Bubble Markets Display Bizarre Behavior Right Before They Tumble

On Jan 31, 2021

us-US-stocks-market-opening — A trader blows bubble gum during the opening bell at the New York Stock Exchange (NYSE) on August 1, … [+] 2019, in New York City. – Wall Street stocks bounced on August 1, 2019, winning back some of the losses suffered in the prior session following the Federal Reserve’s first interest rate cut in more than a decade. Major indices dropped more than one percent in the wake of the rate decision on July 31, which was followed by a confusing news conference by Fed Chair Jerome Powell who tried to justify the move and explain the implications for monetary policy in coming months. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)

AFP via Getty Images

Like the Dot.Com bubble of the late ‘90s, the typical signs of an approaching bubble bust were on full display in the equity markets last week (week ending January 29^th). GameStop

GME
(GME) and other failing or troubled companies (AMC, Blackberry, Nokia, Bed Bath

BBBY
) have become the darlings of the WallStreetBets (WSB) crowd (a gang of small retail investors tethered together via social media). Last week, they mounted a raid on Wall Street’s short-sellers, causing much chaos, and the transfer of large volumes of wealth (at least temporarily) from Wall Street hedge funds to their own pockets. This behavior hasn’t been confined to just last week. The 50 most-shorted companies in the Russell 3000 index have now surged 33% so far in 2021. But, last week it culminated in trouble for several major hedge funds. Trouble is, some of the folks who buy these at sky-high prices will lose when there is no “greater fool” to buy from them at a yet higher price.

Meanwhile, the GDP did grow 4% (Annual Rate – AR) in Q4 (0.985% Q/Q). Unfortunately, all the growth occurred in October. Economic activity in November and December fell at a -3% AR.

The Economy

During the week ending January 23^rd, state Initial Unemployment Claims (ICs) fell -101K, a hopeful sign.

California, alone, was responsible for -64K of that fall. It should be noted that CA showed -59K the prior week and that data was flagged by the Department of Labor as an “estimate.” As a result, the magnitude of the fall in the state programs over the past two weeks is suspect.

Still, the available data (both state and Pandemic Unemployment Assistance programs) show 1.3 million new layoffs in the latest week and from the accompanying chart and table, it is apparent that no real progress on the employment front has been made since September. And that squares with the observation that GDP weakened in November and December. The chart and table show that some employment progress was made in October, and then things flattened in November, and weakened since.

Other data:

· The Conference Board’s Leading Economic Indicators (LEI) show sequential…