From September 12, 2021
============================
“The masses have never thirsted after truth. Whoever attempts to destroy their illusions is always their victim.” Gustave Le Bon.
“It’s not what you don’t know that kills you; it’s what you know for sure that ain’t true.” Mark Twain
“What happens today has happened before and will happen again.” Livermore
“Our Kindness is God’s ambassador,” Dr. Greg Borrer.
=============================
Primary Trend: Up/Transition
Intermediate-Term: ~ Downtrend
LOLR Trend: ~Uptrend
Trading Position: 27% SPXU, 18% SQQQ, 9% TZA, Cash 46%
===========================
92 Years Of McClellan Summation History
The Truth About 2020
Answering The Billion Dollar Question
===========================
Friday 4:00
SS LOLR STS
Up Up Down
2/5 0/7 0/7
Breadth: -1289/-1129
NYSE McO: -31
NASDAQ McO: -8
=================================
The similarity between these three periods is striking. Our research tells us that the third is ending as had the first and second of the following series:
1928- Sept 1929: 1986-Sept 1987: 2020-Sept 2021:
1929 to Sept: 1929 Complete:
1987 to September: 1987 Complete:
2021 to September:
In this article, we’ll use a lifetime of observation, study, and analysis to provide our best estimate of what that final box will look like when we look back from the perspective of early January 2022.
=============================================
We saw this comment on the Twitter market discussions this week
“12 new all-time highs for the S&P 500 in August. This tops the previous record set in 1929. No, we don’t think now is like 1929, but this is still amazing” — to which we replied:
“In 1929, folks didn’t think 1929 was “like 1929″ either.”
Meaning, of course, that in early September 1929, folks were universally uber bullish for the rest of that year and beyond based on all of the economic data and psychology that existed at that time. Jesse Lauriston Livingston was one of the precious few exceptions- and he became the equivalent of a Billionaire in today’s dollars due to having that insight- and acting on it.
But with perfect 2020 insight, now all know what the truth was.
Likewise, in early September 1987, folks were spectacularly bullish for the rest of that year and beyond based on all of the economic data and psychology that existed at that time.
But, again, with perfect 2020 hindsight, now all know what the truth was.
Market psychology, momentum, and cycles were not tracked for the 1928-1929 period and thus are not available for study.
Nonetheless, we’ll compare what we know of that period today with the vast array of data for the current period. While it isn’t possible to set up displays of numerical data for comparison, the comparisons via anecdotal material for that decade 100 years ago nonetheless are remarkable, as we shall discuss.
First, though, let’s take a close-up look at what followed the August 1929 and then August 1987 precise peak day. More specifically, we’ll examine the 56 calendar days that followed September 3, 1929, and then those 56 days after August 25, 1987.
Below are the charts from the 1929 peak day (annotated by heavy dotted line) to the Black Tuesday crash, and the 1987 peak day (heavy dotted line) to the Black Monday crash of 1987, side by side.
Following those is a chart from the peak day of 2021 (heavy dotted line), showing the beginning of this decline over the last week:
The 1929 and 1987 post-peak patterns are astoundingly similar.
The above charts display how similar were these two periods:
-
For each, the low was struck via a “crash” 56 calendar days following the peak closing day.
-
For each, there were 36 sessions between peak and crash/bottom.
-
For each, there was a minor secondary high on the 26th session after the peak,
-
This was 12 sessions before the final crash.
There is nothing new under the sun! Livermore would NOT have been surprised to see the 1987 market unfold in the way that it did. As he often wrote:
“What has happened before will happen again.”
And, of course, it did. And it WILL.
This now brings us to September 12, 2021. How will this unfold? Like 1929? Like 1987? Perhaps. The set-up is the same, and psychology is the same. The market structure is the same. Valuations are the same- actually higher now than in either 1987 or 1929.
The market will be the final judge. What happened before will happen again, perhaps with that same 1929/1987 pattern, or possibly unique occurrences in 2021 will cause it to carve out a different shape and duration of initial decline yet to be witnessed. We cannot know. But the bottom line is the same:
We know that the market is ready to begin a whole new Bear Phase and that this new trend has likely already started.
==========================
That said, though, let’s compare the condition of the market and market psychology in September 1929 to those same factors right now in September 2021, 92 years later.
Since the 1920s and the 2020s are a century apart, an abundance of statistical data from nearly 100 years ago is not available. Thus we must rely on anecdotal information to make comparisons. But we can say this:
We know of only two times in American history when stock (today many like to say “stonk”) market participation had become a national obsession!
The first was in the late 1920s when historical reports tell us that the masses were taking tips from barbers and cab drivers to “acquire wealth from the market.” Thousands who’d never owned stock in their lives were buying stocks with as little as a 10% margin, i.e., on ten-to-one leverage. Some became millionaires; many lost their lives’ savings, but the prospect of unimagined wealth from the markets became a national obsession.
(Sounding familiar? It should.)
Below we link an article by Rober Shiller that discusses that national obsession. Dozens of more pieces can be quickly “googled”:
Looking Back at the First Roaring 20’s Robert J Schiller
All of those articles will reveal the genuine obsession with markets that had gripped this nation in the 1920s like nothing that followed for nearly 100 years…. until the 2020s.
