Running on fumes?

The market has grinded marginally higher since my last post and is making new all time highs. There's been a massive rotation in the "value" sectors, namely, energy and financials while big cap tech has lagged. Obviously, this is the reverse of what had been going on the past several months and years for that matter. This rotation smells like a dead cat bounce with the possibility to last longer simply because energy and financials were so hated and hard hit, but that hatred has quickly turned to embracement. I remember quite well the beginnings of the last major value cycle from 2000-2008. It started in a stealth-like manner and back then the energy sector was the main driving force of that move powered by a thirst for energy from emerging markets, China in particular. This time around the structural outlook is negative given the alternative energy transformation and ESG mandates. And what about financials, the other major value component? That sector too looks to be in structural decline with fintech banking and low rates eating away at them, but again, they could still have room to run.   

And let's discuss the main catalyst for this rotation into value and for the market's buoyancy overall - the vaccine news. First of all, it would appear that the vaccines from Pfizer and Moderna are effective, but the word "appear" is the operative word. We don't know how effective they will be until after they are used en masse.  The market would also appear to be assuming that the rollout of this vaccine is going to be smooth and that there will be high embracement of this vaccine by the masses. Maybe all this optimism will turn out to be justified  but with expectations so elevated it would seem that the market is vulnerable to just the slightest of setbacks in the vaccine rollout and I'm guessing there's got to be at least a couple. 

Sentiment is very stretched on pretty much every front, and other "sentiment watchers" like me have been quick to notice this and have been frustrated in making bearish calls as the market simply keeps grinding higher.  That's not uncommon. Intermediate term tops are typically harder to time than bottoms in a bull market and when you have the market making all time highs, that typically results in sticky momentum. However, we're now at the point where the market has a running of fumes feel to it.  This weekend Cramer wrote an article titled "To all you Robin Hoodies I salute you!"  which basically congratulates these newbie traders for their optimism in airline and cruise stocks even though they are oblivious to the massive stock dilution in these sectors (much like banks during the financial crisis). This is the type of article you see near a top. On a personal anecdote, I was chatting with a friend of mine who was so excited to talk about his trading success. He told me how he can't wait for the next trading day to start. I know that feeling well and when I got it, it almost always led to getting humbled shortly after unless I managed to come to my senses in time. So, the danger signs are there. 

There is one more potential positive catalyst in the short term and that is stimulus. There was recently some talk about potential positive developments and should further developments happen that could add more gas to the fire in the short term, but if you look at things objectively, any gains from here appear highly likely to be given back and then some in the next month or 2 unless we are going to enter a blow-off move similar to say  Jan-March 2000 in the NASDAQ. That's certainly a possibility but that's not something worth betting on as those sorts of moves are rare. The blow-off phase to a bull market happens when there's widespread optimism by the masses in general, whereby the sky is blue and  everyone is truly all in. I don't think that's going to happen until covid is gone for good or at least mitigated significantly via the vaccine or simply running its course.   

It should be also noted that the last time we saw value and junk stocks take center stage like this was early June which led to a ST peak in the market and the relative out performance of those sectors. That move too was triggered by vaccine hopes  This time around the hopes are more justified, but at this point it would seem that the market is jumping the gun. That's obviously just my opinion which could end up being dead wrong. 

So bottom line here is that I would only be sticking with high conviction names at this point and be looking to takes chips off the table. The risk to doing this is that you would miss out on a possible blow off move to the upside but that's a piggish thing to bet on. 

All clear or bull trap?

Lots has happened since my last post, notably, Biden has won the election (apparently) and there's been 2 positive vaccine announcements. After the election results we saw the market rally in what is being labelled as a relief rally now that election uncertainty has been "alleviated".  Just prior to this election relief rally, noted permabull Tomas Lee from funstrat  tweeted (and I paraphrase) how the market will rally after we know the results of the election as an element of uncertainty would be removed. If you think about the logic of that tweet it's kind of silly. It implies that the market will rally no matter who's elected which therefore means the so called election uncertainty is a non-factor for the market and therefore the rally shouldn't have to wait for the winner to be announced. The market was indeed poised to rally no matter what. 

