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The Upcoming Blow Off Top in Equities

There are many reasons why we believe this market cycle will end with a blow off top, in particular for the very popular U.S. technology index, the NASDAQ 100.

A blow off top for the NASDAQ 100 means that we first need to see a parabolic price increase that can lead to all time highs of 20,000 to 21,000. It is a very rough estimate. We monitor and trade markets daily so our analysis always changes based on market action and changing market conditions.

So, here are a few reasons why we believe in the blow off top thesis :

Flows in Liquidity

Global liquidity is close to making new highs ! And the U.S. is currently the no. 1 country where you want to invest your money in. It's certainly not in Europe, the Middle East nor China.

As as further pointed out by Steno Research:

USD liquidity is likely going to increase massively in Q1 due to a series of technicalities surrounding the BTFP, ON RRP and TGA facilities, which makes us set for a material rally (or a blow off top) in Q1.
These three liquidity adding mechanisms will more than outweigh the QT program (running at a little less than $95bn a month on average), leaving a very benign liquidity picture ahead for Q1-2024.
By our estimates, liquidity will increase with $8-900bn until end-March, which almost resembles a QE-light / stealth QE scenario, and the Fed has seemingly lost control of these mechanisms.
This will in case be one of the fastest liquidity additions on record, only outpaced during the early innings of the pandemic! 

It's an Election Year in the U.S.

We've discussed the President Election Cycle before (guess what the best year in the cycle is usually the year before the election ...) but it's looks obvious to us that both candidates will promise their constituents nothing less than the MOON IN ALL ITS SPLENDOR. Loose fiscal policies are overshadowing restrictive monetary policies, by a big margin.

We expect most of these promises to please markets !

Sharpe Ratio

The QQQ (NASDAQ 100 ETF) 10-year rolling SHARPE ratio has now reached a reading of 3.26 !

While this is an amazing risk-adjusted profile for tech stocks at the current moment, extreme readings in SHARPE RATIO of equity indexes like these are a pretty good warning sign for an upcoming reversal in risk-adjusted returns.

A Wide Range Year is Rare

Based on the annual returns of the NASDAQ 100 since 1986 (see the above chart), we can spot 2 WRBs to the upside calculated over a 14-year period (the second one is over a 14 and 20-year lookback period) for the Nasdaq 100:

WRB 1 -> 1999

WRB 2 -> 2023  

While a Wide Range Bar or Wide Range Year up suggests more upside in the following year, it is also a sign of excess when we are near the end of a cycle.

WRBs are a sign of institutional activity and highlight momentum at the beginning of a cycle and excess when a cycle matures.

Geopolitical Risks are on the rise

The Ukraine and Middle East situations have continued to be at the center stage of the geopolitical arena in the last few months. However, it looks like Taiwan and South East Asia will be a key highlight in geopolitical risks this year.

The impact of a conflict over Taiwan would have a far greater negative impact on the world economy and international relations than COVID and the Great Financial Crisis of 2008 had.

By cracking down on Beijing’s semiconductor industry, effectively putting China in a corner at times when semiconductors play a bigger strategic role within a country's economy and national security than black gold (oil), the U.S. and its allies are indeed playing a very dangerous game. 

It's one of the reasons why China is preparing for war, but not the only one. China wants to be the next Superpower after a century of humiliation by the West and Japan following the Opium Wars of the late 19th century and WWII. President Xi calls this new era the Great Rejuvenation of China. And he has made clear many times that Taiwan will be reunified with China before 2049. I would not doubt him. We expect that it will be much sooner than 2049.

The Taiwan's presidential elections will be held on January 13, 2024. It is a crucial election for the world to monitor.

About the candidates and the latest polls:

Don't be Complacent

I would not be complacent when the market enters a parabolic slope. It often signals the end of a cycle.

Consider progressively rebalancing your portfolio as the market makes new highs.

Here's how the great bull market in bonds ended when COVID hit - a text book example of a blow off top:

We warned of a secular top in the bond market in the spring of 2020 ... it sure was an interesting timing !

Remember, this game is not about generating pure alpha, but rather about generating better risk-adjusted returns !

That is why as Macro investors we have a better edge!

Good night and good luck !

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