2/08 Market Update – Important observations regarding a market primed for a reversal

I have been observing the ongoing financial market distortions in the wake of the manufactured covid crisis, and I wanted to relay my interpretations of the data and trends that I intend to take advantage of in the coming weeks and months.

I have included two charts that illustrate what I am trying to show to the reader. Please click the charts to enlarge.

Red/green candles, 10-year breakeven inflation rate; Purple, UUP (US Dollar Index Bullish Fund)

The above chart shows how the USDX (UUP:NYSE) has fallen to the low end of its three-year support. The reasons here are very simple to understand. The US Fed has engineered a collapse of the UST yield curve in the wake of covid, yet has allowed domestic inflationary expectations to run hot. As domestic inflation has run hotter than elsewhere in the developed world, the USD’s appeal has waned, given that its correspondent short- and longer-dated yields are remaining intentionally suppressed. Why own the dollar if its real yield is lower than elsewhere?

The Fed’s publicly announced intention was to allow inflation to make up for lost time and that it would force inflationary expectations to move higher for an extended period. As we can see on the chart, the TIPS spread and inflationary expectations have moved higher, and am growing concerned that it has moved higher than even the Fed thought.

What does this mean? I have to believe that if the covid dilemma wanes over the next several months, the Fed may have to begin removing some stimulus earlier than initially forecasted. I have to believe that this is why we are seeing a floor here in the USDX as those who have been short and bearish on the USD are beginning to reassess what I see.  I find it difficult comprehend that the Fed will allow their current monetary policy to continue unchanged for another year, let alone two.

Okay, what does this mean for the markets overall? Let’s take a look at the next chart. Please click to enlarge.

(Right axis) Purple, Nasdaq 100; Light blue, S&P 500; Red, DJ Commodity Index; Red/Green candles, 10-year breakeven inflation rate; (Left axis) White, 10-year UST yield

It is clearly evident that the collapse in breakeven inflationary expectations, as well as the sharp drop in the 10-year UST yield, corresponded directly to the rise in the Nasdaq 100, S&P 500, and DJ commodity index. We can see from the first chart that the USD, after its initial bump up when covid hit, has taken it on the chin. Based on its reactionary behavior, I believe the USD’s weakness here has less to do with global politics and much more to do with the Fed’s current policy.

I feel it’s very important to show some people what I am looking at here, and I will go out on a limb to make some intermediate-term market predictions.

  • The charts and sentiment are telling us that the USDX has found a floor here, as an increasing number of traders are contemplating that sooner, rather than later, the Fed may have to act to rein in inflation. The Fed may have to speed up its timetable.
  • If this is the case, any dollar-bearish trade will be in jeopardy. This includes the commodity bullish trade, as well as the near-term speculation in stocks.
  • The market pretends not to concern itself with round numbers, but it’s obsessed with them. I think we can begin to see a pullback as the S&P 500 takes on 4,000.
  • I would be concerned that the Fed may have to begin looking at a modification of its policies. This may initially translate into a change in the Fed language at some point that will be sooner than the market expects.
  • After a change in the Fed’s language, they may have to begin to rein in agency-backed mortgage purchases. The Fed needs to keep the USG in business, and the last part will be a reduction in UST buys.
  • The last change in Fed policy will be for an increase in the overnight rates.
  • If the Fed begins to engage in anything considered hawkish, we will see stocks, commodities, and bonds fall in value. The USD will rise, which will hit the monetary metals and, dare to say, bitcoin.
  • This is not a change in the overall trend, but rather a reversal on the way up. I am especially concerned about commodities as I doubt we are yet in a commodities supercycle. These commodity markets are probably the most overstretched I have ever seen, and if we see the speculative money come off the table, these commodity markets could get hit very hard. When everyone is this bullish, I have to take the contra.

Believe me when I tell you this. The Fed can easily say that the covid vaccine campaign is moving along well and that the world is getting back to normal more quickly than they thought. If inflation continues rising much higher here and the inflation gauges (like the TIPS spread) do not stabilize, the wheels could come off the wagon on QE, and the Fed still has it within its grasp to tamp it down.

With this said, the longer the Fed goes without a change to its current policies, the higher asset prices will rise. The longer the Fed waits, the worse the downside will be when it happens.

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23 thoughts on “2/08 Market Update – Important observations regarding a market primed for a reversal

  1. CPI data on weak side. More asset pumping on the way. Remember to always set aside some profits, so we have something to show for our work and risk… and tax obligations.

    1. So is CCTL still in play? You mentioned it could go parabolic.
      I didn’t buy DIGAF fortunately as it dropped 11% so far.

  2. Chris 1st off thanks again and i will admit here in front of everyone i dont know much about trading or markets. I do my best to understand the comments above but will admit some of it is over my head but anyway you mentioned a pullback on the S&P do you think that will be short lived if the FED/Gov starts sending out cash to the people? Will that not pump up the market? as always thank you for taking the time to share your information.

    1. It all depends on inflation data. If inflation stays low, the Feds can send out paychecks to everyone and we can sit around and trade all day. Inflation data is low and the CPI data this morning was below consensus, because everyone is also sitting on all this offsetting debt. It really is all so insane, but at least we know.

      I am making hay while the sun shines. The massive speculative cash inflows into OTC stocks is without precedent. That is thanks to social media and the message boards. Cryptos and penny stocks are the biggest beneficiaries of social media. The plebes can pretend they are running hedge funds out of their rented studio apts.