Last week Pfizer announced positive vaccine news and the market went up further still and after fizzling a bit, its having another strong move today after Moderna's positive vaccine news. Given what we know so far, all the vaccine news does appear to be promising and hopeful. Yes, we don't know how effective they actually will end up being, how many people will end up wanting to take it and when but you can't deny that this is good news. So, does this mean full stream ahead? All clear? Well, the problem is that this latest market flurry has rendered sentiment conditions to be the poorest I've seen in a long time. We have seen a massive spike in inflows, bullish sentiment and bullish positioning. Now, mind you it's not unusual to get this kind of strong bullish sentiment thrust at the onset of a sustained relief rally especially when for the past several months, these metrics have largely been bearish to neutral. I therefore won't be so quick to point this out as ominous as I see a lot of others doing but at the very least, this is not an ideal time to add to new positions, especially when these spikes in optimism are based on election results and vaccine hopes which have no economic substance at this point and won't have any for several months to which we can't quantify just yet. I'm not so quick to jump upon the all clear just yet. A bull trap would appear more likely than the all clear. 

The market is all about expectations. So, now that the vaccine cat is out of the bag, what is going to propel this market further? I suspect it would have to come from improving economic data and/or an announced stimulus package. The former seems unlikely but I think it's simply a matter of when, not if a stimulus package will be forthcoming given the massive spikes in covid cases around the world but will we get some sort of negative catalyst first? The market would appear to be ripe for at least a pullback. When I ask myself the question is it scary to put on a bearish trade here, the answer is yes. That's usually a good sign to do so. 

In the next post I'll address the value vs growth rotation that is happening. 

Wringing out the weak longs, but could there be something more sinister at hand?

Well, I pretty much nailed the top a couple weeks ago. The reason for the cautious stance was simple. Too much of the weak traders which includes many of the hedge fund and trend following types piled into the long side. These folks are just buff sniffers, they aren't true "believers" in the bull market. They chase when markets go up and run for the exits when they go down. Now they are starting to do the latter. Recall trader Mr. X I follow? On Monday he commented ""this is just a corrective move not bear market behavior". That complacent attitude he had has now notably shifted to "there's no motivation to put cash to work now".  So, I think we're on the way to wringing out the short to medium term complacency that the market has. Some folks are hopeful that after the election we will have an element of uncertainty removed from the market and so it can start going up again. Don't hold your breath for that. Until we get the complacency fully wrung out of the market and the hot money gets defensive/bearish I would be skeptical of any bounces being sustainable. I said the same thing in late September. There's probably going to be a shit load of whipsaw action next week. 

What if we are at the brink of something really nasty i.e. a real bear market? Does market action and fundamentals suggest this? Well, the former is indeed showing some signs as it stands now. We got a potential double top and a market that has been dripping down daily for the most part. If you look at a long term chart of a market bell weather like Apple it has clearly gone parabolic. The thing that is missing though is marked change in fundamentals i.e. earnings. Last night Apple reported strong numbers but a disappointment came with Iphone 12 rollout delays. But look at this following chart with respect to Apple's price to sales ratio.

At the very least this suggests that you're not getting a bargain buying Apple  here. It would be one thing if a parabolic run up in a stock is being supported by accelerated sales/earnings but that's not the case with Apple. 

I made a postulation a few weeks back that NASDAQ 10K or lower could be in the cards. That might very will end up happening because despite the great earnings of these tech giants, too much hot/weak money may still be in these names. But, as usual, I'm going to let the indicators do the talking and navigate accordingly. A good post election shakeout may change the sentiment picture, but as it stands now, there's not enough capitulation in my view and any bounces will be of the dead cat variety. 

