“Untethered…”

“Untethered…”

Authored by Sven Henrich via NorthmanTrader.com,

As markets have continued the non stop levitation to new highs they become ever more untethered from basic market history and I want to highlight one interesting example.

But first for context:

In Failure is not an Option we discussed an unusual program running through markets and the market’s need for constant new highs to prevent a trend break. Since then markets have continued on this required program delivering new highs every week and on many days since then ending August with the most new highs since 1929 and 1987. Quite a feat.

But nobody should be surprised, liquidity remains the name of the game at the exclusion of all other factors.

After all Jay Powell did his bid to not disappoint markets and offered a predictably dovish non committal taper speech at Jackson Hole that markets used as an excuse to continue on the path of new highs.

But perhaps more importantly the period between June and August has seen incredible liquidity expansion on the side of just 2 central banks: The ECB and the Fed:

The ECB & Fed have added $7 trillion to their combined balance sheets in just a year & a half. Between 2008 & 2017, in those 10 years they had added $6.5 trillion. This means they have bought more assets in 17 months than they did in the 10 years following the GFC. pic.twitter.com/aplJeLqOIr

— Sven Henrich (@NorthmanTrader) September 1, 2021

Just since June the ECB and the Fed combined have added $1 trillion to their balance sheets. For all the taper talk, the hot inflation prints, they have injected another $1 trillion in just the past 3 months.

For reference: It took the ECB and Fed THREE YEARS to expand their combined balance sheets by $1 trillion in the period immediately following the great financial crisis between January 2009 and December 2011.

What took 3 years then, they’ve just done in 3 months.

And coinciding with a $1 trillion liquidity injection since June suddenly the S&P makes a new all time high every single week:

Constant levitation has consequences and the evidence can be seen in the charts. One of the most common technical events in markets is a reconnect with the monthly 5EMA. Whether in bull or bear phases this EMA acts as support or resistance and gets tagged on a regular basis.

Sure, there are some months were it doesn’t get tagged, it may not get tagged for a couple of months, but it always gets tagged. But not in 2021:

As testament to how uniquely one way oriented this market is:

No basic monthly 5 EMA reconnect for 5 months in a row.
Only one monthly 5 EMA reconnect in 9 months.

Even the levitation years of 2013/2017 had regular reconnects.

Not 2021. pic.twitter.com/acPygIWhba

— Sven Henrich (@NorthmanTrader) August 31, 2021

Only 1 reconnect in 2021. Only 1 reconnect in 9 months. And now we are on month 10 with 6 months in a row of no reconnect:

There is no precedence for this. None. Not in 2000, not in 2007, not in 1987, not in any history of previous market extremes that I’ve seen. What was a regular part of regular market functioning has been removed from the market equation.

The 5 EMA is such a regular magnet for markets that all history also teaches us that the farther markets move away from the 5 EMA, either to the downside or the upside, it tends to revert and reconnect, a balancing out from excess if you will. Consider even the violent reactions to the upside and downside in recent years in the chart above and you see the regular revisit.

Not now. So far. Which makes one question the veracity of what we continue to witness driven by all this liquidity.

I’ll add one more piece of history for consideration as we are now in September. In the past 15 years $SPX has tagged its monthly 5 EMA in the month of September in every single year but one. That’s a 95% hit rate.

The one year it didn’t tag it? 2018, right before the 20% drawdown into Q4 of that year:

What’s this all mean? For one markets continue to defy all history, but not in a good way. It means markets are disconnected and distorted and all of history demands a reconnect with the monthly 5EMA.

Currently the monthly 5 EMA sits at 4383 or nearly 5% lower from here. No big deal right? After all these markets are way overdue for something larger than a 2%-3% pullback right?

Well, actually just a basic reconnect with the monthly 5EMA would come with a major price: The breaking of the uptrend:

$ES trend watch: $ES hit the upper channel trend line in overnight. Support trend remains intact & as long as it does bull remains intact.
A sustained trend break would open larger target possibilities to the downside, including MA reconnects & .236 fib tag. pic.twitter.com/MR3N0XHtrd

— Sven Henrich (@NorthmanTrader) August 31, 2021

Oops. So not only must markets make constant new highs, they can’t even afford a 5% pullback without breaking the uptrend which would invite all sorts of negative technical consequences and could change the current market landscape dramatically not necessarily staying confined to a mere 5% pullback.

The only way for markets to avoid a trend break then is to continue to avoid all market history of monthly 5EMA reconnects. All of history. This is what investors must then count on. Best of luck.

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Tyler Durden
Thu, 09/02/2021 – 11:20

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