By Ron William, CFTe, MSTA

The Minsky risk call is now heightened as the S&P500 reactivates its crash pattern after finally breaking under key support at 4100.

The Minsky risk call, featured in past reports and media interviews, is now heightened as the S&P 500 reactivates its crash pattern after finally breaking under key support at 4100 (Figure 1). This is further amplified by a broad-based breakdown in major headline U.S. indices such as the Russell-2000 and Nasdaq 100. In terms of behavioral sentiment, the S&P 500 Minsky crash pattern continues to characterize a polarization between buyers and sellers as part of a broadening top, with each higher price high (point 1, 3, & 5) and lower price low (point 2, 4, & 6). Expanding volatility becomes self-feeding. Point 5 is deemed as the “kiss of death” signal. This pattern spans from the prior highs of 2018 and includes the pre-pandemic peak and price exhaustion gap near 3400. It equates to an extended 20% price drop and net peak-trough drawdown of 30% from the all-time highs of 2022.

Currently, there remains a divergence in bearish sentiment versus real positioning with initial spikes in fear indicators, but still no panic, thereby implying further capitulation ahead. A notable example is AAII cash position and allocation into equities, which signals the mood of investors is more bearish than positioning (Figure 2). Global equities remain bearish, marked by the EM top in Q1 2021, the global market breadth and the MSCI World (ex. U.S.) top of June 2021, followed by the major breakdown of growth vs. value in Q1 2022.

Market internals continue to be fragile in the U.S., led by mega cap technology and the ongoing FAANG stocks being de-faanged. The chart breakdown still warns of an extended 40% price drop into pre-post pandemic levels (Figure 3). Watch AAPL, MSFT, and semiconductors for further downside risk.

A key driver has been the prior growth-value rotation during the reflationary cycle of spring 2020. However, in January 2022, the first reversal was triggered on the MSCI World Value chart, which is part of a distributive top phase that is verging on a breakdown under key support (Figure 4). The negative domino effect is also now translating to other sectors, notably steel and miners, with increasing evidence of a top in late cyclical sectors. This would mark an interim top in commodities, marked by energy-oil as the last domino to fall, exasperated by a deflationary bust scenario of the 2022 bull cycle and rising socio-economic concerns.

A key measure of the unwind of selective bubble phenomena and related greed trades will be the completion of a top in Bitcoin as part of the major bear market ahead and potential Darwinian winter period in digital assets over the next few years (Figure 5).

A confluence of market timing headwinds remains, with both seasonality and our composite cycle warning of growing mean-reversion risk into H2 2022 and 2023 (Figure 6). More to follow on seasonality timing patterns in future FSC blog articles.


Author: Ron Willian, FSC Development Director

Read Ron William's full bio here.