Another thing that troubles me is the behavior of bond yields. I have always said that prior to most notable sell-offs in stocks there tends to have been a notable rise in bond yields. As the market then corrects so do bond yields which helps build the foundation for the next rally as the TINA narrative and lower discount rates are supportive for stocks. We got the rise in bond yields leading up to the mid Oct peak but since the market has rolled over, bond yields have remained elevated. That's normally not a good sign for the market. The only other time I recall not seeing bond yields decline as the market was forming a bottom was that last waterfall decline from Feb 2009 to March 2009 to mark the bottom of the 2008 financial crisis bear market.  In hindsight, that may have been a sign that the bond market had correctly been pricing in better growth ahead. Maybe that could be the case here, but more often than not, when I see bond yields not declining during a stock market sell-off , it signals complacency and at some point bond yields will end up declining notably before the sell-off is over. Again, I will defer to the indicators and expectations. 

What about all the "pricing in" I was talking about in a prior post? The problem is that too much complacency and hot money flows built up to negate this...at least for now. Too many people were trying to play the contrarian and ended up becoming a victim of it! I still believe that deep down there is still that underlying pessimism and distrust of the market which is why I think there's still a good chance that we're not at the verge of a big bear market just yet. The big bear markets happen when the sky is blue, the outlook is rosy and monetary/fiscal policy is restrictive. We clearly do not have those conditions in place. But because of the weak/hot money positioning this correction has the potential to be a nasty one unless we really see a big u-turn in the sentiment indicators soon. Stay tuned for next week as the election circus unfolds.

Notice how I didn't even mention that it was the new lockdowns and/or lack of stimulus that triggered this sell-off. That was simply the catalyst not the cause. The true cause is the poor sentiment/positioning backdrop for when you have such a condition, the market is ripe to sell-off no mater what catalyst may present itself. 

Notable shift in ST sentiment

 Yes it's me again Mr. hypocrite chiming in on the market's ST prospects. A timing indicator I don't normally look at is Mark Hubert's stock market timer index which right now is at historical extreme high level of bullishness. Also NAAIM sentiment is back to historical bullish positioning. This to me is clear indication that the market is vulnerable here in the ST at least....we'll see what happens. 

Focusing on bigger and better things

Lately I have found myself fixating too much on ST wiggles of the market, but it's hard not to especially given all that's going on. I've stated before many times that the shorter the time frame the more random the market is and if you fixate too much on the ST you risk missing out on bigger and better things. Big money is made riding big trends. I've been guilty at times of being too fixated on the very short term, i.e. like trying to capture the next 2-5% move in the market.  When I look back I find that it is better not to worry much about the ST direction of the market until there's historical extremes in sentiment indicators which imply significant risk to the market of 15%+ . 

Now being the hypocrite that I am, let me give my 2 cents about the ST action we've been seeing in the market. We have gone from ST oversold to overbought. This was due to a combination of stimulus hopes and bear traps i.e. when Trump got covid and then called off stimulus talks. Both those events ensnared and ripped off the nuts of the permabear trading community making them angrier and even more bitter than before. The recent spiky move in the 10 yr bond yield and the CDN dollar (which still stupidly continues to act as a ""risk on" currency) is what we also saw in June and at previous ST tops. AAII sentiment, NAAIM and fund flows as a whole have incrementally grown more bullish but are nowhere close to any historical extreme. Over the weekend there's news of resistance to Trump's revised stimulus offer. Will the market gap down on this? I don't know, nor should I really care on the grand scheme of things. I need to focus more on the bigger picture which is this:  based on the evidence I see, I  believe the market is in a primary uptrend and will continue to be in one until we get a lot more people "in the pool" and that's going to be reflected by historic bullish fund flows/positioning from retail and professional. That's going to reflected in the narrative changing from "we're still not out of the woods with the recovery" to something like "global synchronized growth is back!" which at that point the pandemic will have passed or largely passed. Until then, we have a wall of worry type environment. Granted, that doesn't mean we can't get nasty declines but they should be short lived ones. Remember, the market pre-prices all widely known expectations/fears and so if any do come to fruition, the market reaction is either short lived or it's ignored. Right now there is a widely held fear that Trump is going to contest the results of the election if he loses. There is also the expectation that Biden is going to win. The Covid 2nd wave is also old news. So, any kind of negative reaction to any of the above will be short lived or ignored unless people suddenly become too complacent about it. Maybe a little bit of  complacey is creeping in as of late...tough to say for sure. Even if that's the case, complacency will likely to turn to worry and fear very quickly if the market starts selling off from here, because the underlying deep rooted skepticism is still there in my opinion. 

