would impinge upon the dream.  Something would happen that alters the playing field.  It's unavoidable.

"Black swan events" (unexpected high-impact improbable events) are really a misnomer, in the sense that, while each improbable event may in itself be unique as a standalone, such events are not rare as a collective.  So an individual "black swan" may be rare, but flocks of black swans are not.  They are instead all-but-guaranteed types of events that come about (in a seemingly-cyclical fashion) because time itself is -- fundamentally -- constant change.  

And if things are going smoothly, then change can only be in the opposite direction. 

The moment the sun reaches its zenith, it begins to set.  There's nowhere else for it to go, unless we altered the nature of time itself and could somehow freeze everything, to stop change from occurring.  But not even Janet Yellen's impenetrable hair helmet can halt the progression of time.

So the Central Banks hope this will die the way they "want it" to, but they do know it has to die eventually, to preserve faith in the system.  Obviously, they hope it will not be a Black Swan Event that ends this round, because they lose all control in that situation.  But for reasons just discussed, that is a very real possibility.

One way or the other, it does eventually end.

As I said, it may not be tomorrow, and may or may not be "soon," so I'm not saying we should start worrying obsessively and blindly shorting every rally.  In fact, I would strongly suggest you do not do that.  Let's partake of the punchbowl for as long as the party is still going.  When the time comes for it to end, the signals will be there.

As I said, I wrote this partially because I wanted to provide at least a bit of "early" education for the new generation of investors.

And I did want to put to rest the myth that this "new prosperity" could go on "forever."  It cannot go on forever, because the fundamental nature of reality forbids it.  Trade safe.

So, needless to say, Coronavirus has proven all this out and clearly falls into the category of : "eventually the fundamental nature of reality would impinge upon the dream.  Something would happen to alter the playing field."

Coronavirus has torn asunder the best laid plans of mice and men.

But the story doesn't end there.

I think that part of what makes a successful speculator is the ability to find balance.  The nature of the herd is to overreact in BOTH directions.  The nature of the successful speculator must thus be the opposite:

To seek reasons for caution when others are fearless and -- on the flip side -- to seek reasons for hope when others are hopeless.

Now, this doesn't mean that as soon as everyone is hopeless, you should blindly become hopeful (nor vice-versa), because sometimes the herd is spooked by a very real threat.  It simply means that you don't allow the herd to drag you into group-think, and you thus calmly attempt to continue to assess the CHANGING situation.

Because, just as I wrote in The Acrobats:  "The moment the sun reaches its zenith, it begins to set," the reverse is likewise true:  Once the sun reaches its nadir, it begins to move on toward morning.

The fundamental nature of reality means that change comes in both directions.

In reality, as I said initially, change is the constant.  "For the better" or "for the worse" is merely a judgment that we humans apply to those changes.

So the bottom line I'm trying to get at is this:  The majority of people react to their own thoughts as if they were "real," the way, say, a tree or a rock is real.  They have a thought, and then they simply accept that thought as true.  But thoughts are not real.  And they are often not true.  So, to be ahead of the herd, we must be our own harshest skeptics.  We cannot afford to be overwhelmed with "the emotion of the moment" by taking even our own thoughts at face value, but must instead seek to chip away at our own ideas -- to find out if those ideas are solid, if they are merely possible, or if they are completely baseless.

We turned bearish near the high -- then began looking for a broad market crash almost immediately thereafter, while most people were still thinking "short-lived correction."  NOW, however, many people have begun thinking this will never end.  And surely that means we should at least start looking for hope.

Consider this case:

What if a cure or vaccine is announced directly?  If that occurs, then the economy will not only return to normal, but it will return to normal along with trillions of dollars in Fed money to fuel a blistering rally.

So the economy will return to "normal," but on steroids.

And one positive we can probably anticipate, at least for the U.S. economy, is a repatriation of some of our production and supply chains.  We are learning the hard way that globalization is another system that is best suited for "days of wine and roses" and not necessarily for the hard times (it's interesting that there has been a "global" push toward populism ongoing for the past 3-5 years, and this virus seems, in some ways, to be underscoring that push -- but that's outside the realm of this particular discussion).

Anyway, this, along with the charts, is one reason I haven't QUITE become convinced yet that we're entering a long-term (being defined as several years or beyond) bear market.  Sure, it's absolutely possible that we are.  To consider the worst case:  Perhaps this drags on and on with no vaccine/cure, and the economy continues in gridlock, and the Fed becomes impotent, and thousands of companies go bankrupt, and we never fully recover.  And/or perhaps the stress causes a critical systemic failure.  Those are both very real possibilities.

But at present, I'm still slightly more inclined to think "months" instead of years ("months" at least in terms of finding the bottom, which is where the bear technically ends -- it will of course take some time to recover all the losses).

As noted, I do, of course, keep an open mind to the other possibility -- I mean, after all, my long-term counts going back to 5 years ago (and beyond) had the price zone near the recent all-time-high, and the 2019-20 time frame, as an inflection zone for the long-term end of a Cycle/Supercycle degree rally.  So maybe the recent high was it, and this is actually "the big one."  I can't stress enough that I'm not ruling that out.

But what I want to stress even more is that my approach right now is to "trade what I see" and not get too hung up on the long-term here.  After all, we can't trade a move that's 3 years distant, we can only trade what's right in front of us.  

We were bullish just before the all-time high, then we caught the top, AND we caught the crash, and we have remained on a bearish footing as the market has continued to make new lows.  As long as it keeps pointing lower, we'll keep riding it lower.  Hopefully when we finally get that first impulsive rally, we'll likewise turn around and catch a good chunk of the ride back up.

I'm glad that I recognized the big pending crash wave ahead of time, to give long-term investors a chance to get out well before the massive carnage ensued, but in the end, being on the right side of the market in real-time is really all that matters.


I began this piece on Sunday, with futures limit down, then took a nap, then came back and have been working on it (and the charts) for the past couple hours... but just now, the Fed announced that it would buy unlimited "Trashuries" and Mortgage Securities.  So if you're looking to sell either, call the Fed and tell 'em Charlie sent ya'.  (Do NOT mention my name!  I will disavow.  "DISAVOW!")

On a more serious note:  Is this Fed action the "hope" we were just discussing?  Perhaps, but probably not.  The thing to keep in mind is that we can't compare Coronavirus with the 2008 Financial Crisis (which is what many people are trying to do).  In 2008, the system WAS the primary crisis and it could thus be addressed and remedied directly by the Fed.  The Fed was on the same plane as the 2008 crisis.

The Fed is not on the same plane as the current problem.

Coronavirus represents a fundamental economic issue which is CAUSING a financial problem.  This puts the Fed one step removed from the actual crisis, so it may not be cured with simple Fed action.

Anyway, I'm running out of time before the open, so let's look at some charts.  Near-term first -- and again, while the Fed move seems bullish, let's not put the cart before the horse.  Let the charts, not the news, lead the way:

Bigger picture, this decline could continue to run if it wants -- it has plenty of room before the KO level:

Finally, SPX has now resolved its pattern satisfactorily, but that doesn't mean it has to end here:

In conclusion, I like to be early, so people can absorb what I'm saying (plus, that's the whole point).  I fully expect I am a bit early to be talking about hope, but we should start preparing now.  If any game-changers arrive to stop the virus, then we'll have an economy under resumption AND we'll have gobs of Fed money backstopping everything.  That said, again, since Coronavirus represents a fundamental problem that the Fed can't cure, bulls would -- perhaps for the first time in many decades -- be wise to take Fed-only announcements with a grain of salt. Trade safe.

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