“There’s Real Fear & Panic Out There” But Imbalances Don’t Last

Authored by Sven Henrich via NorthmanTrader.com,

It’s been a long journey from Lying Highs in September to the carnage we are witnessing in markets now. The bull market trend looks broken and political chaos is adding to lousy sentiment.

Markets overshot to the upside and now they’re overshooting to the downside (in the short term at least) creating an imbalance in charts and signals that will need to repair itself technically in the weeks and months ahead. I’m of the perhaps variant view that only once that repair effort has taken place we can then fully assess whether this market is onto a multi-year bear market journey. It sure looks this way at the moment.

My update here then is context of Perspective and Dirty Rally.

All that I outlined in these articles still applies.

The risk range I’ve been pointing to has been reached and quickly so:

Whether Friday was the low remains unconfirmed. It is notable that the 2000 analog I’ve been pointing to so far plays a charm as markets bottomed on December 21 back then:

Hence it remains entirely possible that we’ve seen a low on Friday or may before cash open on Monday.

Political chaos in DC has now overtly infected market sentiment. Friday’s government shutdown talk and now the reality of the same is causing consternation, as were Navarro’s negative China comments on Friday afternoon.

Weekend news reports that president Trump is considering firing Fed Chair Powell is causing literal panic talk in the financial world and hence it is no accident that Treasury Secretary Mnuchin took it upon himself to attempt damage control before futures open on Sunday:

You can make of it as you wish, but I have little doubt that the former Goldman Sachs employee is getting an earful from the financial community.

Make no mistake about it, there’s real fear and panic out there as markets are dislocating to the downside.

Given the political risk bleeding into markets further downside risk can’t be excluded.

For $ES the risk range extends into its .618 fib and the weekly 200MA:

And the monthly 50MA and lower monthly Bollinger Band are sitting in the 2340 zone:

I can’t say whether we reach these levels in the near term as clearly Mnuchin and others are working hard at damage control, but these levels must be part of the risk profile. But if these levels were to be reached in the near term I suspect current market downside would be contained in their proximity. For now at least.

As I mentioned earlier markets have dislocated to the downside creating imbalances and these imbalances are apparent everywhere in charts and signals and I’ll highlight a few examples.

But note that on many charts we are showing 2008/2009 like conditions, something that is entirely inconsistent with the earnings and economic data we’re still seeing:

It’s almost as if markets are pricing in a financial crisis that has yet to occur.

Consider:

$BPSPX: Back to levels not seen since 2009:

$NDX components below their 200MA at readings not seen since the financial crisis:

$SPX components below their 200MA at readings not seen since the financial crisis or the bottom of the 2011 correction:

$NYHILO near rock bottom:

$NYMO weekly close at -99:

I could go on, but you get the message: These markets are extremely oversold with readings seen either at bottoms or at points where significant counter rallies have emerged in the past.

In context we see imbalances everywhere.

$SPX is now 13% below its daily 200MA:

$RUT is as oversold on the weekly chart as it was during the financial crisis:

But where is the financial crisis?  I see slowing growth and concerns about a coming recession, all of which is true, but I’ve yet to see evidence of a financial crisis.

What I do see are markets that dosed out on a tax cut and 10 years of artificial liquidity and are now paying the price for excess optimism. Now it’s hangover time and when you’re hung over every bit of noise makes the headache worse. Time to sleep it off and let markets heal, and this is the process I expect markets to undergo once things calm down a bit.

As of now we have massive imbalances to the downside and these disconnects will cause an effort at a reconnect. With earnings data coming in January and increased pressure to resolve the trade wars likely producing some attempts at resolution in Q1 2019 we can then reassess the bull/bear market debate with updated information.

Despite technical extensions bulls kept screaming for every higher targets in September. Bears are now screaming for ever lower targets in December. Ignore the screaming. Focus on the technicals. Everybody chill. Imbalances don’t last.

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