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To The Breaking Point

To The Breaking Point

If you thought fundamentals, valuations and earnings growth matter the joke is on you.

In 2020 central banks have managed to do the unthinkable: Not only once again save investors from any damage in markets, but they intervened to such a degree that negative earnings growth is now the stuff of new record highs as well.

After all, never before have we seen indices vertically catapult to new record highs 2 years in a row on the cumulative reality of no earnings growth (2019) and negative earnings growth in 2020 with a multiple expansion of a near 50% in just 12 months with an unemployment rate of near 7% to boot.

As it’s all unprecedented it becomes a question of sustainability:

To get a visual appreciation of the vertical nature of the price action check a chart of small caps, up 17.5% on the year with negative earnings growth yet going vertical to new all time highs:

The chart apparently as vertical as the Citi Euphoria index:

If you are looking for precedence you will come up short as the vertical extension on some of these charts have no precedence.

Case in point, take a look at $RUT on a monthly basis:

The 10 MA oscillator has moved past the only to 2 previous all time extreme readings in the 15 range, now sitting above 21. Note the 2 previous occasions of extreme extensions above 15 resulted in an eventual reversal to and below the monthly 10MA.

Not only is the price action far extended, but price is entirely outside the monthly Bollinger band. As I outlined at the December 2018 bottom and again at the March 2020 bottom, markets don’t like technical imbalances, they lead to reversion and this market here is showing a historic imbalance as prices have been crashing to the upside.

…click on the above link to read the rest of the article…

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