And I knew there was no turning back.” – Thunderstruck AC/DC
“The difference between truth and fiction is that fiction has to make sense.” – Mark Twain
“Every crowd has a silver lining.” – P.T. Barnum
“The masses have never thirsted after truth. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim.” – Gustave Le Bon, The Crowd
“Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.” – Charles Mackay, Extraordinary Popular Delusions and the Madness Of Crowds
A flock of birds wheeling in flight at the identical instant, is an example of the “mass mind.”
The panic buying in cloud and software names yesterday on the heels of CRM’s blow out earnings and the announcement of it going into the Dow is a good example of a flock of stocks in flight.
A chunk of Wednesday’s SPX rally was due exclusively to CRM, which gapped up and exploded 29% intraday taking my Four Horseman, TWLO, COUP, OKTA and MDB along for the ride.
There are times when the market wheels and crashes without any obvious change in the economy, such as in 1962, 1987 or even 1929.
The economy was going gangbusters in each instance. Some will say the crash in 1929 was anticipating the Great Depression, others argue that the great unwinding of the crash was a catalyst for the a downturn that was exacerbated by policy makers.
That’s not what this is about. It’s not my objective to debate the cause and effect of the ’29 crash.
My proposition is that these crashes were neither a function of fundamentals or technicals, but that only mass psychology could have foreseen those smashes.
Clearly fundamentals have not been great during the pandemic, yet the market has been in a virtually uninterrupted advance.
Is it discounting the resurgence in the economy on a miracle vaccine.
It has shrugged off souring trade relations with China and a failure by Congress to pass a new relief bill and social unrest and rioting.
Technicals have been suspect all month.
Mass psychology is the mainspring of the market and can trump technicals as overbought becomes more overbought when a parabola is playing out as with the NDX currently from the July 24 low.
On July 24, the NDX turned its 3 Day Chart down on an undercut of its 20 day moving average and tailed back up.
The SPX has closed higher for 5 consecutive days and for four out of those days, breadth has been negative.
In other words, the NYSE advance/decline ratio closed with more stocks down than up on the day… including Wednesday’s rip to new record highs.
The same is true for NYSE up and down volume.
The SPX 5 day closing streak has been marked by more NYSE down volume than up volume on 4 of the last 5 days, including Wednesday.
While the internals wane, investment advisors have become even more bullish. The weekly Investors Intelligence Advisors Survey has 60% of advisors bullish and just 16.2% bearish.
This is the highest extreme since January 2018, which marked the start of a correction that didn’t end until March 2020.
It must be said that the January 2018 extreme in advisor sentiment was the highest in 31 years — back to, yes, 1987.
This rally is in rarified air.
My proposition is that mass psychology is dominated by cycles and the Great Spiritus Mondi.
The only tool I know of that manifests mass psychology into form is the Square of 9 Wheel of Time & Price.
On March 23, the SPY hit a low of 218. It was a time and price square-out that propelled me to state a low was in.
I was by no means clever enough to see a direct route versus scenic route to new record highs in just 5 months.
Of course, 5 months after the 1929 crash, I suspect The Crowd believed that the worst was behind them and the market was on a march to a new plateau.
W.D. Gann wrote that when time and price square-out, expect a change in trend.
The following Square of 9 shows the aforesaid square-out.
It also shows that 2 price cycles of 360 degrees up from 218 is 352.
Green is March 23 low
Red is 218 (SPY low on March 23)
Purple is 352 (2 cycles of 360 degrees up from 218)
It looks like the SPY is melting up to 352.
Summary. At some point ‘The Crowd” will no longer be able to restrain itself in the face of an upside onslaught.
It is at that point you may return to them the stocks they sold you at lower levels.
Optimism will be replaced by frenzy and fear of missing out.
Fundamentals at their apogee and Technical Indicators will point down in the face of the Parabola.
The above is logical and, therefore, easy to understand, but it is hard to see in the moment.
Such is the moment when the market turns, all at once, like a flock of birds.
Strategy. Timing is always illusive but with yesterday’s record highs, VXX made a new low for its downtrend and reversed with authority.
As well, earlier this week I flagged the Trap Door pattern in ten year yields, TNX, a pattern which opens the door to a potentially profound move up in yields.
This on a day when Fed Chair Powell is set to deliver what is advertised as a profound speech on inflation.
I can’t help but wonder if the Last of the Bond Vigilantes won’t take the ball out of the Fed’s hands at this presumptive turning point.