As extraordinary were the popular delusions of the 1920s regarding the stock market, even that period did NOT measure up to the madness of crowds we’ve seen now in the 2020s!
Here are some brief excerpts from an article entitled Extraordinary Popular Delusions we published here in late 2020, which in turn quotes a Zero-Hedge Article, “Charting The Market’s Descent Into Insanity,”
“Indeed, by September 4, 2020, the market cap for Apple had exceeded the entire market cap of the Russell 2000. Speculation had driven one issue to a higher capitalization than not 20, not 200, but 2000 companies that we deal with daily.
These include Alexander & Baldwin, Allegiant Travel, Boise Cascade Company, Boyd Gaming Group, Brunswick, Ceasar’s Entmt Corp, Cheesecake Factory, Coca-Cola Bottling, Denny’s Corp, Hecla Mining Co, and one thousand, nine hundred, ninety more similar companies.- COMBINED.
That’s a delusion. That’s madness.
The images and narrative above detail the once-in-a-century “Feedback Loop” that developed due to the highest call buying in recorded history this last month.
That record refers to total dollars spent buying calls, the percentage of NYSE volume represented by these calls, and the share of dollar value moving into call options daily compared to NYSE stocks. Each set records never before having occurred since humankind walked this planet.
These extremes occurred in August 2020- we do not have to look back at some historical Stock Bubble in history books to find this madness.
Just think about this: not only are the billions of dollars each day at new record levels since forever- but more than 75% of those $Billions are going into options of less than 14 days maturity! This level of pure, raw speculation makes the frantic activity of the 1920’s look like a peaceful walk through the park. If these are not earmarks of the top, we can’t even imagine what would be.”
Options trading in the 2020s makes 10% margin trading in the 1920s look like a walk through the park in springtime! Especially when 75% of those options will expire in less than 14 days, and unless “stonks” rise sharply in that particular short period, the speculator will lose most or more likely all of his “investment.”
2021 is 1929 on steroids!
A reread of our article linked above will help remind the reader how insane this environment has become. And that article is from a year ago. The madness had grown into complete hysteria as we approached the September 2, 2021 peak.
==============================
Let’s accept for the moment that, in fact, “the top is in.” We could be premature on that, and if so, we will come back one more time to wait out the completion of the cycle, which began in March 2009, in any appropriate way.
But we believe that the evidence that we will be faced with that as we now move forward is minimal (perhaps 10% to 15%) and that the risk of NOT preceding as though it were confirmed fact far exceeds the risk of having to ride through one more test or a marginal new high and deal with the consequences. Put another way, the upside risk factor here is far less than the loss of profit from the expected decline we’d have by not acting now.
Incidentally, we’ve quoted Dr. Robert McHugh Jr. here recently. On this subject, his weekend report today states (excerps from the very detailed report):
“The trend in the stock market is now clearly down…The S&P 500 just experienced its worst week since February 2021…The major stock indices closed at their lows for Friday, which is usually not good in the short run.
There is a good deal of evidence this weekend that the stock market has topped. In a major way. Let’s take a look.”
About the fundamentals, he writes:
“The August 2021 Consumer Sentiment Index reported by the University of Michigan fell to its lowest level in a decade, since 2011, to 70.2, which was lower than the lowest level during the 2020 pandemic. Why? What have folks so concerned about? People know. People see.
One major basic problem is “Money for Nothing.” The cold hard fact is this has produced a massive labor shortage. Want proof? Try buying anything. Online; in stores; wherever. “Item out of stock” notices. Car dealerships with little to no new cars. Furniture offered with photos, but with 6-month minimum waits for delivery because they have not even been made yet, minimal housing availability.
“Why? Labor shortages resulting from a disincentive to work means lower productivity…Sure to lower productivity. Let’s understand one thing: Lower productivity means lower GDP…means economic destruction. Economic destruction means lower stock prices.”
So two questions remain:
-
How should we expect the decline ahead to look in terms of shape and velocity of decline, and
-
How will we position our accounts to maximize profit within acceptable limits of risk?
We’ll discuss.
The shape of this decline could replicate those patterns detailed above, coming off of September 3, 1929, and August 25, 1987. But it doesn’t have to. We’ve studied in detail every major top of the last century as all have these factors in common:
-
They start slowly and produce a lot of counter-trend rebounds in the early stages.
-
As rebounds fall short of the starting day for the trend, they carve out lower lows and lower highs.
-
The further one gets beyond the starting point of the decline, the more urgent each decline becomes.
-
Since 1929 (which is similar to 2021 in many ways) and 1987 produced secondary highs around 26 days in, we will be watching that area and will look to maximize exposure at that time.
We will follow this trading strategy:
-
Our goal is to get to near 100% short via leveraged short ETFs in the coming 5-7 sessions
-
We will use every advance in SPX this week, even intraday, to ADD to our short position
-
In the early part of this initial decline, we’ll look to a relatively small VXX position and endeavor to have the heaviest VXX position at around 24-27 days past the September 3 top as markets prepare to accelerate downward.
-
We will aim to ride the decline near 100% short through a selling climax or a strong reversal indication before taking off this initial tranche of positions.
-
We’ll trade subsequent Intermediate-Term TRENDS with small long positions when in an uptrend, and with heavy short positions when the TREND is down.
You must be logged in to post a comment.