Morning Note: Things Are Overall Worse Than The Early-00s -- And That 'May Be' A Good Thing For Stocks

Here's what it looks like when the market leaders begin to roll over, before the really bad stuff begins:

Trendline busted, 50-day moving average breached and flatlining, first resistance level lost, testing the next. Momentum (bottom two panels) rolling over sharply.

Of course the leadership I'm referring to are the tech stocks that dominate the Nasdaq 100 Index, the index featured above.

The above illustrates the beginning of the bursting of the great dotcom bubble of the late-90s.

Here's how it played out over the next 3 years:

Oof! Peak-to-trough, that was an -83% experience. The S&P 500's was -50%.

Wanna see how the Nasdaq 100 sets up currently? No you don't, but I'll show you anyway:

Yep, trendline busted, 50-day moving average breached and flatlining, first resistance level lost, testing the next. Momentum (bottom two panels) rolling over sharply.

So, therefore, am I predicting, or expecting, an early-2000's style bloodbath for stocks starting sometime soon? 

Honestly, no (not that the risk isn't there of course -- and not that stocks can't still go notably lower from here)…

Well, why not? Why, if the setup looks so similar -- and the extremes (valuations, sentiment, and so on) are equally or more extreme versus back then -- don't I anticipate a similarly devastating near-term outcome?

Well, frankly, because believe it or not the overall setup is actually a lot worse today than it was back then. That is, when we factor in what amounts to a present debt bubble for the ages. 

Huh?? Then doesn't that virtually assure that we're nearing a bear market to beat all modern-history bear markets? 

Well, I'd have to say absolutely, if, that is, we were operating these days within anything remotely resembling a free market, which we're not, not remotely. 

You see, while, again, the risk is absolutely there, the devastation that a massive bear market would bring to the economy is far more than the institutions most responsible for our debt mess are willing to bear -- and they control the creation of money (the Fed), how it's spent  (at the federal level [the treasury and Congress]) and -- they believe -- the level of interest rates (the Fed).

Still, by the way, this doesn't mean we should be playing in those high-flying tech names. I.e., there are much smarter, safer ways "to play" the present setup...

We'll do a deeper dive in this week's main message, coming your way sometime tomorrow.

Asian equities leaned green overnight, with 11 of the 16 markets we track closing higher.

Europe's seeing quite the rebound this morning, with all but 1 of the 19 bourses we follow notably higher as I type.

Save for bank stocks, U.S. equities are seeing quite the rally as well to start the day: Dow up 255 points (0.80%), SP500 up 1.70%, SP500 Equal Weight up 0.83%, Nasdaq 100 up 3.24%, Russell 2000 up 1.99%.

The VIX (SP500 implied volatility) is down 8.28%. VXN (Nasdaq 100 i.v.) is down 5.96%.

Oil futures are down 0.17%, gold's up 1.90%, silver's up 3.07%, copper futures are down 2.28%, and the ag complex is down 0.12%.

The 10-year treasury is up (yield down [helping stocks big this morning]), and the dollar is down 0.24%.

Led by silver, tech, gold miners, gold and emerging market equities, our core mix is up 0.84% to start the day. Oil services, banks, Verizon and ag commodities are this morning's laggards.

As you know, truckloads of additional "stimulus" -- the pending $1.9 trillion and I suspect another $3 trillion in infrastructure spending to follow -- are heading the economy's way, which I imagine the equity market will like. While the economy attempts to digest the massive dislocations, distortions (read that into inflation, interest rates, etc.), and so on that will no doubt come from the largest misallocation (as it'll be govt directed) of resources we've ever seen.

Brings to mind, once again, the "Weber-Fechner Law", described below in James Weatherall's excellent book The Physics of Wall Street: 

"The Weber-Fechner law was developed by nineteenth-century psychologists Ernst Weber and Gustav Fechner to explain how subjects react to different physical stimuli.

In a series of experiments, Weber asked blindfolded men to hold weights. He would gradually add more weight to the weights the men were already holding, and the men were supposed to say when they felt an increase. It turned out that if a subject started out holding a small weight—just a few grams—he could tell when a few more grams were added. But if the subject started out with a larger weight, a few more grams wouldn’t be noticed.

It turned out that the smallest noticeable change was proportional to the starting weight. In other words, the psychological effect of a change in stimulus isn’t determined by the absolute magnitude of the change, but rather by its change relative to the starting point."

I.e., the more the "stimulus" they pile on -- atop what they've already piled on -- the less positive bang they get for the proverbial buck. 

Of course it's ultimately the longer-term negative bang(s) that trouble me. 

Have a nice day!

Marty