      I may buy another condo this year.

      1. BTW since TD Ameritrade no longer charges commissions on Nasdaq and NYSE trade, I make as many as 50 trades a day. Most trades I do not bother to announce. With zero commissions, it is so much easier to scalp profitably for pennies.

        Apps like Robinhood have the backing of the PTB since it forced all brokers to ditch commissions. I liked the Robinhood CEO tiff with Musk over GME. Two puppets doing the will of their father the devil, duking it out on social media.

        The plebes love it. Stock mania is the result. I haven’t done this well since late 2017 when I was trading cryptos in 2017. Reminds me of trading during the tech wreck 20 years ago. Trading was easy back then, too. Enjoy it. With today’s low CPI numbers, the plebes can drink and party some more.

  3. Just an observation here… I am noticing that a few of these new SPACs and companies that make batteries and EVs have faltered over the past week or two. I suspect that now that the big boys like GM and Ford are getting on the EV bandwagon, some investors are taking some profits. I think of GOEV, RMO, QS, GIK, VCVC, etc., as some examples.

  4. Sold off half CCTL so far up to .016. The shares I still own are free now, so I will ride them to the top or wherever the plebes take them. I will let you know what else I do. Won’t leave you hanging. A shocking walk-off grand slam.

    1. I feel like I was the opposing relief pitcher playing away who just hit a walk-off grand slam to take the lead. The crowd went dead silent. I think CCTL is a multi-bagger… still. Already 3x for me since yesterday afternoon on an otherwise dull day… this is how we stick it to the man. Pay your taxes!

        1. Be careful on the reversal here going into close. Big profit taking after a huge run up. I always feel more confident when we get in before the run. You paid up for your shares, so be vigilant and take profits as they accrue. I am playing with house money, so to speak, but there is another one DIGAF that the message posters are trading. These play off of the action in RIOT.

          I already withdrew my realized profits from my trading a/c and into two checking a/c’s from late yesterday and today. Holding about 25% of yesterday’s 800k share position. I would have bought more, but it ran up like a rocket before I had a chance. Oh well, about 50% of the profit as OEG YTD, but all in one 24 hour period.

  5. If your bearish on bitcoin based on your prediction of dollar strength, how does this correlate with your CCTL play?Are you just thinking short term?

    1. I actually am not bearish on btc. I guess it’s my old trader days with futures taking scalps. I traditionally looked for ways to short, even if I was bullish overall. I am actually bullish on btc as it’s hard to see bearishness here, especially. longer term. I hold a smattering of btc, eth, ltc, bch and don’t really look at it. It’s in coinbase and kraken and I chose to pay marked to market taxes on them every year, like futures.

      I may malign btc and cryptos as a concept, but that does not mean I think they are going to zero. Quite the contrary. The masses love them and thus I take an objective view.

      This commentary I put out contemplates a hypothetical situation, as the Fed has to rein in this stimulus or it risks a bad retracement when it finally does. perhaps that is the intent I guess. Maybe it never comes to pass and the sky is the limit. With this morning’s announcement of TSLA buying btc, the miners are on fire. CCTL was the only one that is dirt cheap. It could go to 10 cents and be a 300mm company. That would mean 15x from here.

      As for my stock picks, these are all primarily trading opportunities. I post them as I get asked via emails and sometimes on comments section about any picks I may have from time to time. CCTL looks to be ripe for a MAJOR parabolic move. Today was already, and I guess tomorrow it will be even more as it had a massive move in the last 15 mins. Every time I refreshed my trading screen the percent move in portfolio was breathtaking. This market is nuts.

      The trend is our friend and that is higher with everything… until the Fed utters anything regarded as hawkish

      1. The uptick in Bitcoin today was from Musk’s statement, but the $1.5 billion purchase happened a month ago. I always thought the powers that be would pump it up very high then dump it.
        At this point in time what news could tank Bitcoin?

        1. It’s a freight train for now. I wrote this article, because I wanted to illustrate that the markets will bow to any Fed action. I have gotten a bunch of emails about commods and my answer is they will fall with everything else if the Fed changes course. For now everything is heading north. These cryptos are on fire. I look at eth with astonishment. Bitcoin was 4k at the covid crash. It’s up over 10x since the covid low. It has responded the best of all investment classes.

          We are definitely seeing the PTB pumping btc. Musk needed permission to do that. He needs permission to do anything, but he has major financial support and protection.

      2. Got it. Thanks.
        Would you say that you’re macro theory hinges on the progression of the coronavirus situation then? Also, I’m curious what you mean by the “manufactured coronavirus pandemic” if I’m quoting your correctly?

        1. Indeed. Manufactured. We approach it this way. 911 was manufactured and so was 2008. I am deliberate in the words I use.

          I am not saying the markets are going to do what the article states. It’s just that they will if the Fed reverses. All the markets are now in sync with Fed action. Even commods, gold, and btc. Nothing will be immune. Except cash.

          For now, the TIPS spread may just be part of the speculative fervor, but it has gotten the attention of many, and Zerohedge just wrote an article on it this morning.

  6. CCTL; Coin Citadel… Given the explosive price movement in btc I found a really obscure mining firm on the pink sheets. Lotto ticket money. This market is absolutely insane! Cost basis .006

      1. Sold third just before close on CCTL at .008. Up 33% in last 15 mins. Still hold 2/3 of original position.

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