Wednesday, April 18, 2018

Equities Are In A Potentially Dangerous Spot: 2000 Market Crash as Analogue

We are not fans of analogues, you have to be careful with this stuff.
Humans are pattern-recognizing machines and are so good at it that we can see patterns that don't even exist.* We call it the Rock Man Syndrome.**

We are leaning toward Jeremy Grantham's original melt-up target of S&P 3300 as a blow off top. He hedged a bit in conversation with The Economist April 10 but said there was still a 40% possibility.
"An update from Jeremy Grantham"

From Northman Trader via ZeroHedge: 

On The Big Market Tops
Following the exuberance in January and subsequent corrective actions in February and March and now into April there has been a lot of speculation that markets may have topped in this cycle or are in the process of topping. While earnings are expected to hit record highs in 2018 due to the recent tax cuts much uncertainty has crept into markets due to concerns of reduced liquidity offered by central banks, rising rates into record debt levels, tariff policies emerging and previous bulletproof tech stocks such as $FB, $GOOGL and $AMZN entering a period of unfavorable news cycles, in some cases of their own making.

Given this backdrop I wanted to share some thoughts on market tops and analyze if the lessons of previous big market tops can be informative for our current markets.

Firstly, let’s look at the current situation. What made the first quarter notable was the strong outperformance of the Nasdaq versus other indices. Specifically we can observe that the Nasdaq made a new high in March while the $DJIA, for example, did not:
Notably we’ve seen a similar constellation before. If you are guessing the year 2000 you are guessing correctly. Not only did we see a similar event, but it also occurred during a comparable time frame:
New high for $NDX in March with a lower high in $DJIA. Given this similarity it seems fair to ponder if history will rhyme here....MUCH MORE
See also January 20's "When to Sell in a Bull Market". 
Failure to retake the all-time highs in the S&P 500 (2,872.87) and DJIA (26,616.71) would be the set-up for the analogue.

DJIA  24,784.78
S&P    2,710.84
NDX    6,809.31

*On the other hand here's an example of what incisive pattern recognition can accomplish. This chart is from early June 2007 and foresaw what was coming:

Jan. 20, 2009
Technical Analysis: S&P Black Swan Formation
"The very rare black swan formation - note both feet and neck are complete and the rare vampire tooth variation is in place.  This is very bad. Very very bad."...

**The Rock Man Syndrome comes from a close reading of Harry Nilsson's The Point!:
...The Rock Man said, "Say, babe, there ain't nothing pointless about this gig. The thing is you see what you want to see and you hear what you want to hear. You dig? Did you ever see Paris?"
"Did you ever see New Delhi?"
"Well, that's it. You see what you want to see and you hear what you want to hear." 
And with that the Rock Man fell soundly asleep...