Stock Market’s Stars Are Crossed For A Major Upset

The bear is back

The Big Bear is back. Ursa Major is in the house of the rising sun, and Taurus is in the house of the setting sun. Those are bad signs for investors who are now daily diving into their horoscopes. The market is pouring out of an inverted Big Dipper, otherwise known as the Big Bear (Ursa Major), and no one (not even the Fed chair) nor any positive event seems able to stop it. I can easily tell you why.

But first, even Goldman Sachs (GS) now says that the stock market’s twin peaks this summer were actually a strong indicator back then that the market was crashing into a full-blown bear market, not just a correction, making my prediction that the big change would come in early summer pretty darn close to right even if the tailing action waited until fall. Entering a brutal bearish mood, Goldman has joined numerous others in saying the present market troubles in the US look worse than many people realize:

Two months ago we reported that according to Goldman’s bear market indicator, the risk of a market crash dead ahead was higher than before the dot com bubble burst in 2000 and ahead of the 2008 global financial crisis, or as Goldman puts it, “our Bull/Bear market indicator is flashing red.” (Zero Hedge)

In fact, Goldman’s “Bear Market Indicator” just hit a higher zenith than it did right before the Great Recession and right before the dot-com crash. It has not been this high for almost half a century:

Fast forward two months, and one market correction later, and Goldman’s mood has only gotten worse, not helped by the brutal market action of October, which saw many assets hitting a bear market, and the S&P falling on 16 of the 23 trading days while, collectively, equity markets across the world shed around $5tn of market cap.

To Goldman strategist Peter Oppenheimer, “the obvious question now is whether this has marked the start of a bear market more broadly, or if it is a less entrenched, albeit sharp, correction from which markets will quickly recover.” And, as he concedes, “things do not look encouraging” as three factors suggest that “equities could be about to enter a sustained bear market”:

  • First, the growth/inflation mix is turning against equity returns.
  • Second, a sharp decline is often followed by a bounce.
  • Third, the GS Bear Market Risk Indicator is at elevated levels

Goldman notes that the kind of rounded double top I’ve often talked about typically results in a decline (on average) of 34%. Rarely, they say, does the decline happen without some bear-market rallies along the way down. These are traps if you fall for them and think the worst is over and the bull is back.

Central banks are the central reason the stock market’s stars are crossed

Bank of America (BAC) says, if there is anything they learned from 2018, it is the following:

That central banks trump everything…when global liquidity peaked in Q1, markets peaked

That we remain in a deflationary world which cannot handle a 10-year Treasury yield above 3%

That investors have no satisfactory answers to the existential questions of “If not stocks, what?”, “If not tech, what?” (Zero Hedge)

So, even BofA thinks the stock market peaked this year because central banks are reeling back their decade of money printing, which is exactly why I predicted it would peak this year. It is predictable because “central banks trump everything.” BofA finally figured that out because 2018 taught them this lesson. I think it was self-evident that CBs trump everything for the obvious reason that they can create an infinite amount of money and direct it where they want it (and it costs them nothing to make this money).

The US stock market’s doom was, in other words, written in the stars for this year well before the year began. If you didn’t see this coming, you weren’t reading in the right places or you were reading but in denial.

It is all wrapped up in that centerpiece nugget above: the world cannot handle 10-year treasury yields above 3%. The Fed’s Great Rewind has kicked long-term interest over that level, as I stated it would because their refusal now to roll over all their government debt into new issuances forces the federal government of refinance on the open market. Attracting busloads of new buyers for all that debt requires higher interest. At the same time, the government has chosen to greatly expand its debt.

The other thing that I said would happen is that bond yields and the stock market would enter seesawing relationship where bond interest rises, which entices money out of stocks, which pulls interest back down some. Then the next step in the Fed’s unwind floods the market with more bonds, tending to push bond yields back up, which sucks more money out stocks. It’s a pump. Every time bond yields rise, they pump money out of the stock market. The handle on the pump goes down. The Fed lifts it up again with another roll-off of bonds, and then it goes down again and pumps more money out of stocks. The stocks that get hit the worst by this pump are banking stocks.

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Disclosure: None.

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