NASDAQ: 12,000 Test Level
Sparked by Mr. Market’s undying faith in the someday Fed pivot — even if it’s failed him repeatedly since late summer — the tech index crossed the 55-day moving average on the market’s big gap up on Thursday. It then continued upward with another big gainer on Tuesday, bringing the NASDAQ close to the all-important 12,000 level.
As you can see on this 6-month chart, this critical barrier defines the rise and fall of the summer bear market.
After three tests between June 24 and July 18, the NASDAQ broke above 12,000, where it remained until September 15. Now we are one good day away from another challenge of that mark.
One way of looking at this is to see it as five months of sideways movement. From that standpoint, you could say, “what bear market?” There really hasn’t been much downside movement, despite the big swings.
However, zooming out to look at the big picture, here’s a 3-year chart with weekly bars:
Clearly, the downtrend from the Jan 3, 2022, peak is still intact. Not only will the index need to break the 12,000 mark, but it will have to stay above it and break the red downtrend line before we can even talk about a possible reversal in the market.
The lower support line at 10,500 represents broken resistance in the comeback from the COVID crash in July of 2020.While right now the NASDAQ is trading at the top of the channel shown on the chart, it’s worth noting there is basically no support below 10,500.
As we pointed out a few weeks ago, and expanded on in last week’s Concierge letter, there is room to the upside in the equities indexes in the near term. However, given the structural problems besetting the economy, the most likely long-term direction is down…and if one of those Black Swans we’ve been warning about comes to pass, it could be a long drop.
Yellen’s Plunge Protection Team
Gordon Long of MATSAII.com has been pointing out that Treasury Secretary Yellen is now taking the lead role in manipulating the markets, as Fed Chair Powell holds the line with his apparent commitment to drive weak money out of the markets.
A very, very, very, very slightly softer than expected Core CPI print (combined with broadly less-hawkish FedSpeak) sparked the biggest rally in stocks since April 2020, the biggest collapse in Treasury yields since March 2020 and the 3rd largest short squeeze ever! What does such a reaction tell you?
It told us that Yellen’s Plunge Protection Team (PPT) orchestrated exactly what we have been warning about – the temporary reduction of market pressures on the Federal Reserve’s Inflation fighting efforts without the Fed actually doing anything. Why do we sound so certain?
On Tuesday we read in the WSJ that CPI Swaps were suddenly falling. Additionally, so were Inflation Swaps. Our long term readers will recall when we were stunned to discover Inflation Swaps in May of 2021 and how they were controlling Treasury Break-Even rates and Real Rates within the Fisher’s Equation to control Treasury movements. Tuesday we discovered CPI Swaps. These were the Derivative instruments of choice for Yellen. We warned in our latest Newsletter (Yellen’s Forced Derivative & Contingent Liability Card) that Yellen would be forced to use the vast derivative markets to facilitate the Federal Reserve achieving its goals.
This article, with links, is well worth reading, as is all of Long’s macro analysis.
Always remember these markets are totally financialized and detached from the real economy. What Long’s research points to is the range of tools the Biden administration has for checking any market collapse, even if they aren’t getting what they want from Powell.
That’s why we continually bring it back to the Black Swan danger. When – not if – a major crisis hits, there will be nothing Yellen or Powell can do. And if we see cascading effects, where one adverse event leads to another, the outcome could be truly disastrous.
Dollar Down, Crypto Buzzsaw
Back on October 8, we commented on the long bull run in the US Dollar Index:
Is This the Top of the Dollar Bull?
The events described above also sparked a fall in the US Dollar this week, as measured against a basket of foreign currencies by the U.S. Dollar Index ($DXY)…this week’s turn indicates a possible peak in a very long upward trend. The question is: is this a top in the dollar, or just a correction in a continuing bull market run?
[T]here is a lot of potential downside to this move, without constituting a break in the trend. Even if the DXY drops to 105, a case can be made the uptrend is intact. What traders need to answer is whether fundamental factors support continued strength in the dollar, or has the current relationship of forces in global currency markets shifted in some decisive way.
We wrote about how the strong dollar is distorting financial markets two weeks ago, and did an in-depth analysis in July. Readers might want to revisit those articles to get a handle on the complex Dollar dynamics. For now, we are simply watching. It’s too soon to call a top, but at the same time, the factors that have been driving the dollar relentlessly upward are looking increasingly suspect.
With Treasury rates moving steadily higher, the dollar now looks weaker than it did in October, and it appears we are now in a significant downtrend.
While we still can’t call the end of the long dollar bull, we are on the brink of crossing that critical 105 level, after which a further decline to 100 and lower is a distinct possibility. However, note the Index is currently looking quite oversold. A short-term bounce is due.
We will go more into the outlook for the Dollar in our Look Forward to 2023 Special Report, towards the end of the year.
And finally, we can’t let this issue close without a comment on the epic collapse of crypto exchange FTX.
You Think You Had a Bad Week…
Regardless of your feelings about this week’s election, which did nothing to change the political landscape in Washington or move the markets, you can at least be thankful that you aren’t Sam Bankman-Fried.
The baby-faced crypto mogul saw his net worth go from over $16 billion to approximately zero in the course of about 72 hours last week, as the cryptocurrency exchange he founded, FTX, collapsed in a heap.
Despite rumblings of liquidity problems at FTX, everything was going fine until rival mogul CZ basically sparked a run on FTX assets. For a moment it looked like CZ’s firm, Binance, would step in to bail out FTX. However, CZ cited financial irregularities in his due diligence… and that was it. FTX crumbled within hours of his announcement that Binance would not be riding to the rescue, and entered bankruptcy on Friday.
As we write, Bitcoin is back down to around $16,000, and there is good reason to expect that more damaging revelations will come to light as the FTX bankruptcy story unfolds.
We do not consider this a good time to try to time the bottom in Bitcoin, or any crypto currency.
While we have been insisting all year that Bitcoin is a risk-on asset, pointing to how closely it has mirrored the NASDAQ, this shock event has led to a decoupling. The tech index was up almost 9% this week, even as BTC was plunging.
Call it the exception that proves the rule.