Date: 2021-12-05 07:02:17, Author: u/vazdooh, (Karma: 4591, Created:Apr-2018)
SubReddit: r/vitards, DD Click Here
PICTURES DETECTED: this DD post is better viewed in it's original post
Tickers mentioned in this post:
DIA 346.24 |IWM 214.71 |NAT 1.8 |QQQ 383.13 |SPY 453.42 |TSLA 1014.97 |
Hello Vitards,
In the light of recent market developments, I thought it's a good time to do another post.
It's been a crazy couple of weeks. We're in a the middle of a correction that looks like it has more to go, VIX is breaking out, the market looking like it has peaked, new COVID variant, yield curves inverting, and probably others I'll remember along the way. Let's take it one at a time.
Omicron & The Market Sell-off
No, omicron is not the reason why the market is selling off, just the excuse. Market technicals have been extremely weak for a while. After the October correction, which was only 5%, we've gone straight up, with no pause, for 4 weeks. The market gapped up multiple times. This was on the back of only a couple of companies: FAANG, TSLA + EVs and semiconductor stock. At the same time, it was a complete blood bath for many other companies. This is not a healthy market.
Something was bound to break, and it did. The scary part is that the big winners have only just started to drop. When FAANG & semis join the correction party, like they did on Friday, look out below. More details in the market section.
Treasury Yields
Before moving forward, please read up on what the yield curve is, and what contango and backwardation mean. We will use these concepts when discussing the VIX as well. A normal yield curve looks like this:
What happened recently is that the US treasury yield curve has inverted on the long end. The 20Y now has a higher yield than the 30Y. An inverted yield curve has historically been a forward indicator of recession.
Historical Examples of Inverted Yield Curves
In 2006, the yield curve was inverted during much of the year. Long-term Treasury bonds went on to outperform stocks during 2007. In 2008, long-term Treasuries soared as the stock market crashed. In this case, the Great Recession arrived and turned out to be worse than expected.
In 1998, the yield curve briefly inverted. For a few weeks, Treasury bond prices surged after the Russian debt default. Quick interest rate cuts by the Federal Reserve helped to prevent a recession in the United States. However, the Fed's actions may have contributed to the subsequent dotcom bubble.
What Can Inverted Yield Curve Tell an Investor?
Historically, inversions of the yield curve have preceded recessions in the U.S. Due to this historical correlation, the yield curve is often seen as a way to predict the turning points of the business cycle. What an inverted yield curve really means is that most investors believe that short-term interest rates are going to fall sharply at some point in the future. As a practical matter, recessions usually cause interest rates to fall.
US Treasury yield curve based on Friday December 3rd
This has a 9-24 month lead.
Back to our friend, the 10Y - TNX. On Friday it broke the trendline, sitting right on the RSI trendline. If the breakdown is confirmed on Monday, this will go a lot lower. The first support is ~1.15, then ~1. I believe this will happen, regardless of what stocks will do.
The Dollar
The dollar continues to show strength. When we correlate this with the recession expectation, this makes sense. Recession = low inflation from an expectation perspective.
Looking at the EUR-USD, we get confirmation of this strength.
Commodities
The fact that the yield curve has inverted, which implies a potential recession, is obviously not good for commodities. Strong dollar is not good for commodities. We're seeing feature contracts go down across the board. Omicron was the trigger as well, but likely not the cause. This has played out throughout November, and will look to continue. Some weekly charts for various commodities.
| US HRC | EU HRC | Oil | Iron | ALMN | CPR | NAT GAS |
|---|---|---|---|---|---|---|
| Dec | Dec | Jan | Dec | Dec | Dec | Dec |
| Feb | Feb | Mar | Feb | Feb | Feb | Feb |
| Apr | Apr | May | Apr | Apr | Apr | Apr |
I remembered seeing this tweet from Andrew Cosgrove a while back. He now has it pinned:
Bitcoin & Crypto
BTC just dived in sympathy with the market. Looks like more downside to come.
The BTC believers holy grails is when we get a divergence from the market in BTC: the market goes down but BTC goes up. Looks like they need to keep waiting.
Market & VIX
I'll start with the VIX, as it broke out of the long term falling wedge pattern. Every time it does this, we get a volatility event.
VIX weekly, historic breakouts
Now, remember the curve inversion thing. The VIX also has a curve, relative to the the VIX features value. Usually the VIX options trade at a premium relative to the VIX features. On Friday this has inverted. This means people are pricing short term contracts higher than long term contracts, relatively speaking. This very likely means more volatility in the short term, at least until close to the monthly VIXpiration on December 22nd. Source.
VIX call activity - December 22nd
The most traded contract on Friday for VIX was Dec 12/22 60C. This is only half the picture, there was a lot of activity for VIX puts as well, but those are relatively normal and to be expected. The bullish bias is the anomaly here.
SPY is about the break the channel trendline
We are very close to having a relief rebound. It will happen early-mid next week almost for sure. Look for a gap down that gets bought intra day, or a reversal intra day. This rebound will last a few days, but we'll get back to choppiness for the end of the week when we get CPI data. I don't expect the full recovery rebound to happen before the fed meeting.
We have CPI data next Friday, that's bound to create some volatility, and push us down hard on a bad print.
- Good print - lower inflation. The fed does not need to taper as aggressively. May result in Fed slowing taper to be more accommodative towards the market.
- Bad print - higher/static inflation. The fed has to continue tapering or even accelerate. There were rumors that they will double the rate of tapering for December.
The market will not settle until the Fed meeting on December 15th. After that, depending what the Fed does, and other factors such as Omicron, we might get another rally.
Has The Market Peaked?
The fact that the indices are breaking the Covid crash channel, or are about to, makes me believe that the market top is behind us. Going into winter we have a plethora of potential negative catalysts related to energy, COVID variants, lockdowns, economic slowdown, geopolitical situation (Russia-Ukraine, what will China do after the Olympics relative to Taiwan?), China real-estate bubble. And these are just the things we know about.
If we have peaked, we will go sideways-down for another 6-12 months, before we get the inevitable crash. To confirm this, we need one more signal, in a lower high. The market rebound we will inevitably get by the end of the year should be just that.
I will not go into detail on steel in this post, but the environment we're going into is one that is likely to be adversarial towards value. The market is forward looking. Expectation of a recession will lead to a beat down of value stocks. Most likely winner will keep winning (big tech), losers will keep losing (everything else).
I feel like a harbinger of doom, making these posts when things are bad, but it is what it is 🙂 Next post at the end of the year.
On a more lighthearted news, the game I'm working on is nearly ready to be make its reddit/discord debut. We'll be launching both in the week of December 20th. I'll talk to the mods and see if they'll let me make a post about it here.
Thanks you & good luck!
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