"You Are Here": Echoing The Cognitive Dissonance Of September 2006
With an almost perfect six-year lag, the S&P 500 appears to be following the same path as it did into the Subprime crisis from the Feb 2003 lows - almost too accurately. The analog is stunning 'optically' and even more concerning from a behavioral perspective. By this time in 2006, we had seen the US Home Construction Index drop 40%, Subprime lenders going bankrupt left and right, Magnetar Capital had started to create CDOs with the express intent of failing, and Nouriel Roubini had just given his IMF presentation on the forthcoming US housing bust and major recession. Despite all of this, which in hindsight was extremely worrisome, the S&P 500 managed to gain 200 more 'the Fed has our back'-points before cognitive dissonance finally gave in to the reality that the 'music had stopped' - first out wins, and large crowds and small doors don't mix. With the current market rising on ever-decreasing volumes (in futures and stocks - so it's not about the high-price equities), divergence between the new highs in equity indices and falling 'net new highs' in NYSE stocks, and near-peak post-crisis level of complacency in options prices, it seems risk and reward are at best skewed neutral, and at worst flashing red warning signals.
The '03-to-'08 Analog...
This time we have energy and food price inflation soaring; debt soaring; Advanced economies at ZIRP (and some NIRP); asset prices levitating; Europe in tatters; and China's growth gone... and yet, we keep buying - as the golden carpet ride of Central Bank malinvestment blinds us to the reality that we 'need' a devaluation... It is no different this time - we are behaviorally the same humans with all of our greed and avarice and self-important status-quo defending to be done; As Darth Vader might have said if he was still around (in the future?):"The Cognitive Dissonance Is Strong In This One"
NYSE Net New Highs Are Bearish-Diverging...
S&P 500 Options Implied Skewness (the amount the distribution of returns is different from normal and biased away from downside moves) is at near-peak post-crisis levels of complacency... and rising...
We can only assume that TPTB know this - and the jawboning that has managed to stabilize our markets for the last month has enabled enough protection/hedging to be put on as to provide comfort to those that really matter when this thing cracks.
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