Starting with some thoughts I tweeted on June 17:
Here’s a chart showing how extreme the selling/capitulation has been:
This is absolutely historic selling. Remember DotBust? Lehman? This is even more selling than seen at the depths of those recessions.
If a global recession is coming, it will be the most widely anticipated in history.
Everyone finally sold out perfectly at the top.
I’ve lost count of how many charts look like this, most at historic extremes. Every time I send one out, 90% of the responses are “this is 2008, crash coming”.
Take this next chart as an example:
Pretty self-explanatory. I shared it on Twitter with the following commentary:
The Russell 2000 has seen a historic wipeout in positioning (like everything else). Traders have completely abandoned this index, perhaps using it as a “hedge” against other holdings. Look at the bottom panel, showing Small Speculators in a historic selling capitulation, matched only by 2008. Extremely contrarian Bullish.
Then I added:
Now look at all the bottoms in the last 11 years. Small Traders were capitulating/selling in all of them. Forget Stocks for a moment. When Small Traders do this in any market, emotions are the primary factor. Avoid emotions, they are the enemy.
Here are some of the responses I received after posting these two charts:
“It says we are in 2008 all over again”
“Small Specs are smart money, this is right before a giant crash”
“Doesn’t matter, liquidity is falling and nothing can stop it”
“There is nothing but talk about how bearish everybody else is. Kind of funny”
“Translation: smart money leaving, dumb money overpaying”
Only one person responded to the first chart with the following:
“Looks like all were great entry points”
Every day since Stocks bottomed in early June, I continue to be surprised by how extreme the mood has become. And it’s not just the data. Even just talking to people it’s clear that a deep fear/anger has taken over. Emotions are at historic extremes.
I’ve kept a trading journal for over two decades. This is a shortened version of what I’ve observed these last few weeks:
- Since Stocks bottomed in early June, it’s been a relentless rally only surpassed by the extreme reluctance to embrace it. Every single day it’s the same story, veiled in some fresh argument:
- First I was told the rally was fake because it was all short-covering and not real buying. Then it was supposed to fail at resistance, as traders bought massive Puts and investors sold their longs (what little they had left) down to the bone, pushing my models to extreme oversold. As June FOMC approached, Stocks had supposedly gotten ahead of themselves and would peak on the Fed announcement. Then I was told Stocks barely rose after the announcement, which indicated buyer fatigue. The next day when Stocks exploded higher again, I was told the Fed was manipulating rates on behalf of the White House. Now with the S&P grinding highs “it’s too late to be bullish” (this is from an actual headline that came out last week). To top it off, on the day of the breakout last week, traders pulled billions out of SPY because they felt like being even more in cash.
- Mass insanity is the only way to describe the last few weeks. The Bearish narrative is so entrenched that it still hasn’t adjusted to the fact that Stocks ran to new highs in almost a straight line. Bears were promised a recession, a deflationary bust, a trade crisis to last “the rest of our careers”, an “uninvestable anti-Tech mood”, “Tech’s glory days are over”, and “don’t take any risk in 2019” (these quotes are from various media articles published during this rally). And now, with Stocks at the highs the same people who missed the whole move say “it’s too late to be bullish”.
- Paul Tudor Jones once said there is no training for the last third of a Bull market. There are very few people left in the business today who saw both the 2006-2007 Housing/Commodity/EM Bubble and the 1999-2000 Tech Bubble in real-time. The current environment is the complete opposite of those periods.
- If the Bull market HASN’T ended, then it’s missing a classic “final third”.
Back to the same chart from earlier, adding some red lines:
This is the third time in this Bull market that Stocks recovered from a large correction but investor selling continued relentlessly. In 2012 and 2016, the selling persisted until Stocks had already pushed all the way back to previous highs. The following years were both massive extension rallies.
I can already hear the feedback…
“But it will end in tears just like [insert favorite year here] all over again, Short everything!”
Maybe it will end in tears. But I’m not sure that it has to end right here. One thing we can all agree on, is that history repeats itself. Just don’t forget it can also repeat itself on the upside.
This is one of the most extreme environments I’ve ever seen. Though I am far from certain, I think the path of maximum pain is higher. Stocks & Commodities are rising, the Dollar & Bonds may be headed lower. Central Bank liquidity is coming back, not just in the U.S. but all over the world.
Meanwhile against this backdrop, Stocks just posted the biggest first-half gain since 1997. You know what else last happened in 1997? Stocks broke to new highs with more individual investors leaning Bearish than Bullish (AAII survey). Who knows, maybe it’s time to dust off the old diary from the 1997-1999 “last third”, just in case.
Thanks for reading!
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