Opinion: ‘Liquidation Panic’ has gripped the stock, bond and cryptocurrency markets – and this could be the beginning of the end

The US stock market is in a liquidation panic as everything is sold out. The good news is that these panics don’t usually last long.

Analysis by Rob Hanna Quantifiable edges Rare suggests Reverse Zweig amplitude (ZBT). Although the sample size is small (n = 10 since 1926), the negative effects of the study are clear.

take a deep breath. Despite the fact that negative ZBTs were not part of Marty Zweig’s work as detailed in his book, “Winning on Wall Street,” this study comes close to “data torture until you speak.” While positive ZBTs are rare buy signals, there have been six cases since Zweig’s book was published in 1986. Can you really trust the results of a study when the last instance of a negative ZBT was in 1943?

panic in the air

Two (unscientific) weekend polls on Twitter are evidence of panic. Callum Thomas has been running a weekly poll since 2016, and the readings are at an all-time low. The weekly downside reading for stocks exceeded levels seen during the COVID-19 crash in 2020, even though the four-week average did not.

Market analyst Helen Messler ran a similar survey at the end of the week and the results were net-bearish -20%. In the limited time I conducted this survey, there were only a few instances when readings had reached these levels:

While the sample size is small (n = 5), four of the five samples experienced a S&P 500 SPX,
-3.88%
recovery next week. In one exception where the market showed a red candle, investors saw a “Tuesday” rally that drove prices higher for the remainder of the week.

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As a purely anecdotal note, participants in the Meisler survey appear to have a shorter time horizon than in the Thomas survey.

Some silver linings

I don’t want to suggest that this is the “bottom”, as the US stock market still faces some valuation challenges. But some silver linings began to appear in a series of dark clouds.

Let’s start with the long-term technical perspective. I made the point that the percentage above 200 dma hit over 90% as the market recovered from the COVID crash in 2020, making a “good overbought” (top panel). The case of “buy goodwill” faded in the second quarter of 2021.

In the past, the market reached the bottom of this indicator, reaching 15%. It’s now about 20%. It’s getting close. These regressions also ended when the percentage above 50 dma (lower panel) fell below 20% and this indicator fell below 5% in the past. It is now there.

Technical conditions align with long-term bottoms, although the market still lacks valuation support.

In short, the technical conditions are in line with long-term bottoms, although the market still lacks valuation support.

In the short term, the crypto space plummeted over the weekend when Celsius halted refunds and transfers. Not only did the episode raise fears that this was another case of fraud or a Ponzi scheme explosion, but it also had real repercussions on liquidity.

Some crypto investors with holdings in Celsius facing margin calls had the option of either liquidating their positions or adding US dollars to an institution that does not allow withdrawals. The silver lining is that the performance of cryptocurrencies is closely correlated with the relative performance of speculative growth stocks, as is the case with ARKK. But is this a positive divergence I see?

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Waiting for the Fed

One development that investors are watching is the Federal Open Market Committee’s announcement on Wednesday, and the event may provide some relief for risky assets. In the wake of the hot CPI reading, the market is now ruling out a 30% possibility of a 75 basis point rise on Wednesday. Additionally, it is discounting a series of price hikes with the final rate from 3.75% to 4.00% in early 2023.

I think these expectations are too stringent. On the question of what the Fed will do this month, just remember that the Fed is a bureaucracy and an institution. He is not a trader who sits in front of several screens who trade the market and pivot policy is not based on a single data point. A 50 basis point increase is likely, although increases of 75 basis points are reasonable this year.

On the other hand, a final rate of close to 4% may be very aggressive with the two-year Treasury yield level at 3.3%. In the past, the two-year yield was another estimate of the final federal funds rate. In fact, the market is discounting 3.75% to 4.00% the fed funds rate next year and 3.3% in 2024, indicating federal easing and therefore a recession.

Kam Hoi writes an investment blog A humble student from the marketThis is where this article first appeared. He is a former equity portfolio manager and sell-side analyst.

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