Market volatility remains elevated, another stock market comeback, US data, bitcoin base formed

Written by Sven Henrich via NorthmanTrader.com,

On January 2 I said:

“The party is coming to an end quickly and the Fed will want to fight inflation without causing a recession that will be a real task. How to achieve this?

Easy, let markets fall, but not so much that it causes a systemic event, but enough that inflation numbers fall year after year, declare victory and then again a flip-flop policy to prevent any major damage to markets by the time that middle terms are in everyone’s minds. ”

On January 4th, $ SPX peaked and we have been down ever since.

$ SPX -11% from the January highs, $ NDX -17%, small capitalization -20% from their 2021 highs and of course crypto weakening. In short, everything we’ve talked about over the past year. Liquidity goes and the bid goes. In this case, the liquidity did not really go at all, they just talked about it. And speaking of liquidity: One source of liquidity that has disappeared, buybacks, is coming back again from this week and more powerfully in February.

But the main point: If the goal was to fight inflation by dropping markets to pull out of the surplus without really sharpening in a big way: Happiness, mission accomplished.

It all seems like a “garden variety” correction, but some of the maps tell a completely different story, that of absolute carnage which again emphasizes the weakness beneath it that has been building up for months. I talked about it in mid-December The unraveling before the expected Santa Claus rally:

“A potential Santa Claus rally, despite storm clouds not only packing up, but they are already all around us. I suggest you pay close attention, despite the expected upcoming holiday silence… .While major indices are making all-time highs and giving the appearance of a raging bull market below, there is already a raging bear market in individual stocks. Not only does pricing stay far beyond the historical resistance of the top quarterly Bollinger band, $ SPX also stays well above its quarterly 5 EMA. A graph that requires the ultimate technical feedback, a process that many of its components have already undertaken. ”

This reconnection has now taken place:

And that reconnection cost a price.

Basic, holy shit:

Nasdaq new highs / lows:

Almost as bad as March 2020.

But change the reference to a weekly closing and all of a sudden you get a different perspective:

Worse than 2020, worse than 2018, not even during the depths of the financial crisis have we seen anything like it.

The monthly perspective of knowing the month is not over? Net wow:

Never seen it before. The only thing that came close was 1998, a 20% correction that ended up being a massive buying opportunity for a blowout movement that was coming.

The first conclusion I draw from these graphs is that this sale in its current state is one of the worst we have ever seen in terms of the underlying damage done to individual stocks. But given the time references, there is also opportunity to erase these most extreme readings before the end of the week and month. We have 5 trading days over this month and a monthly reading like this is simply unprecedented. So there is a lot of opportunity to change this reading for the better on a monthly basis.

These maps also show that on an individual component basis the massacre beneath it is historical.

But it’s not just on the Nasdaq, US new highs / lows tell a similar story:

See the weekly reading and you will appreciate how serious this correction is:

The previous negative differences built up again last year following the historical script that culminates in the rollover we are now seeing.

The monthly perspective:

Yes. Again that 1998 reference.

Mainly early January weakness is not unprecedented in the context of another correction that took place before another blowout movement. Who can forget 2000:

A dive below the 200MA and then rally. But 2022 was by far the worst stock withdrawal in history.

We have just come out of the 4th longest period without a marker of the 200MA. Diving at the bottom of a marker? Many times below:

And now with an RSI in the 20s. Yes, history says it can get much worse, but we have seen more often how meaningful bottoms also emerge from such labels.

Bottomline here: The bubble warnings issued last year due to unprecedented liquidity were largely ignored, investors piled up in unrealistic valuations while internal values ​​slowly weakened last year as indices maintained their trends and now it has ended in a valley of tears as wide price ranges were simply taken out in a matter of a few weeks.

Yesterday, $ SPX reached the lows of July, 6 months’ purchase was wiped out:

$ NYSE shows an even broader time frame falling below the March lows:

And small-cap capitalization is losing the entire 2021 price range:

Put ALL 2021 buyers under water.

We are very oversold and there is a lot of bounce motivation to have in the days and weeks to come, but be absolutely clear: Not only has there been tremendous carnage that has taken place, there has been massive technical damage done to cards with a lot of trapped supply above all that resistance will be on the way and as long as indices can not get above their broken moving averages, risk remains lower.

I have long argued the Fed overdo it by insisting on buying trillions of assets while fiscal stimulus has already flowed through the system. This excessive inflow of liquidity has melted asset prices into a historic bubble and now investors and traders chasing the liquidity party have paid the price. Not just with huge losses, but now with inflation to begin with. Well done Fed. And now stiffer. In slowing growth and a massive market correction.

Best wishes:

The Fed is running a tightrope, the very tightrope that they themselves have laid out by stimulating another boom and bust cycle.

As I also said on January 2: “My base expectation for 2022 will therefore be much broader price ranges in indices and that the things that did not matter matter again.”

This expectation has already been realized and 2022 is definitely already a very different year. Happy trading.

***

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