Where did something wicked go?

Last Sunday, I wrote about the big swings in the stock market that had just happened as follows:

I’m anticipating this coming week will be horrendous. That kind of extreme bouncing is nothing but the rapids right before the lip of the waterfall.…

I think that is what this is — extreme chop like the rapids you enter at the top of Niagara Falls just before going over the falls itself. Once again the ride is going to head the opposite of where optimism is taking market maniacs, and the market is about to become extremely rough in the next few months. There are likely to be more rallies that won’t be much more than huge rapids to go over in the journey, because we’re heading down a chute of waterfalls now.

“Something Wicked This Way Comes!“

My prediction for a horrendous week of major flips in stocks did not appear to be playing out well when the following Monday came and flipped from the pervious Friday’s plunge, taking the market way up; except I expected that much. In last Sunday’s article I’d also said these major intraday swings typically reverse direction alternately during a major crash event, as I demonstrated on the following graph:

The good, the bad, and the downright ugly

As could be expected, when the market flipped on Monday back to a large upward swing, one reader commented that “Monday is up not down,” so I responded as follows:

Did I say anything about Monday? I was careful not to because Friday was down, so I thought Monday might swing the other way in these large back-and-forth swings that I said happen during major crash events.

We need to see how this week plays out. Monday is but Day Three. We had a big down then up on Thursday, a fairly good size down on Friday, an equal-size up on Monday. Now, does the market swing the other way on Tuesday? Or do a reverse of Thursday where it goes up then plummets? We’ll have to see.

I don’t think it will go as regularly as 2020 down the waterfall, but if you look at 2020, you will see it swung from one extreme to the other on almost an alternating daily basis. There were spots with a few lesser days in between. I would think this crash might be a little more drawn out because we are not dealing with the massive mandatory shutdown of the entire global economy. There will be some serious rocking and rolling along the way, but I am anticipating a rough journey down a chute of waterfalls.

Disqus comments

So, I never expected the week would be a perfect seesaw of days that overall went down hard. In fact, I had already described the action as follows:

As for the Dow, fourteen of the top seventeen intraday swings in history came during the Feb-Mar. 2020 crash. As you can see, the market during these massive crash events tends to alternate between record intraday swings that are up days (like Thursday’s) and large ones that are down days, but the down days clearly set the trend:

There is always someone who wants to hold me to a claim I never made. Regardless, I did think the week would trend downward hard, even if the big ups and downs were irregularly timed, as I figured they would be; so I had described the week as likely to be “horrendous.”

Again, unsurprisingly, when Tuesday also went up, my comical commenter was happy to quickly retort with an apt quip:

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” ~ Laurence J. Peter

Comments

(And here I am doing just as he warned, though, if I am an economist, I am a backyard economist, which is why I am a lot more accurate in my predictions than economist, which isn’t saying much. I’m not as wedded to schools of thought or particular theories, but think my way though the cause and effect of every situation.)

And, so, the week started looking like Zero Hedge was going to be right. They were predicting a major rally due to all the usual cover-your-shorts stuff that keeps getting in the way of a perfectly good crash. Their favorite experts — two big-bank gurus, each named Michael, one from Bank of America and one from Morgan Stanley — had just flipped from their long bearish positions this year to predict a huge short-term rally followed by another worse plunge late this year or early next. I scoffed like my own scoffer at ZH’s claim in their comments section, calling it the “Two Michaels Rally” that wasn’t going to happen.

If the two Michaels were right, neither this past week nor any part of October would bring a horrendous surprise. Nothing wicked would come this way. Then Wednesday put my prediction somewhat back on track with another fairly strong intraday swing back to the downside. The market started by going up about 140 points on the Dow and then plunged in a 440-point intraday swing to get down to -300 points at its intraday low. However, it ultimately closed at a modest drop of a 100 points from Monday.

In my defense, I wrote,

While it looked by Tuesday I might have been wrong, look at what an explosion of chaotic swings this week has, in fact, turned out to be as Nomura Capital lays out emphatically:

“Unprecedented Weaponized Gamma” – Nomura Explains Why This Week Has Been ‘Such A Hot Mess’

“Nomura’s Charlie McElligott began his must-read note overnight by warning “go home options, u r drunk!”

“And ‘drunk’ they are, as the cross-asset strategist details below

“WHY THIS WEEK HAS BEEN SUCH A HOT-MESS OF SWINGS…

…options trading causing “intraday chase” flows we’ve never seen the likes of previously.”

That is EXACTLY the dynamics I said we’d see in a big-bear crash. So, I got the major swings part right, but the overall crashing trend, which is far more important, surely didn’t go in my direction as anything anyone would consider a wicked surprise. Unsurprisingly, my commenter concluded,

Yep you blew that by a longshot bad call. The market is now up higher than it was a month ago!

… and provided a final quip for the week:

“Sometimes the only way you can win is to stay out of the game.” ~ Ashleigh Brilliant

Sometimes, it definitely feels that way, especially if you put your beliefs about what was going to happen out their so unequivocally. Whether I wind up having to suffer fools or am the fool remains to be seen, but it’s not looking overall in my favor. There are few who ever say, “Wow, you got this right all year so far,” but always those who are ready to rush in and say, “Duh, you missed that one. Better just give up.”

