David Rosenberg: “It Was Black Friday Before Black Monday”

“It could never happen again…” is the constant refrain of the asset-gatherers and commission-takers around the world as they prepare to defend their livelihoods from yet another delusion-clarifying plunge back to reality for stock prices.

Well, after this week’s bloodbathery – and tearing down of the social-media-will-remake-the-global-economy narrative – many are starting to recognize that all is not well… and perhaps, just perhaps, the support pillars of this flimsy potemkin village we call ‘the stock market’ have already crumbled…

Dollar funding markets are extremely stressed and The Fed’s balance sheet contraction (and its implicit tightening of liquidity) is not helping…

Gluskin Sheff’s David Rosenberg has been very vocal  about his fears that market participants are blindly ignoring the similarities – fundamentally, geopolitically, and technically – to 1987.

He previously tweeted…”Hmmm. Let’s see. Tariffs. Sharp bond selloff. Weak dollar policy. Massive twin deficits. New Fed Chairman. Cyclical inflationary pressures. Overvalued stock markets. Heightened volatility. Sounds eerily familiar (from someone who started his career on October 19th, 1987!).”

Hmmm. Let’s see. Tariffs. Sharp bond selloff. Weak dollar policy. Massive twin deficits. New Fed Chairman. Cyclical inflationary pressures. Overvalued stock markets. Heightened volatility. Sounds eerily familiar (from someone who started his career on October 19th, 1987!).

— David Rosenberg (@EconguyRosie) March 1, 2018

And in his latest tweet, Rosie warns…”It was Black Friday before Black Monday.“

Suggesting investors “Look at this memorable clip from the legendary Louis Rukeyser’s Wall Street Week from October 16, 1987.  Focus on what Marty Zweig had to say, and pour yourself a strong one as you do!”

Marty starts around 6 minutes in…

David may be on to something… “you are here”…

All of which confirms our recent note that JPM continues to view 1987 as an important analog for 2018, “as we anticipated a similar cross-market dynamic heading into the year whereby interest rate and curve volatility could be a primary driver for volatility in the equity market.”

To underscore this, the technician notes a surprising similarity namely that to date, the 2018 pullback has traced out a similar trajectory as both the Apr-May and Aug-Oct 1987 corrections:

“In 1987, both correction periods traced out a remarkably similar path up until about day 35 from the peak. In the Apr-May period, the S&P 500 had established a well-defined range support zone with the initial pullback. The market had gone on to retest and hold that support in late May ahead of a powerful 20%+ rally to the Aug peak. The initial drop from that peak into Sep 1987 established range support in Sep, just as the market did in spring. Except the mid-Oct retest of that support failed to hold.”

In other words, in 1987 it was roughly 40 days past the prior peak that the S&P decided whether to keep going higher, or crash. If indeed the current market is an analog, the S&P faces a similar choice now.

Some further observations from JPM:

We suspect that a confluence of stop orders through that support and the 10% peak to trough correction threshold triggered or at least contributed to the market dynamic that defined the three-day crash event. It is also worth  noting that the aggressive trend to higher Treasury yields and curve steepening reinforced the equity weakness until  the May and Oct 1987 bottoms. Even during the brief crash episode, the trend to higher rates reinforced equity weakness up until the last day of the meltdown. As far as that cross-market driver goes, the aggressive trend to higher yields and early-2018 curve steepening moves have in part reversed, so we see a low probability that the  equity weakness resumes with the same momentum it had in early Feb.

Unless, of course, it does… which is why JPM urges to keep a very close eye on which way the S&P will break next. And while another ramp higher obviously removes the risk of another “1987” event, a move below the 2,610-2,637 support confluence would leave the market susceptible to a retest of the key support in the 2,500s that held in Feb, according to JPM. Hunter’s recommendation: “we suggest at least partially reducing the new long exposure accumulated during the Feb turn and on the early-Mar pullback if the market breaks below 2,610.”

The 200- day MA has risen to 2,585, which sits just above the 2,541-2,557 Oct-Nov 2017 range lows and 2,533 Feb 15 trough. That area also roughly lines up with the 10% peak to trough threshold, an area that marked a floor for the majority of late-cycle drawdowns. Even if further weakness materializes, we think the market will hold that area, but would wait for a reversal pattern to set up before suggesting re-entering any long exposure reduced on the break below 2,610. Longer-term support rests at the 2,463 Jan-Mar equal swings objective, 2,417 Aug 2017 low, and 2,400, which marked a key inflection in 2017 – first as resistance and then support.

All this is summarized in the chart below: