Weekly Comment - September 17, 2020

Sep 17, 2020 | Nick Foglietta


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Don’t be the “short stack” trying to call the “tall stack.”

Bottoms are Events, Tops are Processes

The title of this short editorial is an old Wall Street adage, which refers to the processes of making a bottom and top in the stock market.

The stock market tends to drop sharply, at the end of a decline and then bottom on a swing to BULLISH internals. Tops take time to make tempting investors to buy the dip but never really giving the returns associated with the preceding BULL market any longer. We may be in this process now.

Financial markets were relatively sideways since last writing to you. Interest rates are locked flat, and stocks have tried to short-term bottom and bounce. Breadth for stock markets improved quite nicely since last week.

Let’s look at a couple of three month charts.

The first chart is the S&P 500 index. The decline seen is mainly caused by technology correcting. I am watching to see how this chart behaves in front of the US election now less than 50 days away.

The next chart shows our Canadian stock index. Similar shape and similar cause for decline.

Gold bullion prices remain range bound in US dollars. There is an easily visible floor at $1,900 for gold.

The only chart that caught my eye this week was “broad money growth” in the US.

That is a 55 year time frame featured in the chart. Broad money growth (liquidity) has come right back into normal levels in the past four weeks.

We now are going to get to test the theory:

Are asset prices elevated because of broad money printing and government hand out programs?

If the answer is yes to that question, I expect stock market to have a meaningful pullback here.

If no, then stock markets will continue to work their way forward into the US election.

As stated in the Tri-Annual Review “Harvest Time,” investors should be extra careful with higher risk positions as the present BULL market shows its age.

Here is another interesting anomaly to consider:

Pro-Shares Ultra Pro QQQ (TQQQ), which mimics the NASDAQ but leveraged 3x daily exposure, collected $1.5 billion more in assets last week. That was the largest increase since 2010. But the QQQ, non-leveraged NASDAQ proxy lost $4.8 billion, the most in 20 years.”

H/T – Peter Boockvar

That is one of the strongest indicators of sentiment I have ever seen.

The confidence to speculate with triple leverage at record highs, but investors taking down investment exposure at a record rate.

This is going to be a short comment. If I don’t have lots to say I don’t want to waste your time reading my musings.

Let me end with what I thought was a great way to sum up “the central bankers’ bluff”: H/T Santiago Capital

“QE (quantitative easing) is largely a bluff by the Fed because they are only holding a pair of 5s. But they also have the biggest stack at the table so players must take notice. Banks are experienced and know they are bluffing. As such, they call by not lending money out easily and buying bonds even with ridiculously low yields. The public folds and buys equities and inflation linked securities.

In poker parlance, that is a pretty solid summary. It also describes my own personal biases as one who “folded to buy inflation.” But my “ace in the hole,” is that I am not a true believer in Fed rhetoric.

I will tactically exit this market on any technical weakness. Don’t be the “short stack” trying to call the “tall stack.” Play each hand as it is dealt, but know you can always pick up your chips and walk away from the table.

Have a great week and reach out if you'd like a call.