Tuesday, July 14, 2020

When You "Typically" (as in no guarantees) See This Sort of Price Action

Bloomberg's "macro man" Cameron Crise made his case this morning as to why stocks are historically risky right here. Should sound very familiar to regular readers.

Here's his entire post, I'll bold key points...

If Monday Didn’t Scare You, Well It Should Have: Macro Man

By Cameron Crise
(Bloomberg) -- 

On the face of it, Monday’s late-session swoon in the U.S. equity market was just an orthodox decline of the type we’ve seen seemingly hundreds of times before. One headline or another hits the tape, for some reason the algos latch onto it, and BAM! Before you know it, we’re a percent or two lower in major equity indexes. Certainly that’s been the initial interpretation of the market on Tuesday -- nothing to see here, please disperse. Yet there are surprisingly few analogs to the exact circumstances than manifested in the high-flying segment of the market. Those that emerge are rather scary indeed.
  • In some ways, navigating financial markets is like driving before the advent of GPS devices. You try to follow a road map, you look for familiar neighborhoods, and you try not to get distracted by back-seat drivers yelling in your ear. One of the techniques that proved useful earlier this year was identifying price action reminiscent of the GFC or even the 1930s, which provided a warning of the market mayhem that ensued in the middle few weeks of March. The nature of the price action can tell you a lot about the market that you are in.
  • A friend forwarded me a tweet on Monday morning noting Tesla’s share price and claiming that bubbles are now mathematically impossible in the new paradigm. This was clearly a satire of an infamous Bitcoin post from a few years ago, but I have to admit — it captured the zeitgeist beautifully, and if you didn’t know any better you would have been taken in. Maybe it was a coincidence, but Tesla dropped nearly $300 after the tweet was written.
  • Reversal candles from Monday’s price action are pretty widespread, particularly in the go-go sectors of the market. Another pal passed along an interesting trivia fact: the NDX rallied 2% from the previous close, made an all-time high, but then closed lower by more than 1%. The only other time that happened was on March 7, 2000 -- three days before the peak of the Nasdaq Composite and the Internet bubble.
  • I checked the numbers, and yup! It’s true! A sample size of one isn’t statistically significant, of course, but that precedent doesn’t exactly inspire confidence. I ran a similar screen for the S&P 500 going back to 1983 (when our open/high/low/close data begins), and this set-up has only happened once: in January of 1987. Obviously at that juncture the market kept rallying for a number of months, but when the party ended -- boy did it ever!
  • Similar screens on other indexes (the SXXP, Nikkei, MSCI EM) yielded no precedents. So this sort of thing is pretty darned rare. If we dispense with the requirement of making an intraday all-time high, a few more examples from the SPX pop up. They don’t exactly inspire a lot of confidence.
5W TRAILING RETURN5W FWD RETURN
1/23/19879.10%4.78%
10/3/2008-15.49%-15.31%
10/8/2008-22.75%-13.47%
10/9/2008-26.43%0.15%
10/10/2008-27.62%-2.88%
10/29/2008-21.57%-9.12%
11/10/2008-13.03%-0.66%
8/25/2015-11.87%2.81%
  • Evidently, this is the sort of price action that you see either at market tops or in the midst of crisis periods. These days, you could argue that both of those descriptions fit the bill. Is this a guarantee that mayhem will ensue and that you should sell everything and retreat into a bunker? Of course not. I won’t even bother to call it something ominous like the “Hindenburg Omen” or the “Titanic Syndrome.”
  • Yet by the same token it’s at least a sign that our market voyage has taken a turn into a somewhat less-than-salubrious neighborhood. You shouldn’t necessarily panic, but by the same token being a little afraid may be no bad thing.

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