Analysis, Perspective, Trading Strategy
Thelma and Louise, Spaceballs, and the Stock Market
By Joe Duarte on July 8, 2018
of the most poignant lines in Mel Brooks’ “Spaceballs, the Movie” which
coincidentally was released in June of 1987, roughly four months before the
stock market crashed, is “there is an upside and a downside to every Schwartz.”
Adapting the Schwartz to the current market, it’s easy to see that in the present
things are crashing and burning. But if we look further out, crashing stocks
are bargains in the making. Thus, as we wait for the dust to clear in the safety
of cash and some sparse shorts, we can consider the present and what may lie
Last week in this space I wrote: “The stock market may already be
broken, given the nearly complete collapse of the market’s breadth
on December 14. Consequently, with the Federal Reserve likely to increase
interest rates on December 19, 2018, the stage is set for an even more
explosive move in the markets.”
I then added: “Quantum physicists describe a three tiered system
of laws that govern the universe based on Chaos Theory where the normal
state of affairs is a state of non linear order described as being
predictably unpredictable. When things fall out of this normal state
of Chaos, they transition, often violently, into Disorder, which triggers
a mechanism known as Complexity. It is Complexity that eventually returns
situations into Chaos, although the new state of non linearity that
follows a state of Complexity may or may not resemble past periods
of Chaos. More specifically, at the point when Chaos falls into Disorder,
it is said that events fall off of the “edge” of Chaos.”
Of course the nearly 10% drop in the S & P 500 over the last
week, and the entry of the Nasdaq Composite (COMPQ) and the Russell
2000 indexes (RUT) into a full blown bear market as the rest of the
indexes circle the drain confirm that we are well into the Disorder
cycle. Thus, it’s plain to see that the Stock Market and America’s
pocketbook are fading rapidly thanks to the Federal Reserve, Congress,
the White House and the Algos. This, of course, makes Monday’s trading
session, ironically Christmas Eve, one which will potentially be remembered,
whether there is a momentous crash or something else.
The stock market’s most accurate indicator since the 2016 presidential
election, the New York Stock Exchange Advance Decline line (NYAD) has
been destroyed by the recent selling spree and shows no sign of any
meaningful reversal at this point.
Furthermore, since NYAD is primarily a measure of the market’s liquidity,
unless and until its current state is credibly reversed, the risks
of a major liquidity event, think Lehman Brothers, are on the rise.
Both the Nasdaq 100 and the S & P 500 closed below their lower
Bollinger Bands on 12/21. Thus, a bounce is likely at any time. But
just because they bounce it doesn’t mean this is over. If the bounce
fades the selling will increase and we could see another 5-10% to the
down side in a hurry as the algos pile on.
However, if stocks continue to collapse and other
markets such as bonds, commodities and currencies join the collapse,
it is at that moment that the liquidity bomb is likely to explode and
all bets are off.
It’s a Bad Time to be in Charge
In the real world, the Fed will get the blame for the market’s crash
and for the potential damage done to the economy when Mr. and Mrs.
America look at the 401-K statements at the end of the year just in
time for the Christmas credit card bills to arrive. But the Fed won’t
be alone in receiving blame. Certainly the presence of trading algorithms
and the speed with which they unleash buy and sell programs which in
turn feed on one another and extend the prevailing trend, up or down.
It is this high frequency trading and the one sidedness that results
from the self perpetuated automated selling that compounds the up trends,
as we saw over the last nine years, and the selling sprees such as
the current bear market. “There is an upside and a downside to every
The Thelma and Louise Moment
Finally, there is the evolving psychology of the Thelma and Louise
moment just as the iconic T-bird convertible hits the edge of the grand
canyon and the girls are about to hit the gas pedal. This is when fear
fades, reality dawns and helplessness sets in just as everyone decides
to sell all at once creating a liquidity trap and a potential collapse
of the market’s structure.
From a trading standpoint, there is nowhere to be but cash with an
occasional stab at the short side via options and inverse ETFs. If
the market crashes into oblivion on Monday it will be a great opportunity
to cover all shorts. Furthermore, when a bounce materializes it’s good
to be skeptical and if one chooses to trade it keep a short leash on
the position with tight stops.
Ultimately, this could be a good time to alternate between reading
a book and compiling a trading list, instead of trading. Certainly
the fish are biting somewhere.
May the Schwartz be with you.
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of Trading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
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