June 5, 2020

MarketMap 2020 Issue #11

“There were so many people who thought we had to retest the bottom,” said Cramer.

The best salesman on Wall Street went on to say, “Billionaire hedge fund investor David Tepper told CNBC in May the stock market is one of the most overpriced he’s ever seen, only behind 1999. Hedge fund manager Stanley Druckenmiller said in May “the risk-reward for equity is maybe as bad as I’ve seen it in my career.”

He was ranting by the end of his morning segment after the Dow was surging 700 points based on the unexpected unemployment numbers that those who waited for a test of the low will be forced to buy now, and there was little or no risk of Convid comeback and the economy should be reopened.

Sounds like Crammer wants his audience to chase the equity curve.

Obviously with the Fed in Trump’s pocket along with the ten big banks following Steven Mnuchin’s lead, only time will tell if the market regime changed as CT predicted back in January 2018 or if the market herd has gained risk immunity.

Well, every cartel cracks sooner or later.  At the end of 2017 I pointed out that the government had painted itself into a corner by using up all the tricks of the trade from QE to tax cuts at a time when it was not needed. Rather it would be needed to provide a soft landing when the next recession hit.

After looking at a Trillion dollars of debt on that basis, the trigger happy Fed and Treasury have dug the hole even deeper, to the extent that the risk is now hyper-correlation from either end of the normal volatility curve.  As we all know, the market does not like instability.

So, here are two historical charts, which puts today’s market in perspective, I think.  The chart on the right is the expanding triangle that formed after the post-WW-II 17-year long bull market consolidated. It began at 1000 on the Dow in 1966 and ended in October – December 1974 (when I joined Stix &Co).  It took another eight years from that low before the next secular bull broke out from the base.

The chart on the left is today’s market reflecting the same pattern and putting it at the beginning of a new bull market that after a rally to test the old highs will fall back into a trading range for the next seven years +/- a few years either way.

However, given that today’s market is likely inside the base building and has not experienced a bear market yet with its economic repercussion it is not likely in avoiding more declines greater than 20%.  The next comparison chart shows features the same expanding triangle of 1976, peaking at 1000 and leading to a bear market exceeding 25%. Note that the rally from the end of the triangle at point (E),[4] was truncated, it failed to make new highs. Given our outlook for a peak in June, this idea should keep hedgers and investors on the front foot.

Today and early next week the tidal systems flip from down to up, hence the down cycle was inverted aka it failed. Today you can see the effects of the cycle turning back up. The window for a peak begins to open June 13, which is a Saturday.  It runs from that date, let us include the 12th into June 22, a Monday.

Contrary Thinker will be looking for its volatility model in that time window for a “no-fear” background that is exploitable and it will be looking for its OB/OS model to be giving out of gear ( as opposed to negative divergences) for a sell signal. Lastly, for strategy engagement, the market will need to be on the right-hand side of a high pivot.

The Short Term TEM on the four primary indices will be posted in the LI Space shortly, for the background.

Great and Many Thanks,

Jack F. Cahn, CMT

A Thinking Man’s Trader Since 1989,

Copyright 1989-2018

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