When The Train Leaves The Station
No Stopping It
Above is a 6 month chart of the $SPY. Charts really can’t predict what the next trade will be but they do give you a full accounting of the path you took to get to where you are.
Charts can help you make probabilistic decisions about markets. But, they aren’t the be-all end-all.
Last week, I blogged that the market was showing “no confidence” in President Biden. If we had a British-style PM-type government, the country would be calling for an election and based on polls, we would toss the Democratic Party to the curb.
Here is what I know about market psychology. When the freight train leaves the station, nothing short of big news turns it around.
I think we are starting to see panic in the market. When markets panic, they overshoot their targets. Based on this 6-month chart, the target is 426 in the SPY. The first target is around 435 to fill the gap.
Mr. Market watched President Biden’s press conference and saw that there was nothing there. Nada. He is incapable of executing his job. Not only that, but he invited Putin to do a small invasion of Ukraine, and with all the saber-rattling from neocons in both parties, the market is telling you that it doesn’t want to see American troops committed to a place with no strategic value to the United States. But, Biden is clearly not running his show so there is great uncertainty as to what will happen as the chess game plays out.
I have traded all kinds of markets on the up and on the down. Markets break faster than they rally. Face ripping rallies are actually pretty rare. I have been on the long side and the short side of them. I can remember dozens of trades I made where markets just ripped and there was basically nothing you could do.
When the train leaves the station, you cannot step in front of it. You really can’t sell, and you certainly can’t buy this market.
Don’t give me the bullshit about the Fed raising rates. You might hate the Fed. But, they have done an excellent job of being transparent to the market. Everyone has priced in two rate hikes for certain, and possibly three. By the way, I remember when interest rates were double digits so even if they raise rates by half a basis point, money is still cheap.
Inflation is driving the market, and so is fear. Mr. Market knows Biden doesn’t have an answer. Any policy he has proposed would fan the flames of inflation, not crush it. His party falls in line and won’t buck the party line. Even Manchin and Sinema would be for some spending bills depending on what they were targeting.
There is also fear of stagflation now. Welcome to the mid-1970s. Ford announced it was slowing the production of the Mustang because it couldn’t get semiconductor chips. How many products that we buy today have similar issues? Supply chains are not repaired from the totally misplaced forced economic shutdown. We still have a lot of fear from Covid and the people fanning the flames of fear are simply stupid at this point and don’t understand how to read data.
A couple of stories on crashes.
I remember back in October of 1987. My wife was a top salesperson for her division of Johnson and Johnson. The week before the October 19th crash, we were on an awards trip in Palm Desert, CA. A lot of the big wig execs from the home office were there and every day the market was continually getting crushed. One of them finally looked at me and asked how far I thought it would go.
I said, “When these things get a head of steam, they just keep going. There is no stopping them.” He retorted, “Your a real bear aren’t you?” I said, “No, not bearish or bullish, but just watch the prices.” The next day, the Dow got crushed again. My first day back at work was the big crash. That was the single worst day I have ever seen.
In 2000, I was on Bloomberg television. I used to do some commentary on all the financial networks. Never got paid for it. The anchor asked me where I thought the Nasdaq was going to go. I had looked at some charts prior to going on. My gut told me that the Nasdaq was full of bluster with no reason to be where it was at. I said, “I think it can go to 1500.” She said, “1500!!!! That’s quite a call.” I told her that there was way too much gas in the market and these companies were all trading on fumes, not real business or earnings. She ended the interview and I got a nasty letter from a Bloomberg producer telling me that viewers of Bloomberg were professional and I shouldn’t make outlandish statements like that. They were never letting me on their station again.
The Nasdaq on that day hit its all time high.
Then came the decline starting in March. It was ugly. I know guys that were long stocks that wouldn’t sell. They lost everything. Amazon had a 90% drawdown to give you some feel of what it was like.
In August of 2007, I got the feeling that the market was way overvalued. I shorted the S+P. Treasury Secretary Paulson announced the TALF that day. I got run over by the freight train. A year later, I had looked at the lean hog ($HE_F) market and got pretty short, along with having a ton of spreads on. The hog market started to break slowly.
In October of 2008, a congressman who will remain unnamed, called me to chat about how to vote on the bank bailout package. We had a long chat.
In the chat, I told him my position in the hogs. I told him if they didn’t bail out the banks, I was going to make a lot of money because when the stock market really breaks down, all assets tend to fall as people turn positions in everything to cash. Plus if they get a margin call on one asset, they might liquidate another to cover the margin if they like the position. They also might sell both out, take their licks, and start over.
We talked extensively about what it would mean to vote yes, and vote no. At the end of the chat, he decided to vote no. Personally, I thought the banks should have paid their penance for taking too much risk. Bankruptcy is a great disinfectant and the Federal Reserve was there to make sure things would be stable. That vote helped him in his next campaigns but initially hurt him since the general public wanted to see anything happen to stop the stock market destruction.
As the Senate debated the bailout, I was watching in the pit. My position was so large and the liquidity so light that I couldn’t get out no matter what. We watched other contracts trade and the S+P 500 gyrated wildly. The bailout gave the stock market a short sigh of relief before it started lower again. Once November elections happened and Obama was elected, it picked up steam hitting its low in March of 2009. Initially, Mr. Market didn’t like or trust Obama. It was only after he became President Wall Street that they had confidence in him.
The hogs broke like crazy after the relief rally. I never closed my position and had to pay taxes on it. Commodities are different than stocks. The first three days of trading in 2009 the hogs were lock limit higher against me and I lost 2/3rds of my profit. I didn’t cover, because I thought hogs were going lower. Swine flu hit the herd and the stock market broke. I covered in early March.
Remembering some of the bankruptcies back then, I recall massive interest rate option positions being transferred overnight from bankrupt firms to solvent firms. I think that happens without the bailout too.
Interestingly, 2009 was my worst trading year ever. I could never get in sync with the market after that and I didn’t buy the stock market rally. I also tried to fight the Federal Reserve which is a losing battle. The hogs also transitioned from pit to screen that year and I lost my edge.
But, the fact remains. When markets get a head of steam in one direction, they don’t stop. This one ain’t stopping for a bit until there is some sort of news it can hang its hat on. You never know where that news will come from and you won’t find it on television, or in a newspaper. Odds are good it will be some obscure fact and not a big thing.
Trading markets like this you have to look within yourself, do your homework, measure your risk, and hang on for the ride.
The situation in Washington is not going to get better. Even if the Democrats forced Biden out. The market would actually break further on that news because of the uncertainty that would follow.
I don’t know where the bottom is or when a relief rally will happen. I do know early yesterday it looked like a dead cat bounce and I tweeted as much.
I don’t want to pat myself on the back too much because I am busy doing a bunch of stuff now and not actively trading the market. I have a different perspective than people who are always in the market.
But, the fact remains, the freight train has left the station.
Jeff - Love your posts and this was a great one. I had a similar feeling and bought some SPY puts earlier this week. The train has left the station. Hope all is well in LV
Fabulous post. Thanks.
Interest rates are still low.
JLM
www.themusingsofthebigredcar.com