At The End Of The Day, It’s All About Confidence
And sentiment in the markets is now souring. Bigly.
While many factors contribute to their creation, market reversals only happen when a shift in sentiment occurs.
That’s why bull markets can go on for much longer than reason merits. As long as the marginal buyer is keeping the faith that he can sell to someone else for more, prices will remain elevated no matter how ugly the underlying fundamentals:
But at some point, the once-bulletproof euphoria becomes exhausted. And at the critical margin, net buyers become net sellers. (For a reminder of the supreme importance the margin plays, revisit our report The Marginal Buyer Holds The Pin That Pops Every Asset Bubble)
Here at PeakProsperity.com, we’ve been waving a giant warning flag of late that the scorching rally since January is a massive head-fake; unwarranted and completely unsustainable.
In our recent piece, The Bull(y) Rally, we exposed how an extreme and unnatural amount of hand-waving, jawboning and razzle-dazzle from the central State has been expended to ‘justify’ the ludicrous levels today’s prices are at given the preponderance of data showing the world economy is sliding into recession.
We’ve been shining a bright light on the technical compression seen in the major stock indices, indicative that a major breakout move is coming — one we’ve argued is much more likely to happen to the downside.
Well, with the recent fizzling of the principal storyline supporting the bullish narrative — an imminent trade deal with China — our predicted downside breakdown finally occurred this week:
The above chart comes from Sven Henrick’s excellent work tracking the technical overextension of the major indices. From it, you can clearly see how the S&P has broken decisively below the ‘rising wedge’ formation it had been trading in since the start of 2019.
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