Recent Market Rally Was Extreme
There is an ETF that makes aggressive bets on tail risk:
Simplify Tail Risk Strategy ETF
This is the chart:
Looking solely at the major indexes, there is a fairly extreme move, but it doesn’t look way out of the ordinary. In derivatives though, it looked much more like a V-bottom explosion at the end of a major bear market.
The October 2022 rebound is visible on the chart of CYA, but that was a roughly 50 percent decline over several weeks. The move since late October was a 90 percent decline with most losses coming over 4 days.
Last night I posted a chart originally from ZeroHedge, showing an analog (not a very good one) with 2000. A Wall Street firm put it out as a melt-up scenario. Looking at the CYA 0.00%↑ fund above, it looks like it already happened, but it doesn’t seem crazy if this current move simply continues. It looks like the fear is all gone along with bearish traders.
Putting the move in greater context, what kind of market experiences a move that we’d associate with the depths of a financial panic such as March 2020 or the 2008 financial crisis, but with major stocks and key indexes trading at-or-near all-time highs? There is only one example I can think of: the blow-off top phase of the dotcom bubble.
Back in 1999, the whole world, not only the stock market and not only tech stocks, were experiencing a euphoria. Communism was dead, there were no more major wars, the euro officially launched. Everything really was awesome. Stocks were a cherry on top of the sundae.
In relative terms versus small caps, corporate bonds and probably all manner of assets if you want to go looking, the Nasdaq is more expensive now than it was in 2000. There isn’t the visible spike on the chart because current stock market mania isn’t euphoric. In mega-cap tech and cryptocurrency, you can still find lunatic bulls, but the broader market bullishness is the far subtler assumption of the Silents and Boomers: that stocks never go down. You will not find reckless speculative behavior among them, but you will find the assumption that no matter how bad a downturn might be, stocks will be higher in a few years. The current extreme valuations and extreme moves in derivates are driven by speculators, but they are supported by a base of retirees who are overweight stocks. Many retirees are earning 1 to 2 percent in dividends, when they could be earning 5 percent in money markets and CDs.
If the bond bear market is only starting, these retirees have the prospect of rising income and stable account value versus a falling portfolio.
As for here and now, the market looks technically bullish in the very short-term with falling inflation (crude), yield curve inversion, potential continuation of the long-term bond rally and Mag 7 insanity. Some indexes have hit resistance such as COMPQ doing a gap fill (posted last night).
The Russell 2000 lost a key support line this morning though and I’m almost certain the drop in crude is the market screaming recession as loud as it can. Structurally, the iceberg on the horizon keeps growing in size.
Think of capital gains taxes as the price to get on the lifeboat.