Last Stand.

About a month ago, I started dedicating more of my daily bandwidth than I would have otherwise liked to documenting what was pretty clearly an unsustainable rally in tech shares.

For me, it’s never a matter of decrying the supposed “injustice” of liquidity-driven markets, or momentum-based rallies or lamenting the death of price discovery (which went to meet its maker years ago). Rather, it’s merely an exercise is pointing out things that are glaringly obvious, and tech was glaringly overbought.

As Canaccord’s Tony Dwyer and Michael Welch wrote in a January note flagging a nosebleed reading of 82 on the 14-week RSI for the S5INFT, “this really isn’t that complicated a call”.

A reading of 80 or more had only happened four other times in the past 30 years, and each time it marked “an almost immediate peak”, Canaccord remarked, on January 20, adding that “Info Tech has led the market to a position that is excessive and has generated temporary pullbacks in the past”.

As you can see from the visual, that did, in fact, mark an “almost immediate peak”.

Turning to the Nasdaq 100, Tuesday’s losses bring the 4-day decline to a staggering 9%. A quick look at the 14-day RSI for NDX shows the single worst four-session decline ever. What you see in the bottom pane below represents an even more harrowing four-day stretch than that witnessed during the bursting of the dot-com bubble – at least on that measure.

As for the top pane, it’s self-explanatory. The S&P is busy careening downward through key levels that technicians will tell you are exceptionally meaningful.

On Tuesday, some folks suggested, based on a JPMorgan note, that CTAs may still be a long way from deleveraging in earnest. “There remains a healthy downside cushion before CTAs would need to de-lever significantly, given the strength of the rally over the past ~4 months”, the bank’s Bram Kaplan wrote, in a note dated Monday. He added that S&P 500 momentum signals “would flip negative below ~3275-3325 (short-term momentum), ~2900-3100 (medium-term momentum), and ~2800 (long-term momentum), suggesting a double-digit percentage sell-off would be needed to cause CTAs to turn short”.

You should note that things have changed materially since that was applicable. CTAs were surely deleveraging on some of the short-term windows Monday, and Tuesday may well have exacerbated things, as equities plunged through support.

Meanwhile, note that at one point on Tuesday, the NYSE tick index spit out one of the most dramatically negative prints of the entire bull market.

In short, it’s crunch time for the dip-buyers.

Early Tuesday, we ran a chart showing that Pavlov was “alive and well” in 2019. Each time the S&P fell sharply in a single session, returns the next day, and over the next five days, were higher, a testament to how market participants have been conditioned in the post-crisis years.

I’ve updated that visual to include this week’s COVID-19 scare. Have a look:

Of course, part and parcel of that conditioning is central bank forward guidance. The two-way communication loop between policymakers and markets became a self-fulfilling prophecy. Markets became so conditioned to policymaker intervention and dovish forward guidance that no one saw any utility in waiting around for it. After all, if you know it’s coming, why wait on it? Why not buy the dip now?

Once that mentality takes hold, it obviates the need for further dovishness. Markets react to the expectation of dovishness and in doing so, ensure that the policymaker “put” runs on autopilot. As BofAML put it years ago, “competition to buy the dip becomes so strong, CBs no longer need to react”.

That changed in 2019. Policymakers had to react, in part to reverse the Fed’s overtightening from 2018 which broke the spell for many market participants, who suddenly found themselves buying “dips” that didn’t immediately “correct”. Now, it looks as though an exogenous shock to the global economy (COVID-19) means the Fed may need to resort to an inter-meeting (i.e., an emergency) cut.

“The equity market dip has once again sparked calls, or hopes for Fed easing”, JonesTrading’s Mike O’Rourke remarked on Tuesday evening. “[But] Fed easing won’t get Chinese factory workers back to work”.

As of Tuesday morning, markets were pricing in more than 200bps worth of cuts collectively from major central banks in 2020.

I suppose the question is how many rate cuts does it take to cure a virus? Because ~800 of them (rate cuts, that is) haven’t managed to stave off the disinflationary impulse since 2008, nor have they succeeded in engineering a particularly robust recovery.

But, they have succeeded in driving the price of financial assets into the stratosphere. It would be a real shame to let some annoying respiratory infection spoil all of that work.

And so, this may be it. With rates at (or near) record lows and balance sheets still bloated, 2020 may be central banks’ last stand. One last push to rescue the world before the armory is truly empty.