When it comes to focusing on bigger and better things one area I'm really keen on is green related sectors.Companies that have a focus on renewable energy and energy efficiency appear to have a really bright future.  Climate change awareness/urgency appears to have accelerated to the point where major action has to take place in the next 10-20 years. I read an article today about how the EU has plans to upgrade more than 200 million buildings including changes in heating and insulation to improve energy efficiency at a cost of $300B Euros/yr  for the next 10 years. When it comes to renewables, the economics are now making much more sense which was not the case 10 years ago. The movement towards socially responsible investing is gathering steam by the day whereby it's gotten serious attention from big money managers not just as a growth opportunity; but also because they are being increasingly scrutinized by how socially responsible  the companies of their portfolio are. Many stocks that are focused in these above areas have been largely bucking the trend of the stock market in general as of late and I think that may be due to an expected Biden win who is promising big spending in these areas. A sell on the news reaction could be possible here or something worse if Trump wins. But those are ST concerns. The LT fundamentals of this space are solid. 

So while everyone fixates about the covid second wave or Trump's next tweet, I'm going to start focusing on bigger and better things. 

 

Sentiment heading in right direction but stay vigilant

So far the recent decline in the market has led to sentiment indicators reacting in a way that suggests a correction rather something worse, but we could see a rather nasty correction given how high the market got. AAII sentiment is at about 2:1 bears to bulls which has historically been in the vicinity of where bottoms take shape or at the very least a ST bounce. The put/call ratio has decidedly turned up but still has a ways to go to unwind the froth exhibited there, fund flows showed  quite a large outflow this week, large enough to suggest a low especially since flows prior to the correction were quite modest. NAAIM is showing that active fund managers have reigned in their horns, but I'd like to see a bit more unwinding there given that it was at a historical extreme at the recent market high. A couple of other things are also holding me back from signaling an all clear. First is the lack of panic spike down and negative news catalyst. This correction has been taking place without a true discernable catalyst and that can  possibly signal that the market is sensing something that is not widely obvious yet which means there could be a negative "surprise" in store which brings out more sellers. We also have to keep in mind where we are coming from. The market had a rip roaring move up which fooled even the biggest of bulls. There was indeed froth building up and it's still there with the likes of Tesla and such. Therefore, we could very well now have a correction that goes deeper than what a lot of people who missed the boat are expecting. Use your emotions as a guide. When the market was going up in August I had to really resist my impulse to chase it. If I was feeling it, I'm sure lots of others were too, who could not resist it and now they regret it. When the market goes down, it's the reverse. Those who are down on their positions cringe and are tempted to get out of them and eventually a lot do. Are we at that point where buying the market makes you want to cringe? Where it makes you sick to your stomach? Or are you looking at this dip as a great opportunity to buy and feel anxious that you might miss the bottom when the market shows any kind of strength? I don't think we are at the cringe point yet but we'll see what happens. There's this one trader who I will refer to as Mr. X. Mr. X  has been a weak bull for the past several years. He's always been a great barometer of anecdotal sentiment with a knack of nailing bottoms whenever he has the words  "protect your capital" as the main message of his post. We are not there yet. In fact, his post today basically said this: "although the market is correcting don't be surprised if a V shaped bounce developed as this has been the norm as of late". I know it's just one guy but that to me suggests that not enough weak trader types are scared enough. It suggests that FOMO is still there. 

