Abridged from the January 2013 Trigger$ Edition
When water turns to ice, or vapor turns to water, we have what is referred to as a Phase Equilibria change. It can be slow or it can be instantaneous. Whichever occurs, a new and completely different state of reality then exists.
The markets are about to transition through such a Phase Equilibria. We have reached the End of the Beginning and a New Beginning is Near! Unfortunately the new beginning is the Beginning of the End of the Secular Bear Market Counter Rally. It isn't imminent, but it is near!
Once complete, the Bear Market that started in 2000 in real terms, will resume even in nominal terms. The End of the Beginning of the Secular Bear Market has arrived and now the truly ugly part of the bear market emerges .
Old Phase: Recovery & Hope
Since the financial crisis of 2008 the US and world have been in the "Recovery and Hope" phase. This phase normally starts with Triage to "stop the bleeding", then moves to Operations "to fix the problem", then finally to the Recovery or " convalescence " stage. All perfectly normal, if the diagnosis of the problem was correct, the operation successful and there are no complications during the recovery.
Unfortunately, through monetary malpractice the doctors screwed things up!!
Every metric of good health and success is flashing that a dead economic body is being kept artificially alive, except for one measure... the stock and bond markets. These measures, which are now the financially engineered creations of 33 Liberty Street and modern Goldman Sachs algo computers, are no longer a measure of the health of the economy, nor main street America. Unfortunately, the perception is that they are and that the omnipotent doctors at the Federal Reserve have things under control.
The stark reality of the gravity of the situation, the serious of the malpractice, is about to realized.
New Phase: Reality & Fear
Instead of the patient now heading home from a convalescence center, the patient is about to be pronounced dead, to a startled family who have been led to believe everything was ok. Reality is about to set in.
When Reality sets in, Hope Turns to Fear!
Reality - These are the kind of things you will hear in the NEW PHASE when reality sets in:
- It was a Structural Problem not a Cycle Problem!
- The Fed is not omnipotent!
- The System is broken!
- The system is fundamentally flawed!
- "The King has no Clothes"
- "The Cupboard is Bare"
- We have been duped, fleeced ....
- The government screwed up
- Our promised Entitlements are gone!
- The "Greatest Ponzi Scheme" in history
Quantitative Easing - Increasingly exhausting its impact and showing diminishing returns:
It may seem like a rhetorical question, but may the Fed be pushing a bit too aggressively at this stage ? The chart below from Citi shows monetary policy (defined as the funds rate and the Fed's balance sheet) vs. a "market health" index comprised of economic factors, systemic risk metrics, and valuation metrics. Historically the two have tracked well, but not recently. The health index is firming, but policy is getting easier, not tighter. Is the Fed out of its depth here, or do they know something we don't?
The market reaction to QE4 was surprisingly lethargic. It is likely that the near term action is only the normal post election euphoria we normally see along with a weak Santa Claus rally.
The above chart is not a picture of a bull market! In a bull market, the opposite happens. Volume should be going up during the entire period, and it should be declining every time the market corrects. But we're getting exactly the opposite situation. People have started ignoring volume because bears have been talking about declining volume ever since 2010. But it is extremely important. Volume overall has been shrinking ever since the market's low of March 2009. Volume is a critically important momentum indicator that many are ignoring.
Transition: The "Oh SH#&T Moment!"
Transition - These are the kind of things you will here in the Abrupt Transition Phase:
- From "Uncertainty & Complacency" to Shock
- What's happening?
- How serious is this?
An "OH SH#&T MOMENT" is likely ahead if history is any guide.
We have endless "divergences" that must be closed if history and trend are any indication. The following is only a short list. It is the NUMBER and the DEGREE of divergence which creates the "Oh SH#&T Moment".
THE SET-UP FOR AN 'OH SH#&T' MOMENT - Is likely between Option Expiration in January and Quadruple Witch in March
Macro Surprise Index Has Peaked
APPLE and HY (High Yield) is telling us something, if we care to listen.
Long Wedges Are Good Indicators For A Phase Change In Attitude
Rising SYSTEMIC FRAGILITY increases odds of "unexpected" breakdowns
Market Example: 1987 Crash
I chose 1987 to the right, but almost every major "shock" I have witnessed, in watching the markets for decades, demonstrates a protracted rising wedge or ending diagonal characteristic.
Beginning Is Near: A Right Shoulder (Head & Shoulders)
A Unique Pattern - There is a lot of technical information in the following pattern.
An "Oh SH#&T Moments" Is Near, but there is still a little more to go. The following chart of election year averages gives us a clue. Note the Year End and the first quarter correlations. I expect this chart analogy to breakdown after the "Oh SH#&T Moment"