An Extreme View

There is much that I want to say in this post. I am sure I will leave some things out, but it is is one of those rare Sunday afternoons that I write a post early before Monday morning, so we will just see what flows.

First, in this Political period fraught period with all kinds of messaging I just want to say that my favorite Politician of this time is Elizabeth Warren and my favorite Economist is Joseph E Stiglitz. Warren is a little younger than me and Stiglitz is about my age, people who have seen a thing or two. Warren did not carry the day in being the candidate, mainly because the Democrats, and probably rightly so with the close calls in swing states, wanted to put wining above policy. Stiglitz has and still is a big fighter for equality of opportunity as is Warren.

Some things to ponder as the new President gets ready..

1. First who got the government money during the Trump era ? It will become clear at some point, but on a per person personal basis, it was undoubtedly not the little person.
2. And secondly how does all the money manipulation and its many threads unravel.
3. And most importantly how does the COVID pandemic end? The old normal is definitely not coming back in spite of all the push back, but what will the new normal look like?
4. And what will happen with all the government debt and bailouts?

The Markets are at an Extreme Inflection point in my view..

In spite of all the election based happy market talk the past few days from big money people, and I might add the changing arguments, whether it was for a Trump win or a Biden win, that answer was always the market is going up. Until the very end, the big money betting crowd was betting against the polls and on a Trump win. When that didn’t happen the argument changed but the direction of their position talk did not.

Charts in the Shadows..

For me the reality will be measured against some charts that have been sitting in the shadows since October 2018 when the previous Macro cycle was forecast to end.. As long term readers know, I apply the long 18.6 year MACRO cycle measures to all my my views, even short term timing. In 2018 the Trump Tax cuts put a fire under the markets but in October 2018 the Macro cycle turned down on cue and dropped hard into December 2018. That should have resulted in generally a six year down trend (1/3 of cycle).

But, at that point under Presidential pressure the FED rescued the market and we saw it rebound through the October 2018 highs in April 2019 and with Trump putting more pressure on the FED to abandon its effort to get monetary policy back to stability, pushed the Fed to massively lower rates in the summer of 2019. Eventually the FED under heavy Trump pressure lowered interest rates dramatically and pushed the market to the February 2020 high of 3393 on the S&P and the start of the COVID period.

Then another rescue..

This rescue was for the COVID triggered crash in March 2020 where the S&P declined to the 2191 price level. The bounce from there brings us to where we are now, new highs over the past few months and increasingly stretched P/E multiples.

The S&P Monthly Chart..

Here is the S&P monthly data chart showing the activity revolving out of the 18.6 year high of October 2018 and an S&P price of 2940. Also, take a look at the relative strength indicator (RSI) which shows its highest value in October 2018, what one would expect in a apex cycle response. All the activity since, even though with higher prices at points, cannot get out of a lethargic RSI state. We also would point out the fan formation out of that 2940 area as part of this Macro formation. Consequently I would expect us to move in a lower direction out of the current 3550 – 3600 S&P area towards much lower levels over the next 18 month. In the back of my mind I can see the February 2011 monthly high of S&P 1960 in play as a possible objective.

In summary,

The Macro cycle points to the potential risk of a market decline for a number of reasons. One is that current that the market price embeds a huge and unknown amount of manipulation. Secondly, the move from a Wall Street based economy to a Main Street based economy will have growing pains. Third, depending on how the Senate ends up, putting Green infrastructure in to play will no doubt have some teething problems.

How to initialize the Trade this month..

We have a classic short term chart situation in the S&P with four months trading in a general range and with the second month trading outside of the first month and closing lower. Then then the third month trading within the range of second month month and the fourth month trading within the range of the third month.

So now in overnight trading here tonight, Sunday, we see the high of the third week being taken out, the hook is set, now lets get it done in the day session. This is a climatic setup for a big reversal, ( note we could even see the high of the first month taken out, maybe even hitting the magic 3609 level for the supreme hook). But the important thing is the point when the S&P market takes out the low of the third month (3279) on a closing basis. This could happen at any time, at the moment during the this month, but for me Wednesday November 11, or Wednesday Nov 18 would be high value short cycle reversal days.