The Federal Reserve cut interest rates by 0.50% yesterday. The market poured another round on the house and paid the DJ extra to keep the party thumping.
Everything went up in price. The Nasdaq jumped almost 3%. The Silver ETF (SLV) went up 4%. Avina Gold and Silver (ASM) is up 7%. Crude oil climbed more than 2%. Wayfair (W), a company that sells online furniture, popped 7%.
MAG7
The Leverage Shares 5x Long Magnificent 7 ETP Securities (MAG7.L) which trades 5x the Mag 7, stocks jumped 18% on the day. I didn’t even know such a trading vehicle was legal, much less existed.
Everything went up except the U.S. dollar. The dollar fell to 111 against the Euro which is about a 10% fall in the past few months.
Everyone is bullish. The party goes on. But I don’t think it will last. The proverbial punchbowl will run out. I could be wrong about the timing, I often am. But I’d rather be early than be the liquidity for the Wall Street exit strategy.
Cycle Down
The last three times the Federal Reserve cut interest rates by 50 basis point to start off a new cycle, the Nasdaq went down a lot.
Jan 3, 2001: 0.5% cut the Nasdaq fell 56%.
Sept 18, 2007: 0.5% cut, the Nasdaq fell 53%
March 3, 2020: 0.5% cut the Nasdaq fell 23%.
Sept 18, 2024: 0.5% cut the Nasdaq…
But This Time is Different
Many pundits are claiming that this time is different. We have AI. The people who own houses and equities have been doing well. Unemployment is at 4%.
Yes, that is all true. The money supply went up 40% and so did housing and the S&P 500, and insurance rates, and your food bills…
The cost of private business also went up a lot. No one is talking about the bubble in private equity but it is there. Ten years ago finance bros would buy quality small businesses for 5 or 6 times annual earnings, they would build them up and sell them off to bigger fish.
These days they are paying 12 times earnings for independent roofers, car washes, and dilapidated laundrymats. But there are no more buyers. The IPO market is dead and the great SPAC scam is no more.
Free money creates distortions in the market. In 2000 it was internet stocks. In 2008 it was the housing market. In 2025 something will break. Right now the market is sucking in all the money it can before it happens. Talking heads go on MSNBC every day and tell you to buy.
So, in that sense, it is different this time in that the bubble is less obvious to the average investor.
The government debt is also different. In 2007 U.S. debt to GDP was 64%, the deficit was 1% of GDP and the market cap to GDP was 107%.
Now debt to GDP is 121.5%, and the deficit is 8% and growing. Market cap to GDP is 204% – an all-time high. There is no question that our ability as a country to manage the next crisis is worse than it has ever been.
And finally, the chart looks dubious.
This is a five-year S&P 500 chart. Every candlestick is a month. We have a nice doji cross at the top of the trend. The price is riding up the top Bollinger Band with a lot of room to the bottom one.
The MACD shows that the market is overbought. There isn’t a crossover yet like we saw in 2022 but that is a lagging indicator.
Dojis
For those who don’t know, candlestick charts were developed more than 1,000 years ago by traders on the Japanese rice markets. A doji is a reversal signal.
One candlestick glyph is a visual representation of one trading session. Each one shows you an open, a close, a high price, and a low price.
If the candlestick is white, the price closed higher than it opened. If it is red, the price closed lower than it opened. The vertical legs (called wicks) represent the highs and lows.
A doji candlestick, however, is black, meaning it closed at or near where it opened.
In other words, dojis are formed when the candlestick opens and closes at the same level, implying the fight between the bulls and the bears is at an impasse.
Dojis signal turning points. They are the proverbial bell ringing at the top (or bottom) of a market.
They look like a cross. Think of them as flags planted at the top of a mountain. The market walks up, plants a flag, and walks back down.
All the best,
Christian DeHaemer
Outsider Club.
Government chart on debt:
https://fred.stlouisfed.org/series/gfdegdq188S
Brit’s hot take on the Fed cut:
https://www.outsiderclub.com/the-fed-is-worried-about-jobs/
Why you should buy gold:
https://www.outsiderclub.com/i-want-me-gold/
