Discussion
SPX refuses to crack. As I type at 9:59am EST on September 28, UST 30s have accelerated higher yet again, yet SPX is green in the first 30 minutes of trading. It is often said that if an asset does not react to a piece of news the way it “should”, that’s a sign the trend is about to reverse. Bullish equity market participants will take heart, but I think patience is required on the bearish side because 1987 continues to point that way lower…
At this point in the 87 crash sequence, SPX sat just above its 200dma down -9.8% off its high. At the low yesterday SPX was -8% off its high and just above its 200dma. These things take time. This choppy, frustrating stair-step lower is part of the process. (Speaking to myself here - because, after all, this is my personal market diary.)
Instead of getting caught up in the day-to-day price action that is driven by too many different factors to count, market participants with a higher time frame than intra-day should be laser-focused on weighing the broader market evidence, and right here and now the evidence point decisively in the direction of a 1987 event, 2023-style.
On Sunday I walked through three key pieces of bearish market evidence: sentiment, the Fed, and the 1987 analog. All three have become more bearish.
(1) The SPX Daily Sentiment Index closed yesterday at 45%, up from 44% as of the time of my Sunday write-up. And anecdotally, it is crystal clear from scanning Xwitter that everyone and their dog is looking to buy this dip. Everyone.
(2) FRB Minneapolis President Neel Kashkari was deployed by the Fed this week to AGGRESSIVELY cement this move at the long-end of the UST and TIPS curves: He participated in a Q&A on Monday, wrote a follow-up essay on Tuesday, and went on CNBC Wednesday morning. UST 30s are up 25 bps since my write-up on Sunday. Let be me clear: The Fed is actively seeking to break financial markets right here and now. And in the middle of this write-up I received even more confirmation from my FED contact that the current situation in financial markets does not warrant a policy comment from Powell this evening. Buckle up.
(3) In the 1987 crash sequence, once the % of stocks above their 200dma broke below the May 1987 low, large-scale selling pressure emerged. Yesterday the % of stocks above their 200dma closed at 42%, just above the 38% level set back in March. I’m on watch for a decisive break below 38% sometime today or tomorrow.
I continue to believe the path outlined on Sunday (see below) makes sense as a roadmap here, with SPX closing today around its 4198 200dma, falling to 4000 into EOM/EOQ tomorrow, and then the bottom falling out next Monday and Tuesday. To what level SPX falls next week is still up in the air, but circa 3800 where it traded in the wake of SVB back in March makes sense as a first stop, but if a true Volmageddon event occurs it could easily continue down to the October 2022 low of 3490.
A full-scale repeat of 1987 down to below 3100 appears very unlikely.