But never wave bye bye.” — David Bowie, Modern Love
“Some in clandestine companies combine;
Erect new stocks to trade beyond the line’
With air and empty names beguile the town,
And raise new credits first, then cry ‘em down;
Divide the empty nothing into shares,
And set the crowd together by the ears.” — Defoe
In the great Florida land boom of the early 1920s, prices of vacant acreage increased more than ten-fold and then collapsed within one year to the starting point.
The U.S. stock market boom of the Roaring Twenties, ending in September 1929, saw stock prices increase six-fold and then collapse in less than three years to a point lower than where the boom started.
In the 1950 cold war period, any stocks associated with uranium became popular, rising more than ten-fold and then declining more than 90%.
In the gold boom into 1980, the price of an ounce of gold had increased from $35 in 1971 to $875 and then declined more than 60%. It would be almost 20 years until 1999 that a new bull marketwould begin from a low of $252.
When a wild speculation in Kuwait stocks not listed on the Kuwait Exchange ended in August 1982, many had been bought for later delivery with more than $94 billion U.S. in checks postdated as much as 6 months.
6,000 dealers failed to honor close to 29,000 checks, many of which were later found to be worthless. This was an amount larger than the total market value of all stocks on any European exchange at the time, except London.
These are but a few of the episodes of manic booms and busts that litter the landscape of financial history.
There are more than a hundred other examples of the delusion and emotion-igniting excess that gripped market participants in the 20th Century alone.
“Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” — Charles Mackay
The above quote from Extraordinary Popular Delusions is why momentum moves in the market charge ahead, ignoring all signs of trouble while stocks falter one by one slowly at the top.
Momentum begets momentum; relative strength begets relative strength… until they don’t.
Traders' narratives to justify the long trade multiply the longer the market walks up the staircase of delusion before it rides the banister to hell.
Illusions can be said to what fools the mind; delusions are things that one perceives to be truth, contrary to all evidence.
The illusion is that with interest rates remaining near zero, the insanity will continue, that there’s simply nowhere else to put money.
One bullish professor ventures that if rates go up, it will just be more bullish grist for the stock market as money will flee the bond market and run into stocks.
The delusion is what has become a cult-like belief in the Fed; that they can backstop any eventuality — and not just as a stop-gap, but for infinity.
Belief is complete.
As long as the Fed is on the market’s side, all is rosy.
One pundit offers “I can assure that there is no upper limit to the market, that anything priced in a fiat currency that is purposely inflated go up perpetually, forever.”
While trajectory tries to assure us of this, the Weimar experience in Germany argues against it.
Just because one may not know what the limit to price is does not mean that there is no limit.
W.D. Gann wrote that time is more important than price.
While price seems impervious to a charging bull, Time is the Matador with a red cape.
The greatest trick the devil ever pulled was convincing the world that he didn’t exist.
The greatest trick the Fed is trying to pull is to convince the world that risk doesn’t exist.
“But believe me my dear boy, there is nothing stronger than those two: patience and time, they will do it all.” — Leo Tolstoy, War and Peace
Conclusion. We’ve gone from a handful of Mega FANGMAN stocks that dominated price action into September to small stocks being the tip of the momentum spear.
In the last week we’ve seen these Vampires of market cap (FB, AAPL, GOOG, MSFT, AMZN and NFLX) reclaim their 50 day lines to challenge make new highs).
Two questions, is this rotation into big liquid defensive, and will it suck the blood out of the small stocks?
Maybe the small caps and the big caps join hands like Butch and Sundance in a fling to cap off an epic enthusiasm built a three-fold optimism of Fed policy, fiscal stimulus and pent-up demand on the reopening trade; but, under the surface lurks worries about new lethal strains of coronavirus, business unfriendly policies from Washington courtesy of a Democratic controlled House, Senate and Oval Office. As well, despite the narrative as to pent-up demand, arguably the market has already aggressively discounted that trade.
The discounting mechanism called the market has been broken by the Fed who says they’re “in it to win it.”
But it’s difficult to increase more enthusiasm from a point of hysteria.
The idea that fundamentals of the old world don’t matter and that all you need in money is an illusion… albeit one well-bought this century courtesy of Greenspan, Bernanke and Yellen.
MMT is Modern Love.
The modern Fed is religion based on the solitary cowlick of the wealth effect.
The wealth effect works like a Ponzi scheme works.
We must live in the real world, not a hologram where all that market participants know is the price of everything and the value of nothing.
Strategy. We are in uncharted waters with wave upon wave of record extremes over the last three years.
Tomorrow’s report will walk through these extremes.
There are of course those who believe that all market action occurs in uncharted waters, that all market action is random and hence the current unprecedented action is “unremarkable.”
I am not one of those, believing instead that the market adheres to innate price structure and that cycles exert their influence.
My trading career started in 1982 at the famous Drexel Burnham office in Beverly Hills.
I have been through many cycles.
At the tops there were no doubters; at the bottom there were no believers.
I have been providing long and short day trading and swing ideas for traders since 1996 along in a Nightly Stock Report as well as a Morning Report that analyzes the position of the market and individual stocks.
The service includes the Hit & Run Private Twitter Feed where many of our positions are initiated.
So far the markets have shrugged off a slew of oddities and extremes. So far it hasn’t mattered.
As W.D. Gann wrote, time turns trend.
Check out the special report to see how Time shapes up.