Now, I did indicate that it wouldn't surprise me to see the NASDAQ trade down to 10K. If that were the case, we would probably see the SPX go down more than the 10% I said I think could happen. As always, I will defer to the indicators and signals of the market. When I make a call on an index value I'm really just guessing. It could very well end up being that the market bottoms higher or lower than those targets. Don't be dogmatic and check your ego at the door. It is perfectly OK to change your opinions and do a complete 180 turn if warranted but that should not be solely based on the recent direction of the market. It's easy to be bullish when market is going up and bearish when it's going down but you would simply be deferring only to market action which would be the equivalent of driving by looking in the rear view mirror. '

Bottom line is that if we get any bounce from here I would be skeptical of it being sustainable. I would think that we would need to see more pessimism in the indicators and anecdotally, but like I said, it's heading in the right direction.  

My next post will discuss what I think could be priced in the market and what may not be. 

Until the market becomes more embraced there will only be corrections

Since my last post the market rose relentlessly higher for about a month and experienced a decent pullback the past couple of days. Is this just a correction or the start of something worse? I'm thinking the former for the main reason I've been saying for quite some time which is that we haven't seen what I believe would represent a full embracing of  this market. Yes, there's been a speculative fever in the options market and in handful of momentum stocks like Telsa but generally speaking investors appear to be at least somewhat skeptical if not outright skeptical and many of those who call themselves"bullish" are reluctant bulls with a "hey don't fight the fed" or "just go with what works" mentality which makes them weak handed and  therefore easily shaken out like what is happening right now. There may be more shaking out of such weak handed bulls in the days to come but with the VIX almost having touched 40 already and the sharp nature of this recent decline, it would suggest that this is just a correction. The last time I got the sense that investors were generally too bullish was coming into 2018. It was evident by fund flows and the general narrative/expectations. Ultimately that led to a 20% drop in the stock market. Since that's not the case this time, I would expect a correction to be in the 5-10% range as fund flows are still weak and AAII sentiment is still showing more bears than bulls, which is quite incredible...we haven't see a streak of bears outnumbering bulls like this even during the 2008 meltdown. Since the NASDAQ was where most of the speculative action has been focused on as of late, it is possible to see a 20% correction there but comparisons to the 2000 tech bubble are ill founded. As I mentioned last post, back then speculative fever was more intense and widespread. EVERYONE was embracing overvalued tech from the little guy to the big players as evident with fund flows and margin debt. To put it into further perspective I quote one of my favorite twitter follow ukarlewitz:

Nasdaq-100 ($NDX) has had a nice run, up ~50% in the past year and ~150% in the past 5 years. Into the 2000 top, it rose ~1000% in the last 5 years topped by ~120% in the last year alone.

Bloomberg had an article titled "Nasdaq Plunge Is Victory Lap for a Stable of Equity Naysayers". Victory lap? What a joke. The Equity Naysayers have been obliterated these past 3-4 months and so there can be no victory claimed. Where are all the 1929 analogs now with the S&P 500  making new ALL TIME highs just recently?  I remember seeing so many of them on my twitter feed. Where did they go? Where's the mea culpa?  For once, just once I'd like to see a permabear come out and say "I was wrong". But what I would really love to hear them say which will never happen would be this  "I've been wrong not only now but a countless number of times for over a decade repeatedly calling for the end of the word. I'm sorry for being so dogmatic, so stubborn and with such an overinflated ego and I'm sorry for being such a miserable SOB which always make me view the world though dark shaded glasses"....but I digress.

Now, I did say months ago that if the bear case was to play out it would be because we see a return of economic weakness late summer/early fall after the pent up demand from the lockdown and the stimulus from government ran it's course. We will see if that will indeed play out but as it stands now it doesn't appear that will be the case. I could see a soft patch happening but again, because we have that underlying apprehension about the market and the economy I don't think things will unravel. Government authorities will not let their foot off the gas until we have clearly recovered and that is certainly not the case and likewise, investors will generally probably not fully embrace the market until the sky is blue again which by then will be too late.

