Back on June 22, my post ran with the headline, You Have Until July 10 to Prepare for The Collapse – Here’s What to Do. I said then:
I have also warned you not to chase the recent rally. July looks like the month where the market should start to break down. That doesn’t mean that it will, but the risk is high and growing. I would be out of this market, and for more aggressive traders I would be shorting the SPY, and even buying limited amounts of puts on it. I’d look at puts just in the money (just below the strike price), with about 5-6 weeks to go until expiration, to catch this next wave down.
I posted a chart from my trading platform and said this.
At the bottom of the chart you see the idealized cycle periods. The 13 week, 6-7 week, and 4 week cycles all align to the downside starting around July 10. That doesn’t guarantee a decline. It just signals that the cycle wave patterns will be most propitious for a decline at that time.
Since then the S&P 500 has rallied from 2754 to 2794, a gain of 1.1%. It seems like a lot more doesn’t it? That’s because it dipped a bit early in the period. Since closing just below 2700 on June 28 the SPX has risen a hearty 3.5%. The rally has been relentless, casting a pall over bears, and further cementing the complacency of bulls.
Manias take time to die. The big February selloff from the very tippy top of the market was a historical weirdo. Never has a market crashed beginning a day or two after it hit an all-time high. There’s always been a warning period of at least several weeks, or even a few months, where the market weakened technically before crashing. The February plunge was too much too soon. It was merely a warning shot across the bow.
As a result, the market has spent the last few months backing and filling. There have been downdrafts due to the Fed and US Treasury pulling money out of the markets. Then there have been rallies, driven by the corporate buyback game and manic borrowing on margin.
In the corporate buyback game, C suite mob bosses enrich themselves by using the corporate piggy bank to buy back the shares that they had issued themselves at lower prices. This isn’t just me speculating. The SEC has confirmed it. The bosses do this at the highs in their stock prices to line their own pockets, not to benefit shareholders. Corporate buybacks have only been this high once before. That was at the top of the market in 2007. Shareholders were left holding the bag.
Other drivers are the increased use of leverage, aka margin, at the peak of the mania. Loans issued by brokers and shadow banks have been surging to all time highs. But debt! Huh! Yeah! What is it good for! Absolutely nothing! The market can’t get out of its own way. All those corporate buybacks, all that financial debt, and the market is still stuck in a range.
Source: Federal Reserve H8 and S&P
I’m Holding My Puts Until Expiration. But What You Do Is Your Decision
So, am I wrong about this market being headed for the graveyard? We don’t know yet. The market is rangebound, and one of my nostrums about rangebound markets is that the more often a range is crossed, the thinner it becomes. There are fewer buyers and fewer sellers within the range as their orders and strategies are fulfilled each time the range is crossed. So prices tend to cross the range quickly and easily. It’s all sound and fury and much ado about nothing. It’s only when the market reaches the edges of the range that we see exactly where supply and demand are situated.
Yesterday, we reached the top edge of the recent range. Suddenly, overnight, the players found a piece of news that they could sink their teeth into–a catalyst. The Trump Regime announced $200 billion in additional tariffs on Chinese goods. The futures instantly plunged.
Coincidence? Are “fundamentals” the driver here? Or is this a case of the fundamentals of liquidity, the supply and demand for money and securities, exerting their long term influence just at the edge of the range. This is where heavy resistance in the form of a wall of supply stands. In other words, is it a case of, “when the market is ready a catalyst appears?” I’ve seen that happen all too often in 50+ years of observing markets to dismiss it out of hand as a coincidence.
Below is an update of the chart I showed you from my trading platform a few weeks ago. I’ll allow you to consider it and all of this data along with everything that you are seeing, hearing and reading in the finanfomercial media. Then watch the market over the next few days and weeks. There’s something happenin here. What it is ain’t exactly clear.
I think we’re going to find out. Soon. It’s up to you to decide what to do now. I’m going to hold my puts until expiration in the next couple of weeks. If the market doesn’t sell off, I’ll take my lumps and re-evaluate in the days ahead, and let you know how I plan to handle the next phase of this market, whether it’s the collapse that I expect, or the continuation of the mania on ever flimsier support.
If you’re interested in the short side, you can look at our ideas here, or check out Shah Gilani’s put play research and recommendations in Zenith Trading Circle.