The Melt-Up Has Happened: Now It’s Time for the Crash
2023.07.21 17:34
It Happened in 1987.
A lot of people on Fintwit mistake me for a permabear, especially in the current market. In reality, I’m just following the signals wherever they lead. Yes, I like to poke the NVIDIA (NASDAQ:) bulls on Twitter, but from a standpoint of intermarket signals and risk management strategies, I couldn’t care less what happens to NVIDIA. It’s actually a perfect example of why we need to pay close attention to quantitatively-driven, emotionless signals to try to get out ahead of what might happen next.
Because I’ve talked about the dangers of the mania surrounding AI and the FAAMG rally (which a lot of people don’t want to hear about in the midst of this move higher), they’ve slapped me with the permabear label. The truth is that I said conditions were favoring a risk-on melt-up all the way back in the first half of January of this year.
The reasoning was multi-fold. From a broad perspective, risk assets tend to do well in pre-election years, so that positive backdrop was in place. From a signal perspective, the lumber/gold ratio slowed the bleeding and started turning higher again. Small-caps started to outperform. Utilities and consumer staples dropped. Even Treasuries got in on the action right out of the gate in January before leveling off later. The point is that the risk-on/risk-off pairs were developing a consensus position that the market was setting up to move higher. I said that conditions were beginning to favor a melt-up and look what happened next.
Led by the FAAMG rally, the is up nearly 20% on the year and the has gained more than 40%. Utilities (NYSE:) are actually still down on the year and, while the has lagged large-caps, it’s understandable given how narrow market leadership has been. It turns out that the economy has been stronger & more resilient than expected and the intermarket signals were sniffing this out early on.
Now, I’ve also said that I can be both short-term bullish and long-term bearish. Back in January, I said that conditions favored a melt-up in the first half of the year, but a crash in the second half. The fact that the Nasdaq 100 just happened to generate its best first half performance in 40 years might support the notion that equities are due for a breather, but my reasoning is based on numbers and probabilities, not just hope.
The big catalyst for a potential crash is around a major credit event.
