Todd Harrison: The Financial World in Charts
A picture speaks 1,000 words.
In March 2009, when the S&P (INDEXSP:.INX) was at 666 and investors were stopped out against Armageddon—if the tape failed from there, a P&L would be the least of our concerns—the raging bulls were few and far between.
That’s what happens after the market drops 58% in a year and a half—a gambler’s fallacy takes root.
Fast-forward five years. The S&P rallied 176%, in a straight line on the heels of the historic efforts by the Federal Reserve to inject liquidity and manipulate interest rates.
The bear scare is a distant memory, and hibernation followed. Respected credit watchers—some of whom once graced this space—peg fair value for stocks north of S&P 3,000, or more than 64% above current levels.
Pause to let that sink in.
While that type of target talk would have drawn criticism in the past, the tenor of the tape—infrequent and increasingly shallow market corrections—now plants a seed of doubt in the most skeptical market mind-set. Indeed, any attempt to “take the other side” of this rally has been a one-way ticket to humility and shame.
The following charts are shared courtesy of John Hussman and Didier Sornette; they offer a uniquely variant perspective on our current juncture.
Where we are now:
The same chart, 2007-2009:
A stock market crash is, by definition, an "outlier event"; it is not, however, a zero-probability event.
Reading the Tea Leaves
After year-end tax-related selling abated, gold bounced to start 2014 but failed at the 50-day moving average ($1,246); if the bugs are to avoid another windshield this year, they'll also need to push through the series of lower highs (a sign of distribution) at $1,275 and $1,375, per the chart below.
Tuesday afternoon, during the Minyanville Fireside Chat with Michael Gayed, we spoke about inflation expectations and other historical approaches, and how they've been skewed by the policies of the Federal Reserve.
Michael pointed to the emerging markets, and I noted the price action in gold as areas to watch relative to US stocks.
If equities crack this year, the signs will have been obvious to those paying attention; if they continue to lift, those aforementioned areas should play catch-up.
Broadening the Aperture
The current up-thrust, per the chart below, smacks of a blow-off rally, or the third phase of the psychological continuum. These types of moves can last a lot longer than most folks expect, but we would be wise to see it for what it is—or at the very least, for what it could be.
That, more than anything else, will separate the wheat from the chaff when the dust eventually settles.
Two Sides of the Coin
Much has been made about the current levels of margin debt. Jason Goepfert of the excellent SentimenTrader service offers his perspective—a decidedly bullish interpretation—in the chart below.
S&P 1795-1800 remains initial support for the broader tape.
I've nibbled a bit in the cannabis realm, as I continue to feel there will be winners in that new world. Consistent with the vibes shared last year, I cannot share symbols as many of these names are too thin for this forum (and perception is reality).
I find the fascination with The Wolf of Wall Street notable, if only for the socionomic parallels. Twenty-seven years ago, another finance film captured the collective imagination and had everyone whispering, "Greed is good." The stock market shed 35% soon thereafter, and while few (if any) pundits anticipate a similar script, a downside comeuppance is certainly within our forward probability spectrum.
Do rates need to ratchet higher to spook stocks, or will the perception that rates will ratchet higher move stocks?
Do fund flows capture the true mood of the world given that much of the world doesn't participate in said flows?
Why wouldn't Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Chipolte (NYSE:CMG) and LinkedIn (NYSE:LNKD) split their shares at this point?
Once upon a time, a higher dollar was asset class negative. As the specter of tapering morphs into reality, we should keep the greenback on our radar as a macro tell.
- Good luck today, and let’s be careful out there!
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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