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WARNING: Brown Swan Event

A brown swan event is an unforeseen market collapse due to extreme risk and extreme complacency. Also known as a consensus of fools.


Let's see, this week is the second week of earnings so markets must contend with the stock buyback blackout period which means that billions of weekly stock demand from corporations is no longer supporting the market.


In addition, this week is monthly options expiration. What that means is that the majority of outstanding options will expire this week and next week the market will not have the options buffer it's had due to the relentless buying of call options. Options are rented capital, and amid record call buying, that makes this a rented rally.


We also learned this week that hedge fund momentum algos aka. "CTAs" are now selling stock because market momentum is rolling over. The more the market goes down, the more they will sell:




"Also known as CTAs (commodity trading advisers), trend-following hedge funds trade systematically to catch big trends in markets"



FR: The market is now well below the level cited in the article that would trigger selling. We are now heading for levels that will trigger an avalanche of selling. And not just from momentum algos.


The next risk is Bitcoin halving which I discussed in my last post. This event will test the hypothesis that there is such a thing as "guaranteed money" no matter how many people know about an event ahead of time.


Many shorts are now betting that Bitcoin miners go bankrupt en masse due to the "halving" of the Bitcoin reward. Were mass bankruptcy to result then one can imagine the collapse in liquidity that is coming.


Here we see the world's largest Bitcoin miner's stock is collapsing back to the origin of the previous halving in 2020.








The next risk is that since last week's hotter than expected CPI, global currencies have been getting monkey hammered by the strong dollar. Right on time, Peter Schiff is informing us that dollar doom is imminent - even though it's the strongest currency on the planet.


I showed in my last blog post, the risk against the Yen is that carry traders are now record short Yen - the most since 2007 - which means they will be forced sellers of global assets when markets go RISK OFF. However, the dollar risk vis-a-vis other global currencies is that they are now all being pressured lower which pressures global stocks lower as well.


The difference this time, as we see in the lower pane, is that SPX volume is not yet fully oversold.







Next, we discuss bank risk which became back to the fore after the CPI print and has been exacerbated by JP Morgan's gloomy outlook this past Friday. As we see, the leading bank stock is imploding deja vu of the 2022 market top.







Last but surely not least is the biggest risk to stocks which was yesterday's hawkish pivot from Powell and the attendant backup in bond yields. Last week we got a hotter than expected CPI so this week Powell was finally forced to admit that his most recent statements about imminent rate cuts were WRONG:


April 3rd, 2024:


Yesterday:


The last time the Fed got hawkish at a melt-up all time high was of course December 2021. Back then it took a VIX spike to 40 to generate sufficient capitulation to put a bid under the market. This time, the VIX is still below 20 and the Dow is heading to the 200 dma. In other words, the level of overbought extreme is higher today and the level of complacency is higher as well. By the time investors actually panic and discover the sell order, we will see what happens in one-sided markets when everyone tries to get out at the same time.


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