The Toxic Market Cocktail


“Try to catch the deluge in a paper cup.”
-Crowded House

Weak political leaders across the globe and fake money make a toxic cocktail.

It is a fitting last call to a major economic cycle.

The Fed is raising rates to fight inflation. But Powell cannot play Volker because of debt payments.

The Fed cannot increase QE if the economy nose-dives because of ramping inflation. And they cannot taper more because of the bad economy.

This is a cycle that started with high inflation peaking and sky-high yields and stocks surging in August 1982. 40 years later I think the cycle topped out with inflation and yields waking up and stocks topping and plummeting from late 2021.

It’s a Biblical 40-year cycle of debt build-up.

Markets play out in threes and this is the third deluge this century.

We had the 2000-2002 Dot.Com bust, the 2007-2009 Great Financial Crisis, and the current downturn.

No wonder we have a generation that is hooked to the meme “Buy the Dip” and “They Always Come Back”

And of course there was the 2020 four-week Covid Crash that was the Comeback Kid on steroids.

Consequently, it’s not surprising that 2022 has been a slow-motion car crash lacking the pure panic that has accompanied most if not all intermediate term declines.

In a nutshell, market participants have been either holding on to their former high flyers or buying more on the way down… averaging down.

After all, if you liked NFLX at 700, you love it at 170…right?

The Buy the Dippers step into the rallies… then we get another rollover. Rinse and wash and repeat.

So no plum-line panic drop.

Just a bleeding out.

Cycles and the structure suggest it is possible an intermediate-term low was carved out in June.

A Wave 1 decline to be followed by a Wave 2 counter-trend corrective rally.

There is a likelihood that the rally off the June 16/17 low into June 27 was a little wave 1 of this larger Wave 2 counter-trend rally.

The presumption is an a b c pullback has been playing out since the June 27 peak.

The SPX broke down below a rising trend line on Wednesday and Thursday.

On Wednesday, the index rebounded to close above the rising trend line.

On Thursday, the trend line was broken with authority but once again rebounded to backtest the broken trend line.

If the SPX can convert the trend line and reclaim and sustain above it pushing above 3820, a Bear Trap may be in progress.

And there are beaucoup bears for whom every rally has been easy salmon. Recapturing 3820 may be a come-to-Jesus moment those selling every rip.

Let’s take a look.

Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets us into trouble.

Patterns are a trader's best thought process.

That said, if you need a “reason for a rally”…traders have plowed almost $10 billion into inverse ETF’s.

This is nearly twice as much as in May. The run rate is ramping.

Can you say crowded trade?

Crash bets have become chic.

It seems like market participants are hyperventilating about catching a meltdown, a catharsis, a capitulation—call it by whatever platitude you will—FOMO has metastasized from chasing rallies to salivating over when the next plug pull will play out and when the VIX will hit 70.

Answer… not yet, but sooner than you think. Patience pays sayeth Livermore.

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