SPY - The Bear Case
Updated
So I know I'm probably one of 10,000 posts saying "it has to fall now" while the Fed backstops everything every time and makes us all look like fools. I get it. I am mostly posting this here for posterity because I really just think this is it. If I'm wrong, I'll probably spend some time by the sea pondering whether I should ever do this again :D
So here's my case.
100% of everyone, even the dyed-in-the-wool Bulls, have known from the word GO that this entire rally has no basis in fundamentals or, honestly, even optimism. At first, it was built off of the Fed's repo work, then the unbelievable amount of money funneled into the system (unbelievable, though still far less than what the Fed said it had available to use). After some time, it started to wear off and we started to retest 300/barely sub 300. At this point, the Fed threw direct corporate bond-buying into the mix, essentially inflating the prices of the underlying assets in many securities due to the impact that this sudden influx of cash to individual corporate bonds has on correlated asset prices. This brought us back up to an inflated high around June 17/18.
From here we've seen a steady downward channel forming from the highs around June 8/9.
From a fundamentals perspective, the reality is that there are huge numbers of companies in the SPX that aren't currently worth half of their market value based on their current COVID balance sheets. There are a good number of them trading higher now than before the crisis with deep negative EPS (both reported and estimated). Knowing that the Fed is backstopping everything makes the greedy even more, well, greedy. Fundamentally, when you have rampant unchecked greed in a market along with hyper-inflated asset prices derived from whole cloth, what you have definitionally is a Bubble. With the close of the quarter and institutional fund rebalancing behind us, I think it's about to pop.
From a Technical perspective, we've been riding the same line of support since April 1/2. We've hammered down on it May 14 and again on June 15, being soundly rejected and establishing new supports along the way. On June 5th we had a gap up phenomena bleed into a gap down that formed an incredibly obvious island reversal pattern which, it turns out, has been true as we've been in a downward trend since then.
It's interesting to note that the area around 314 has been an incredibly strong point of resistance that we haven't touched in days. Where on the two previous occasions we spent multiple days below the 200SMA have lasted 3 trading days, we've been under it for 5 and at the end of the day we were pretty firmly rejected by it
In fact, this is a point where the 200SMA, previous support line from April AND the new line of resistance for the current downward channel almost exactly converge. Pretty strong resistance there. We saw the price break out of a bullish descending wedge leading to rebalancing, but now that's over and earning's season is on the horizon.
So we're in a position where:
The TL;DR of this is that it looks like not just conspiracy theories, but specific technical and fundamental indicators have converged at this point to make it look like we are about to experience a catastrophic sell-off. I believe it may be range-bound between the two support lines indicated on the chart longer than I'm expecting, but that the fall if it closes below 294 will be precipitous. Everyone who lived through the market in March will, as I see it, see a declining SPX, states locking back down due to COVID, and the press will be screeching about this new swine flu in China all at just the right time for a genuine panic sell that the Fed will be able to cushion but won't be able to stop. I'm anticipating a low back down to the mid-270s.
If I'm wrong, I will take my lumps with honor and join the hall of all the other schmucks who've been wrong about this over the past two months. With all that being said though, there's only so long that you can pretend something is worth a lot of money until it's required by law to show you that it's not.
So here's my case.
100% of everyone, even the dyed-in-the-wool Bulls, have known from the word GO that this entire rally has no basis in fundamentals or, honestly, even optimism. At first, it was built off of the Fed's repo work, then the unbelievable amount of money funneled into the system (unbelievable, though still far less than what the Fed said it had available to use). After some time, it started to wear off and we started to retest 300/barely sub 300. At this point, the Fed threw direct corporate bond-buying into the mix, essentially inflating the prices of the underlying assets in many securities due to the impact that this sudden influx of cash to individual corporate bonds has on correlated asset prices. This brought us back up to an inflated high around June 17/18.
From here we've seen a steady downward channel forming from the highs around June 8/9.
From a fundamentals perspective, the reality is that there are huge numbers of companies in the SPX that aren't currently worth half of their market value based on their current COVID balance sheets. There are a good number of them trading higher now than before the crisis with deep negative EPS (both reported and estimated). Knowing that the Fed is backstopping everything makes the greedy even more, well, greedy. Fundamentally, when you have rampant unchecked greed in a market along with hyper-inflated asset prices derived from whole cloth, what you have definitionally is a Bubble. With the close of the quarter and institutional fund rebalancing behind us, I think it's about to pop.
From a Technical perspective, we've been riding the same line of support since April 1/2. We've hammered down on it May 14 and again on June 15, being soundly rejected and establishing new supports along the way. On June 5th we had a gap up phenomena bleed into a gap down that formed an incredibly obvious island reversal pattern which, it turns out, has been true as we've been in a downward trend since then.
It's interesting to note that the area around 314 has been an incredibly strong point of resistance that we haven't touched in days. Where on the two previous occasions we spent multiple days below the 200SMA have lasted 3 trading days, we've been under it for 5 and at the end of the day we were pretty firmly rejected by it
In fact, this is a point where the 200SMA, previous support line from April AND the new line of resistance for the current downward channel almost exactly converge. Pretty strong resistance there. We saw the price break out of a bullish descending wedge leading to rebalancing, but now that's over and earning's season is on the horizon.
So we're in a position where:
- Institutional investors are holding large amounts of overvalued toxic assets
- We are in a downward reversal currently
- We fell through a major line of support, came back up and were rejected off it
- We are seeing states shut back down
- We are seeing states that aren't shutting down slowing their reopening
- The states mentioned above aren't (no offense) economically nonexistent ones but the major hubs of commerce in the United States
- Major programs supporting small businesses, individuals and the larger economy are set to expire
- Earnings season, the likely catalyst for funds to divest their toxic assets prior to any new downturn is upon us
The TL;DR of this is that it looks like not just conspiracy theories, but specific technical and fundamental indicators have converged at this point to make it look like we are about to experience a catastrophic sell-off. I believe it may be range-bound between the two support lines indicated on the chart longer than I'm expecting, but that the fall if it closes below 294 will be precipitous. Everyone who lived through the market in March will, as I see it, see a declining SPX, states locking back down due to COVID, and the press will be screeching about this new swine flu in China all at just the right time for a genuine panic sell that the Fed will be able to cushion but won't be able to stop. I'm anticipating a low back down to the mid-270s.
If I'm wrong, I will take my lumps with honor and join the hall of all the other schmucks who've been wrong about this over the past two months. With all that being said though, there's only so long that you can pretend something is worth a lot of money until it's required by law to show you that it's not.
Note
Looks like the drop did not occur today, but what I do find interesting is that the price looks like it completely rode along the bottom of the previous line of support it broke through. May indicate losing steam. Either way, I was wrong on it happening today, still have faith that it's not far off but let's give it a few days.Note
Well shit.All hail the Fed I guess.
Trade closed manually
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.