These reports are for informational purposes, aimed at a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
In the mid month QE update, I concluded the intro summary with this warning:
1/16/21 At this point, it seems like we are on the edge of the precipice. The risks are enormous. At the very least, I don’t see the likelihood of significant upside for either stocks or bonds.
Likewise, this could very easily go south in a big way. The Fed would need to act. Would it be too late? Would the market even respond?
We live in dangerous times, both politically and financially. Falling asset prices would lead quickly to a shortage of cash.
Now it appears that this may be beginning, but the trigger did not come from the weakening of the Treasury market. It came from a place called /wallstreetbets (let’s call it wsb), a community on the Reddit message boards. You probably never heard of it before last week, but by now you have become an expert.
However, if you are just returning from a 2 week trip to Mars, this is the public group of wild and crazy day traders which engineered an epic short squeeze in the aptly named GameStop (GME). They drove its price from $4 a few months ago to over $500 in the premarket on Thursday.
In the process, they triggered the collapse of one multi-billion-dollar hedge fund and severely wounded potentially many others, along with their lenders, and one or more brokers.
The best known of those brokers is Robinhood, which hosts many of the wsb types. Robinhood began getting clobbered by the massive moves in GME, with customers unable to meet margin calls. So Robinhood decided to stop traders from opening positions in GME and a few other stocks that the wsb crowd was pumping. It apparently lost a cool billion in the process, forcing its biggest backer to come up with the cash to keep it from collapsing.
Apparently Robinhood is really Robinhoodlum, a strawman front operation for the evil Sheriff of Nottingham, aka, Citadel. Robinhoodlum’s sole purpose is to be the skimmer for Citadel godfather Ken Griffin, not the skimmee for wsb maniacs.
No doubt, this little Game Stoppage has blown up to the point that it destabilized the market. On the surface, we’ve seen bigger market moves to the downside than the upside in the past week. Moreover, I’ve seen bid ask spreads on many stocks widen markedly, especially in the first hour of New York trading. It suggests that dealers are having issues maintaining orderly markets. Narrow spreads signal plenty of liquidity. Wide or widening spreads signal liquidity shortage.
Think about it. The Fed is pumping $160 billion or so a month into Primary Dealer accounts, and we have an incipient liquidity shortage. Mind boggling.
This is the fruit of the poisoned tree that the Fed itself planted when it started bailing out hedge funds who got themselves in trouble with their insanely leveraged, sick gambling habits, more than 30 years ago.
The first of note was LTCM back in 1998. From that point on, the Greenspan put was in place. It evolved into the even bigger Bernanke put. He institutionalized it with ZIRP and QE. As Bernanke said back in 2010, “We pick winners and losers when we make monetary policy. The banks and hedge funds and dealers are the winners. Screw your grandma and grandpa who worked hard and saved all their lives to earn a little interest income to spend in retirement. Their spending doesn’t help the economy. The Hamptons crowd helps the economy by hiring dishwashers, bartenders, tennis instructors, and pool boys to entertain the trophy wives of the Wall Street banker and hedge fund titans. ”
Now it’s just the Fed put. Permanent ZIRP and ever larger QE, whenever its needed.
The banks and dealers and gigantic leveraged speculators all know that they can commit financial malfeasance, and even outright fraud, with impunity because the Fed will always bail them out.
They also know that the Federal Government, starting with the Obama, Holder shakedown racket, and Trump being a crony crook, will never charge any of them with a crime. All they need to do is siphon a few billion from their ill gotten profits, pay it to the Government Protection Racket, and they get a Get Out of Jail Free Card.
Now we have $160 billion a month QE and it’s not enough to maintain orderly markets. It’s never enough. That’s because these Wall Street parasites will always figure out a bigger wealth transfer scam after the current one breaks, brings the financial system to the brink, and progressively weakens the US economy, as they hollow it out with their crooked, flim-flam financial engineering and skimming schemes.
But too bad for them. A few small time wiseguys at wsb have figured out the game, and they are armed and dangerous, much to the chagrin of the Wall Street mafia and its captured media mouthpieces, CNBC, Wall Street Journal, Financial Times, especially FT. They have all been wailing and bleating like stuck pigs. They features slimy pitchmen like Leon Cooperman, egged on by the likes of the pathetic Street apologist Scott Wapner, to cry and piss and moan about the public actually taking over their crime enterprise.
They’re not the only ones, just salient examples of the clips I have seen on Twitter. They’re all disgusting.
But I digress. Here’s the QE imbalance forecast for February. It gives us an outline of what to expect.
Near term cycle projections have risen as the relentless mania just trends right along. We may as well take advantage, right? I’ve added a couple of swing trade chart picks that look well positioned to do just that.
What about all those sell signals? Failed again. Short sellers are setting themselves up as targets in a carnival shooting gallery. That’s typical of an entrenched mania.
When and where will it end? I’ve posted near term and longer term projections based on current trends and cycles.
These reports are for informational purposes, aimed at a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
I have tried in these reports for the last twenty years to identify the most important forces driving the stock market. To some extent, I’ve been successful at that, although sometimes a bit early, or a bit late, in recognizing just what the hell is going on. I just hope that my analysis has helped you along the way.
But there are many forces to which people like me, operating on the outside of the system, are not privy. And there are forces at work that no one can see or understand.
