The talking heads on television have started their nonsense once again but unfortunately for the average investor, the reality is that what we have witnessed in the last week is nothing more than a bear market rally.
The usual suspects were on the bubblevisions proclaiming that the Fed can not raise rates at the original pace discussed, that this was bullish for equities in the second half of the year, and that inflation truly was transitory and would be tame at year end. These are the same dopes that said inflation would never get above the 5% level and that inflation was good for equities and that it would be “good” for the American public.
Thus when I received the edition of Barron’s last weekend that is the feature pic for this commentary, I knew the markets were in serious trouble. There is not concept of long term history nor technical analysis when reviewing what has happened.
For example, during all the turmoil in the markets for the last two weeks, volumes were subdued. There was no serious commitment to a crash in one direction or a rally in the other. A lot of technical price damage did occur however as highlighted by this snapshot on my phone during the retail stock carnage:
The reality is that we have an entire generation that has known nothing but government bailouts for economic failure (2001 & 2009) and a Federal Reserve which pumped the markets to the point where inflation became embedded in the economy’s structural functioning (current era) resulting in a perpetual bull market. Mark Hulbert highlighted this in a MarketWatch commentary last April which should scare the hell out of any permabull:
Why Generation ‘I’ — YOLO investors who’ve never seen a bear market — should worry us all
The key excerpt from this article should resonate with old farts like me and those who have been around since 1979 watching everyone of of these bubble infused cycles play out:
This psychological perspective on the market cycle helps us understand the polarization around topics such as bitcoin BTCUSD, 1.18%, GameStop GME, +6.81% and Non-Fungible Tokens (NFTs). The newest investors, who dominate the markets for such things, ridicule veteran investors who express skepticism. They gloat about how much money they’re making and gleefully declare that the old-timers “just don’t get it.”
As the bubble stocks rallied last week, that final statement rang true once again as the speculative issues rallied off their lows showing some life but no real long term rally towards their all time highs.
The NASDAQ chart below illustrates exactly what I am referring to:
In true bear market form, each rally has been a bull flop, where the feel good period ended and rolled over into the longer term downtrend. What should terrify the “yutes” is that the market, despite being down severely since the start of the year, has not even started to crash yet.
Markets are still in the second wave and as inflation bites harder in June, I look for this current rally at the end of May to dissipate and roll over to new yearly lows but with lower volume. As the severity of the price inflation and the real Fed policy of QT (Quantitative Tightening) begins to impact financial conditions in a serious way, the liquidity issue will become a reality that “Generation Y” has never traded in.
This was best demonstrated by the performance of retail portfolios and how severe the declines have been thus far:
Not until the last holdouts in both the professional market community and retail experience 60%+ declines in their portfolio will the bear market really bite. Thus far the average retail trader has been doubling down pouring money back into the same speculative crap that fueled this bull market in the hopes of making their money back. Until real pain is inflicted, the bear market has not arrived in force. That pain will be the first hint of capitulation when BTFD becomes “show me the damned exit” and the screams of “the markets are rigged” become the internet meme of the day.
By the end of this summer, food shortages, the energy crisis, and the realization that the NATO folly of picking an unwinnable proxy war with Russia along with even higher inflation will kill whatever vestiges of this historic bull market remains. That is when Wave 3 down, the big stock market crash that I have been referencing will occur probably some time between August and October.
That is when the real pain will begin.
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