Human, All Too Human

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

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Great Read – Still in a Bear Market?

Friedrich Nietzsche published his first work in his recognizably mature style in the late 1870s, entitled “Human, All Too Human.” It expresses the will to overcome human failure through an understanding via philosophical insight.

One Large Tremor, How Rare?
Over the past 20 years, there have been 5032 trading days. Only 92 days had drawdowns of -3% or more. That is just 1.8% of trading days. However, 43 of the 92 (47%) were within 1 week of each other. Yes – something that has happened just 1.8% of trading days in the past two decades, yet 47% of the time it occurs again in the same week. Meanwhile, 52 of the 92 were in the same 2 weeks (57%) and 57 of the 92 were in the same month (62%). You can partly see this dynamic above with the ‘bunches’ of large drawdowns. Bottom line; Large drawdowns are commonly followed by more large drawdowns in the days and weeks to come. Very large tremors like the one we experienced last week, DO NOT come alone.

Lots of Weak hands, No Conviction

With so many investors playing “don’t fight the Fed roulette” -conviction is NOT high in the latest bull run. You can make a strong argument, we’re in a bear rally for U.S. equities. It’s clearly a musical chairs market in our view, there are a lot of weak hands on the playing field, rookie investors playing with capital which is NOT sticky. During the entire rally off the March low, the S&P did not get overbought until last week’s post-recovery high, as per the RSI (relative strength index, see below). In bull markets, the various overbought/oversold indicators should stay overbought for three months (see below Q3 and Q4 2019), enjoying some of the bull run’s best gains. In bear markets, if the RSI ever gets overbought, the most you can hope for is that it stays overbought for several days.

RSI Failure with NO Follow Through
We make the argument, this must be a rally within a bear market. Instead of the overbought RSI leading to acceleration, it leads to a historic collapse. How significant? Thursday’s 6.9% drawdown puts in at number 25 going back to the 1920s.  That ain’t bull market action, my friend.

The Robinhood Rally

Last week with the S&P 500 touching 3232, Robinhood sported 33,000,000 separate stock positions, compared to 17,000,000 in March. Rookies prefer to chase rallies, NOT buy heavy capitulation selling with the S&P 500 down near 2300. Sure, every bull market has two to three day selling squalls of three to four percent. They are great and fun to take advantage of. What happened today was completely different. It really does look like the second leg of the rally after the one-month consolidation around 2800 was a Robinhood rally. Breathtaking stupidities abounded, with the poster child being bankrupt Hertz equity rallying from 75 cents to over $6, sporting a market cap of $900 million at the recent peak while the unsecured bonds were trading at steep discounts to par, and even secured paper was in the low 90s! Well, we got back near $2 today. Still ridiculous but obviously the Robinhood crowd was immolated. Which is nice.

Anecdotal: professional race car drivers were talking about getting into the market because their twenty-something clients were making so much money day trading.  A famous blogger on a famous site that has nothing to do with finance told his more than 2 million followers that equities were the easiest game in town because stocks only go up.

Not Nothing

It is “not nothing” that the NASDAQ made a token new high and failed. It is “not nothing” that the S&P pulled even to where it had been 365 days earlier and failed. It is “not nothing”. It is awful. You should accelerate at those levels IF it’s a bull market. Equities flunked that test for size.

Had you shorted the market when Stanley Druckenmiller admitted he was wrong about the rally, you’d be sitting pretty right now. That was the sell signal. This is not to insult Mr. Drunkenmiller at all. Quite the contrary. He is obviously one of the most brilliant investors of all time. But that is precisely the point! When even a man of such genius can’t take it anymore, it’s the top. The lesson is: he’s a genius AND a human being. And all humans have a capitulation point. Without exception. Does anyone doubt Dave Tepper’s genius? No one I know. But he covered his NASDAQ short days before the Dotcom peak. Why? Because he is a human being. And oh, by the way, his best years lay ahead. I’m sure the same holds true for Stanley Druckenmiller.

A little history. A year ago when the S&P hit 3,000, it was expensive. When it then hit 3,100, it was really expensive. When it hit 3,200, it was jaw-droppingly expensive. When it traversed 3,300, it was simply incomprehensible. And where was the VIX index? The low single digits. And when the S&P peaked at 3,233 a few days ago, where was the VIX? In the mid-twenties, after having based there for weeks! Oh yeah, people wanted to hedge their gains, still Covid risks dontchya know, blah blah blah blah blah. Nice, but that is just a BS way of saying pros didn’t believe the rally. But in bull markets, the pros do in fact believe. And they believe in it with all their heart and soul. It’s the human thing to do. There is no long term bull market in all of history that the pros missed entirely. Late to the game? Sure. Sold too early? Happens all the time. Miss it completely without even a small slice out of the middle? It just doesn’t happen. That said, during the entire basing period, the VIX held below its 20-day moving average. Well, it sailed above it with conviction today baby. And you can gamma and skew yourself until you’re cross-eyed, but it ain’t good news to blow up over a moving average that had held VIX in check for so long.

And by the way, where exactly did the S&P fail again? Well, there is a fat gap just above the recent peak that marked the initial break earlier this year of the recent crash. Not just any gap, gentle reader, but THE gap. Literally the mother of the most violent sell-off in a century. A bull market should waltz through that. Not this market, though.

Ah, you say, but second Covid wave fears and some other something in some headline somewhere that you read, that’s what caused today’s carnage. Oh really? What about the time-honored adage that bull markets climb a wall of worry? It’s not the news, it’s the reaction to the news that counts. In a bull market, bad news is greeted with buying, not with historic selling.

Fear replaced greed today. And that is human, all too human.



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