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Crunch time for the US stock markets
Capitulation day is approaching swiftly
Thomas Look
September 30, 2022
Crunch time for the US stock markets
Capitulation day is approaching swiftly
KEY POINTS
The DJIA and the SP 500 fell to 52-week lows on 27 September. The NASDAQ and the NASDAQ 100 still hold well above their June lows - confirming our positive divergence thesis.
The CBOE volatility index (VIX) has moved towards 35; the 52-week high was below 39. The SPX Put/Call Ratio reached 1.69 - the 52-week high was slightly below 2.50.
FX markets are still in turmoil - the British Pound and the Chinese Yuan show continued signs of economic distress. Bond yields in the US keep rising, with the 2 Year Treasury at around 4.3 % and the 10 Year Treasury above 4 %.
Something will break soon, leading the FED to moderate its stance on tightening. This will provide the buying opportunity we have been looking for.
Beware: If the FED keeps draining liquidity to move the terminal rate above 5 %, we may see multiple market meltdowns - aka a crash.
How to play the US stock market
As crashes occur relatively infrequently, we still favor the buying opportunity scenario and would incrementally add to our initial positions entered on 26 September.
We remain cautious as the market enters bull territory cyclically in late October/ early November, coinciding with the midterm elections on 8 November. Contrary to popular belief, a situation where the President is from one party and the majority in Congress from the other has historically supported the bull case.
Beware: These black swan events may trigger a Lehman-type market meltdown
Apart from the FED and the Ukraine war, we see three potential black swan events that may trigger a Lehman-type market meltdown:
a UK stock market, bond market, or currency crash
the Chinese real estate bubble bursting and/or the Yuan continuing to slide massively
(3) Credit Suisse filing for bankruptcy.
I am especially looking at how Bitcoin and Ether are moving. Bitcoin prices have been positively correlated with NASDAQ prices by more than 80 % recently - simply swinging wider and a bit earlier. So a break of Bitcoin below 18.000 - the June lows - may be some form of leading technical indicator of a crash to come. As of writing BTC stands at around 18750 but looks a bit like George Foreman after round 7 in the epic "Rumble in the jungle " fight against Ali. What happened in round 8 is common knowledge.