This week was extraordinarily volatile with massive intraday swings of hundreds of points in the Nasdaq-100 pretty much every day. There were cross-currents of a hawkish fed mixed with great earnings from Microsoft and Apple. Apple’s results last night which were nothing short of extraordinary plus some dovish talk from Neal Kashkari caused a major relief rally today in the market. It looks like it will close at the high of the day with the Nasdaq-100 closing up around 433 points, or 3.17%!

This won’t come as a surprise, but I’m going to pour cold water on this rally and say we aren’t a bottom yet. Not even close. I still feel like we are in the early innings of a major decline. The timing of these things is always hard to work out but I don’t expect it to go on too long, maybe another couple of weeks.

Here’s what I see. Right now, Apple, Amazon, Alphabet and Microsoft are basically the market. Together they comprise about 20% of the S&P. Amazon has been extremely weak of late, but the other three have held up remarkably well given the volatility in the rest of the market. However I don’t think the market will bottom until everything participates in the downside to a large extent and we get some mean reversion in the weighted indices. Such a small number of stocks comprising so much market capitalization poses a pretty large risk to the economy because most passive investors are heavily invested in the S&P so, by extension, are heavily weighted to those four stocks. If those four stocks were to drop significantly, lots of people would see drastically diminished 401k balances which would make them feel less wealthy, spend less and have a negative impact on the economy. This is the wealth effect in action, or as George Soros might describe it as a reflexive relationship where the market prices have a direct impact on the earnings of the companies they represent.

If we look at a one-year chart of Apple, Microsoft, or Alphabet we will see a pattern familiar to markets right before they crash. A long, consolidating period (summer of 2021) followed by a near-vertical rally of 20-30% over the course of three months or so (October-December of 2021), followed by a relatively benign “normal” correction (early January through the beginning of this week), followed by a sharp reversal up recouping about half the decline (the latter half of this week and possibly continuing into next week) followed by a massive quick drop, climaxing over the course of about 1-2 weeks (TBD).

To me sentiment is still very risk-on and there are many talking heads calling Monday’s drop capitulation. It’s certainly possible, you never really know. Still, it’s very hard for me to understand with the monetary policy outlook for the next year or so that at current valuations, stocks are a buy. I firmly believe that Apple has achieved its permanent all-time high. That’s a controversial statement given that they just reported blow-out numbers. But, show me a company that is still growing that was the leading company of its day ten, twenty, or thirty years ago. Companies go through evolutions and lifecycles just like people and when they are at their peak, the only way is down. I truly believe Apple has peaked but the fundamentals haven’t. This is how markets work. Stock prices tend to peak while the outlook is still extremely favorable and there isn’t a bear case to be had. If they dropped when it was obvious, everyone would make a lot of money. Or nobody would. It doesn’t matter whether you’re in a bull market or a bear market- once the fundamentals align with the price action, there’s a good chance most of the opportunity has already been wrung out. That’s certainly how Apple feels at the moment. I feel certain this stock will be lower a year from now.

It’s not the only one. Microsoft’s chart looks similar and it’s price action post-earnings should be troubling to the bulls. After reporting massive earnings growth it could barely stay over $300 and failed multiple times this week before finally closing over $300 today after a very shaky gain. There just isn’t much momentum there.

At the market level, as discussed ad nauseam here, 3-4% rallies in a downtrend are a bearish signal and today’s ramp up into the close actually makes me feel better about this call, not worse.

Finally, as also mentioned here multiple times, sentiment is not close to bottoming yet. We are at what feels like an early phase where people who think they’re clever are looking for signs of capitulation. Things like the 1100 point drop in the Dow on Monday or the bear-bull survey that showed the lowest reading since the Covid crash. But that’s not real capitulation. You can’t summarize true sentiment from a survey or some widely-disseminated numbers. You can’t gauge it from oversold conditions. You have to put in the work to get to know multiple people who follow the market and gauge their reactions to it. So far I sense no real fear and a continued reluctance to accept the facts as they’re presented. Complete denial. Not even allowing for the possibility this market will go lower. People look at a large, quick drop like we’ve experienced over the past 3-4 weeks and believe the worst is over.

Another sign the denial is strong: on Tuesday after Monday’s massive drop, a Bloomberg article made the rounds citing a JP Morgan analyst who attributed Monday’s selling to retail investors panicking. The implication being that it was “dumb retail money” that was selling and then “smart institutional money” that came into buy the dip, taking such great deals off of poor retail’s hands. This type of straw-man story is very comforting to the bulls and further enforces their ill-informed idea that they are the smartest people in the room and on the same side of the trade as this mysterious institutional smart money. Never mind that most institutions fail to match the S&P’s performance nearly every year.

Real capitulation happens when everyone is terrified- bulls and bears and for very good reasons. Nobody wants to touch stocks because of the absolute devastation they’ve created. The pattern never fails. People are arrogant and believe that they are above everyone else past and present. People who panic-sold in previous panics near the bottom were stupid and irrational. This gives them the belief that they can easily spot fear in others and every drop is a great opportunity. They never stop to ask themselves why they didn’t think to buy on previous bottoms whether they be in 2010, 2018, or 2020. They get drawn in in the 8th inning of a bull run and then continue to buy as the market starts into a tailspin. What people fail to understand is that it is never apparent when a bear market is starting because the fundamentals haven’t emerged yet. People are simply taking risk off before the economy turns down. By the time the evidence is there, it’s too late. These people provide the opportunity in sell-offs.

As an aside, it brings me no joy to continue on and on about a bear market or crash. I’m not a doomsdayer normally and I consider myself an optimist. But a person who can’t accept facts as they are presented is doomed to fail in this business. If true capitulation were to be reached by my own measures, I would definitely switch to being a bull, but I just can’t in this market environment.