Is the Complacency Bubble Bursting?
The Fed has been trying to ignite inflation for a decade.
In the last few months, we saw gold rip to 50% of the bear market low.
And in the last few weeks, we saw a massive Spike & Reversal in bonds… with 10 year yields up 30% in 8 days.
The stock market has been volatile as well with the popular averages tanking in August and recovering to flirt with all-time high ground last week.
Momentum growth stocks have seen in discriminant selling in tandem with rallies in value and under-loved cats and dogs.
The heart and soul of speculative sentiment, IPO’s have broken badly.
Last week, SDC became what I believe is the worst performing IPO debut in history.
It’s been an exodus from crowded trade to the under-owned.
In the process, many traders have been caught wrong-footed and blindsided — it’s been a trend followers nightmare.
The question is are these rumblings the harbinger of a larger tectonic shift?
Over the weekend, drones attacked Saudi oil refineries.
Oil exploded 20% higher, the biggest jump on record.
Recent flare-ups in the Middle East this summer such as Iran’s bombing of oil tankers have had little effect on the oil markets.
Consequently, a lot of complacency has become embedded in the energy market.
To quote one astute market watcher: “….a major event that no one’s thinking about at present, this would probably be that commodity inflation is actually going to occur and probably show itself dramatically in an upside statement surge. If that happened, various degrees of panic and confusion would occur as the price assumptions were destroyed in a flash.”
Last week, I wrote about the connection between the July 1990 top quickly followed by the invasion of Kuwait and the 1st Gulf War and the period from the 1929 top and the current time frame.
To recap, basically this ties to Gann’s Master 60 Year Cycle and half that cycle (1990 to 2020).
I can’t help but wonder if the events this weekend could be a catalyst that is a nail in the complacency bubble.
What would a sustained flash in the price of crude do to assumptions of a dovish Fed this week?
The Fed would be between a larger rock and a harder place.
Reports show China has been receiving oil shipments from a larger number of Iranian tankers than was previously known, defying sanctions imposed by the U.S.
Given trade tensions between China and the U.S. and the history of bad blood between Iran and Saudi Arabia, this adds another dimension to this weekend’s events.
Basically, China and Iran have been thwarting U.S. oil sanctions at the same time that Iran is using the Strait of Hormuz to escalate tensions with the U.S. and Europe.
The unthinkable may quickly become thinkable.
At the beginning of September with the perception that long yields in the U.S. were headed to negative, we told subscribers to short TLT and to buy September 140 and October 143 puts.
The Maestro, former Fed Chairman Alan Greenspan, reflected that consensus saying on September 4, “ it’s only a matter of time before negative rates spread to the U.S”
As they say, timing is everything.
With TLT filling the open gap from August 5 and satisfying a 90 degree price decline, we closed out the balance of that short bet on Friday with TLT down to 137 from 149 just this month.
The one factor that all market participants need to keep in mind is that these price moves in precious metals, bonds and the savaging of the growth glamours are indicative of a breakout in fear and greed in markets.
Central bankers may try to temper a reaction to a shock in the oil markets but at this point, the ECB may have lost control of the ability to sustain future growth expectations, and the Fed may be losing the ability to manipulate financial markets.
This thesis would be confirmed by a turn up from this well-deserved pullback, and a new upleg in the precious metals.
Gold has pulled back to initial support satisfying the first 2 consecutive weekly lower lows since exploding in late May as anticipated.
The chart below is in part one of the factors that indicated a large advance.
In addition to a 1 year Cup & Handle, gold was working on two powerful Rule of 4 Breakouts.
Followers were well positioned for a runaway move in gold as evidenced in our June 16 report, Our Gold Prediction Is Playing Out.
They killed it in positions in GLD calls, GOLD calls, as well as positions in AG and AEM and KL.
We also took long swings in GDXJ on three different setups.
Gold pulled back from logical resistance at the top of a well defined trend channel leaving a Key Reversal Week two weeks ago.
If gold clears the Key Reversal Week near the 1565 region and sustains, it points the way to $100 higher.
Conclusion.
Despite a new record high in the SPY on Thursday, neither the SPX or NAZ registered new highs leaving a negative divergence.
In fact as seen in a weekly NAZ below, last week the index backtested a Ghost Line of a 1 year trend channel from 2018.
In so doing, the NAZ broke out above lateral resistance defined by the August 2018 top, but it may be carving out the right shoulder of a Head & Shoulders top pattern.
It is to be noted that the April breakout above the August 2018 top left a Bull Trap.
Ditto the July breakout.
Effectively, the NAZ has traced out two failed tests of the big August 2018 high.
Importantly, the NAZ turned its 3 Month Chart down into the December low, overbalancing every decline since the 2009 low in the process.
The turndown of the NAZ 3 Month Chart perpetuated a new high and broke sharply once again.
Rubber meet road. Now, either the NAZ is being rejected at clear cut resistance, or it will power higher.
The region just below 8000 is the point of no return.
A breakout seems doubtful given the breakage in the growth glamours, denizens of the NAZ.
Market leadership from the December low was anchored in software, which is reflected by PSJ.
PSJ topped on July 26 and has been waterlogged below its 50 day line.
On Monday, it broke down decisively from a Bear Flag.
With fresh damage in names like COUP, it looks like PSF has eyes for its September high of 89.
It currently stands at 93.
Position in SPXS calls, SQQQ
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