Stock market analysis requires many disciplines. Unlike, physics, for example, it’s not rocket science. Hell, it’s not even science. But while physicists and astrophysicists understand more and more about how the universe works, there is much more that they don’t understand. For every theory that they confirm, more questions arise.
They say that approximately 80% of the mass of the universe is “dark matter.” They don’t know what it is. And there’s “dark energy,” that they don’t understand either. They see their effect, but they can’t see the cause, and don’t know what either of them is. So they observe and measure the effects, and make predictions and develop theories based on that.
Liquidity analysis isn’t science, but like physics, when we observe things, we find plenty of dark matter and dark energy. They move things. I don’t know what those dark forces are, but you and I can see their effects in the markets. We can measure those effects, and make predictions from observing them. We call that study, “Technical Analysis.” It’s the other facet of my research.
When darkness engulfs the forces driving the effects, then we all must pay particular attention to the patterns of those effects and learn what we can from them, that is, the technical analysis. Liquidity analysis provides, to the extent of the forces that we can see and measure, the context.
The Composite Liquidity Indicator is a hybrid of fundamental liquidity analysis and technical analysis. When I last reported on it about two months ago, I was forced to conclude, much to my surprise, that the stock market was oversold.
In other reports, I have shown my analysis and conclusion that when the 10 year yield rose above 1%, the Primary Dealers would be in trouble, leading to the potential for a crash.
Those two conclusions aren’t mutually exclusive. It’s a matter of timing. Markets only turn on a dime at bottoms. Tops take time, a lot of time. They can last a year or two.
The current situation reminds me of 1987, however. Then, the bond market began to crash in May. Stocks crashed in October. Will there be a similar 5 month lead time now? Doubtful. It’s a different ballgame today with the Fed aggressively supporting the market week in and week out, and vowing to do whatever it takes to keep the bubble from bursting.
In addition, we know that the dealers and other leveraged players are hedged. Apparently, those hedges are working well enough for now. They’re also getting a boost from individual stock traders.
So is my analysis and conclusion about the likelihood of a stock market crash following on the collapse of bond prices since August just flat out wrong? Or is it merely a matter of time?
I think the latter, but the financial system has far more moving parts than even the biggest institutions can track and understand thoroughly. Furthermore, there’s always something new that we hadn’t thought of before.
You have probably seen the reports about how a community of traders on Reddit is gaming the short side, madly buying call options on stocks that are heavily shorted. This forces options market makers who are writing and selling the calls to them to hedge by buying the underlying. These actions have resulted in ferocious short squeezes.
We all know that story with TSLA. But the poster child lately has been GameStop (GME), a struggling retailer whose stock was $4.00 a share, six months ago.
(Sorry about the busy-ness of this chart. These are what I use for my own trading and for stock picks in the technical trader. They are much larger in my charting program, so the detail is clear).
So the game now is to simply buy stocks of heavily shorted, troubled companies. The worse the fundamentals, the more bullish it is.
Alas this isn’t new. There are whale speculators who have made lucrative careers of just engineering short squeezes. The difference now is that the public is in on the game.
So not only are we dealing with dark matter, we’re dealing with a parallel universe that operates in reverse of what we consider normal.
To sum up, I made the huge call that the stock market would follow the bond market in crashing, because Primary Dealers were overloaded with long inventory and overleveraged in financing it. I set a line in the sand of 1% on the 10 year. Last month, they crossed that. Stocks are still going up.
Here’s what the components of the Composite Liquidity Indicator show us about that, from the perspective of the space-time continuum, dark energy, black holes, Black Scholes, Einstein’s Theory of General Relativity, Maslow’s Hierarchy of Needs, and, of course, Hobbes’s, “It’s solitary, poor, nasty and brutish to be short this market.”
Recent weakness has negated the upside implications of the reverse head and shoulders pattern that formed between October and January. The up phase in the 9-12 month cycle now looks like it will remain flat. Here’s what needs to happen to keep things on the up and up. And a gold miner pick to swing.
This was inadvertently posted a moment ago with the wrong headline and post link. Sorry for the error!
Macro Liquidity continues to bulge. The stock market has followed. It became oversold versus the surge in liquidity that the Fed initiated in March 2020. And it hasn’t looked back since. Should we expect to see stock prices become overbought again before the next big crash?
Stock prices have caught up with liquidity but with liquidity expected to continue rising stock prices could continue to rise along with it. But the balance is shifting and we may not need to see Overbought again on this chart before the next crash. Here’s why, and how I’m approaching it.
Short term cycles have topped out and concurrent down phases are ideally due to last 2-3 weeks. With weak upward momentum in the 6 month cycAle, the potential exists for a significant downdraft. That, in turn would signal the onset of a 6 month cycle down phase. This is the best shot that bears have had for a turn in the tide since August-September.
As a result, I’m shifting my focus to be alert for more swing trade chart picks on the short side.
These reports are for informational purposes, aimed at a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
Both bonds and stocks have weakened over the past 2 weeks. It’s a sign that the Fed isn’t supplying enough QE.
We’ve known for a long time that it wasn’t enough to support twin bull moves in both asset classes. Have we reached the tipping point where it’s insufficient for either to move higher while the other descends?
The answer, my friends, is blowing in the wind—the wind of margin calls now blowing through dealer balance sheets as leveraged fixed income positions continue losing value.
Meanwhile the $2.9 trillion Biden stimulus proposal may boost the US economy, but it will be a disaster for the increasingly fragile stock and bond markets. Here’s why, and what you should do about it.
Lee Adler
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