Irrational Exuberance and You

I received several nearly identical emails yesterday asking whether SPX’s tag of its channel top meant a downturn was imminent. The problem lies with the word “imminent.”We can certainly make a cogent argument that the market is in a bubble: a car company with a market cap of $1.25 million per car sold; more SPACs going public in Q1 of 2021 than in all of 2020 (hundreds of which have yet to buy anything); meme stocks whose PEs would be in the hundreds if they had any earnings; pictures of sneakers selling for $10,000. The list goes on…

Yet at the end of the day, there’s still so much money sloshing around that dips have not only been few and far between but are very aggressively bought. Those tasked with investing said trillions have settled for relative value rather than value. And bears have been laughed out of the game altogether – easily overpowered by algorithms and the innumerable strategies which key off them.

We posted this chart on March 23 [see: Fedsplaining] after SPX had been rejected by its 3.618 Fibonacci extension at 3956, noting that anyone (a central bank for instance) wanting to push stocks above that resistance need only to ensure that VIX breaks down below that falling white trend line.

We examined the same phenomenon back in early 2019 in the wake of the Dec 2018 PPT action [see: The Plunge the PPT is Really Protecting] and countless other times.

It should come as no surprise that VIX did break down and SPX did, indeed, rise above 3956. Like all the other breakdowns, this one has the potential to keep the party going long past curfew.

So…another one of those lovely situations where numerous chart and technical patterns suggest a significant selloff just ahead — but, algos are standing in the way. Which will win out?

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