The past week ended looking like this:

Obviously, a week of extremely erratic swings did happen, as I expected for the time we were entering and as Numura’s Charlie McElligott described, but clearly with a strong uptrend. So, nothing wicked, just erratic.

But something wicked is still coming…

I don’t know if I’ll be right on the October surprise stock-market crash, but this Friday’s big swing upward from Thursday’s slide down was interesting in that it happened just like the previous Thursday’s huge upward swing upon only the slightest whiff of ether to light its burner and loft that balloon ride upward.

I had described the previous Thursday’s hot-air balloon ride as follows to my Patrons:

Zero Hedge explained that “Stocks Erase CPI Losses After ECB Headlines.” According to Reuters, the European Central Bank’s terminal interest rate was projected in a week-old report to be end up being lower than the ECB had formerly anticipated. That, supposedly, was the thread upon which the US stock market’s major 1200-point rebound from the start of the day hung. However, that’s the ECB’s interest rates, not US interest rates, which impact the US stock market far more directly, in spite of the fact that the morning’s [hot-inflation] news related to US Federal Reserve interest rates clearly indicated those rates would likely be pushed higher than formerly expected! It didn’t matter, the market lunged for what it wanted to hear and ignored reality all around it like a convulsive creature, gasping for air.

We are seeing the most extremely insane or rigged behavior in the stock market imaginable. In fact, the ECB report that investors chose to instantaneously cling to because it gave them the tiniest dose of hopium ever measured out actually stated the ECB would NOT even use this report for determining its interest rate, making the tiny dose of hallucinogens a diluted dose as well

The next day (Friday the 14th) was a bloodbath.

This week, Friday the 21st, was every bit as much a situation of the market rising like a hot-air balloon on the faintest fumes of hope. Zero Hedge described this Friday’s drug-addled rally as,

FedSpeak & Yentervention Spark Buying Panic In Bonds, Stocks, & Gold

Fed’s Daly (bear in mind she is one of the more dovish FOMC members) built on earlier comments by WSJ Timiraos (conditioning investors for a smaller Dec hike without sparking a melt-up in stocks) offering the market a bone of dovishness (well less than hawkishness)…

*DALY: LITTLE BIT OF PENT-UP TIGHTENING WORKING THROUGH ECONOMY
*DALY: NEED TO WATCH HOW RESTRICTIVE; CAN’T OVERTIGHTEN EITHER; REQUIRES STEP DOWN INTO SMALLER INCREMENTS OF HIKES

But even she backed off from a real dovish perspective…

*DALY: THINK HARD ABOUT STEP DOWN BUT WE’RE NOT THERE YET

Fed’s Evans confirmed the ‘pause’ – not a ‘pivot’...

*EVANS: EXPECT FED TO RAISE RATES FURTHER, HOLD STANCE A WHILE

Fed’s Bullard was his usual hawkish self:

*BULLARD: STRONG JOB MARKET GIVES FED LEEWAY TO FIGHT INFLATION

Has The Fed done enough damage?

(Underlining mine to emphasize how the slight bullish hope was downplayed each time.)

So, the most dovish Fed member managed to loft the market pretty high based on nothing but fumes from her usually dovish mouth that the Fed has to be careful not to overtighten and based on what everyone knew already — that after its next meeting, the Fed is likely to start taking smaller steps of tightening in order to see how much its actions to date have accomplished.

Whether bouncing the market back up was the Fed’s intention, after trying so hard to pull the market down, isn’t clear to me; but it clearly had that effect. In my opinion, the market was once again just rising on fumes of delirious hope that won’t carry it far. So, it will be interesting to see if this Monday becomes the same kind of blood bath we saw the previous week. Will the empty hope peter out and the balloon flap like an empty sack, falling back to earth, or is this really the soaring “Two Michaels Rally” that ZH has predicted?

For now, as ZH described,

And US stocks had their best week since June (with Nasdaq outperforming)…

Not good for my position. However, they also concluded,

Finally, here’s St.Louis Fed’s Jim Bullard explaining the situation to those who still don’t get it… “I would not call lower equity prices financial stress…”

So, don’t hold your breath for a Fed Put reappearing anytime soon.

That “Fed Put” is, of course, exactly what the stock market hopes to get in Fed easing if economic damage suddenly materializes from its tightening. ZH noted interbank lending stress is nearing the highs it saw in the Covidcrash of 2020, so it may be that something breaking this way comes — something big and bad breaking. That, they noted, may be …

why all the sudden jawboning on rate-hikes and pauses are happening.

Never forget, we live in a world where “insider trading” is illegal, but Fed policy path leaks to Wall. St. Journal reporters move asset prices in the hundreds of billions of dollars.

— Lawrence McDonald (@Convertbond) October 21, 2022

The Fed may be getting a little scared — even though it doesn’t see the stock market’s all-year crash as terrible financial stress — that something else big and bad is coming this way.

I’m sure it is.

(The news stories quoted in these articles can typically be found, as they appear in the news, in each weekday edition of The Daily Doom.)