This Won't Last - Right?

Stocks powered higher. Positive sentiment bumped up. Bond yields have fallen, so bonds are a safe investment again, even potentially a big money-maker. The economy's vibrant and bouncy. Right?

With little and/or muted coverage of the Israel-Hamas war, the threat of an expanded conflict has lessened. Except for the demonstrations against the Israeli government and military by supporters of Palestinians - which includes some Jews - the war takes up almost no band width in most MSM offerings. So the threat of World War III seems to have dissipated. Right?

Here's the thing: None of this will last. At least that's the humble opinion of your editor.

The stock market is on thin ice. Sentiment bounces around with the latest headlines. Bond yields may continue lower for a time, but in the end, they're heading up. 

The economy at best, has some positive sectors. But the idea that "The Economy" - as some sort of monolithic entity - is roaring (Roaring 20s redux?) makes not sense. And lest we take the 4.9% GDP bump seriously, forget that too. We won't get into the weeds with this, but just know it's a mostly technical anomaly that presents a false picture. Not that we're in a depression or anything. But we're far from "in the money" as the old song goes.

(Don't you just love Ginger Rogers? Has there ever been a more versatile and talented actress in any medium?)

When confronted with a wave of the immediate, we turn to sources that think a bit more strategically, that have as well a good track record. So, with that in mind, here are our notes from the latest offering from one of our "Brain Trust" folks.

-   Market deterioration continues

-   Russell 2000 broke support from June and September 2022 lows – when such a level is tested over a long time and is broken, usually indicates “the dam eventually breaks…hard.”

-   S&P also broke important support – Has lower support that could provide some reprieve in selling, but that won’t be enough ultimately to stop this Bear Market.

-   Many well-known stocks hitting air pockets as institutions try to raise cash before the bargain hunters disappear. Huge volume in these stocks indicates massive dumping. (Notes that volume is just as important as price in analyzing what’s going on.)

-   Volume in broader market high as well. Internals heavily skewed to the negative side as hundreds of stocks on NYSE and NASDAQ hit new 52-week lows.

-   Long-Term chart of NYSE has broken support (May, June, October lows – as well as its 200-day MA).

-   NYFANG broke support (August-September lows) – very bearish.

-   Re broader group of tech stocks: only 24% above 200-day MA.

-   NYSE: just over 24% over 200-day MA.

-   Chart patterns and heavy selling indicates next decline could be severe.

-   NAAIM Index: active managers equity exposure down to 24%, down from 101.82% in July.

-   Goldman says selling and short-selling by large investors reaching new highs. Novice contrarians would say this is bullish but this only works in a bull market correction: In a Bear Market, the Bears are right.

-   Massive selling of key big cap stocks seems like informed selling, as seen in weeks preceding 9/11.

-   Short-term, year-end selling of the many losers may overwhelm the usual year-end rally: Money managers don’t want to show they’re holding big losers, prefer showing cash.

-   NB: Thinks selling will accelerate in January.

-   “Fed is done” cutting rates: Inference is that this is bullish. In reality, when Fed begins cutting rates, we’ll get the worst part of the Bear Market.

-   NB: “In our over 47 years in business, we have never seen such a terrible geopolitical, market, and economic environment as the one we’re currently in.”

-   Chart of NASAQ vs. Advance Decline line of NASDAQ shows most stocks have been declining significantly – not what a bull market looks like.

-   Law of stock market trends (like Newton’s Law of Inertia): a major market trend in motion will stay in that trend until there is a major change in the environment to disrupt that trend.

-   Therefore, in a contracting environment that we now have, there would have to be an equal and opposite force to end and revers that trend. We’ve been in an “environment of contraction” since late 2021.

-   Theory of Liquidity and Credit: developed 1970s – still operative. The major trends in liquidity and credit determine the major trends of the stock market.

-   Since the start of the Bear Market in 2022, both equities and bonds have suffered substantial declines amid the economic contraction. See High Yield Bond defaults to confirm severe turmoil ahead: US High Yield Default rate has soared since 2021, similar to what happened in 2008.

-   US federal government running largest deficit as a % of GDP outside of WW II period.

-   So next year, we’re likely to see the greatest money creation out of thin air in the entire history of the US: Has inflationary implications and will plunge the bond market again.

-   TLT has already suffered a 53% decline during its 3.5-year Bear Market.

-   The 40-year Bond Bull Market that started in 1982 will be followed by a Bear Market of 20 years or longer. So far, the bond market decline of the past 3+ years has been the worst since 1780.

-   US debt now accelerating upward with no end in sight. The faster it rises, the harder it will be to slow it without causing a horrible crash.

-   The US added $1 Trillion in debt the last 3 months.

-   All this cannot end without a crisis. Be prepared.

-   Big banks look OK on paper, but regional banks are worsening beneath the surface: bond losses (unrealized) and Commercial Real Estate Market loan losses.

-   Credit Card delinquency: highest on record.

-   Big wall of debt maturity coming 2024-2025.

-   Gold and Silver picking up strength, but likely will fall in the case of a crisis/crash – then will pick up, as happened in 2008.