Right now there are 9 Covid-19 vaccines in phase 3 trials. The historical  success rate of a drug passing phase 3 is roughly 50% (from what I've read at least). Therefore the odds suggest that at 4-5 of them will be successful. Some of these companies such as BioNTech are saying that they will know if their drug is successful as early as October. I wouldn't hold my breath for that, but it does appear that we could get  confirmation of a successful  vaccine sooner rather than later...at the very least sooner than what was expected back in March.  Governments are willing and ready to mass produce the vaccines the instant they get approved and so everything is being fast tracked. This would appear to be incredibly bullish and may be partially why the market has been grinding higher, yet you hear very little about this. Now, obviously we have no idea how effective any vaccine would be but do you think the market is gong to wait for that before responding? Most people are focusing on the negatives and the rear view mirror. 

If we get an announcement of a successful vaccine or the market senses one is immanent, we could see a big surge into "epi-center" stocks i.e airlines, hotels, cruise lines. I'will be looking at some option plays to see if the risk reward is worthwhile. 

Still a mixed picture but underlying skepticism is there

There's not really much new for me to say. I still see conflicting ST indicators but what's becoming clearer to me is that there's an underlying skeptical tone to this market that's not going to go away soon and that's long term bullish. Therefore, any correction we do get is more than likely to not be the start of something more nasty. On  my twitter feed and along with other anecdotal sources of sentiment I don't sense anything at all that would suggest investors in general have been embracing this market. Although there is a segment of the market, i.e. some newly minted retail traders, who have been exhibiting excessive  speculative activity, there is just as much if not more traders/investors who are skeptical. Take AAII sentiment for example which continues to be stubbornly bearish. The following is taken from the AAII website which is a sampling of responses from their members when asked about the new record highs set by the NASDAQ. 

• “The shares of too few companies drive the market’s cumulative results and fail to convey the broad weakness of the economy. I fear this is a formula in the U.S. for a more realistic retrenchment of the overall market. The Nasdaq’s highs appear to be vulnerable.”
• “It’s a bubble. Eventually, the coronavirus pandemic is going to tank the economy and cause a recession. Technology and medical/pharmaceutical companies are hot right now but will eventually take a hit due to the coronavirus.”
• “There is a disconnect between the economy and the stock market. Furthermore, the performance of the Nasdaq is being driven by only a few large-cap technology companies.”
• “I believe that a correction is coming as valuations are too high, but the market will continue to grind higher because of all the Fed liquidity in the market.”
• “The market currently is ignoring the pending liquidity crisis. Eventually, the Fed goodie truck will be empty.”

These responses from AAII members is pretty much what I also see on my twitter feed and I believe is the general consensus view. When the tech bubble of the late 90s was in its final stage you didn't see skepticism like this. You saw people EMBRACE it. You saw people provide justifications as to why the valuations were so high, you saw retail money pouring in hand over fist along with margin debt exploding. Now, I get that there are some people who are embracing this move in the market i.e. the newly minted day traders led by Portnoy and such, but they do not represent what the majority are feeling or doing with their money. So, what could Mr. Market do to make fools of as many people as possible?  I see one of 2 scenarios. Either we keep going up relentlessly with only shallow dips to eventually suck everyone in, or we get a correction severe enough only to wipe out the day traders but not severe enough to satisfy the naysayers. Either way, we are not in a position to see the market fall apart in a big way just yet in my opinion. 

You always got to remember this. The market typically does a good job in discounting all known information. Therefore, acting on any of the common gripes you hear such as the ones above from AAII members, typically will not be fruitful aside from a possible ST hiccup. 

A watched pot never boils

I know I sound like a broken record here but there continues to be an underlying skeptical tone to this market which is preventing it from having any kind of  decline other than modest pullbacks. Just when it looks like some complacency/bear capitulation is building, all it takes is a 1-2% dip for bulls to quickly run for the exits and for the bears to get embolden again which then of course, puts a halt to the downside. Once again fund flows and AAII sentiment continue to exhibit quite high bearishness. As mentioned in previous posts, not all indicators are giving this message but there's enough holdouts to suggest that we have "a watched pot never boils"syndrome in effect. Until there is more widespread complacency I suspect the market is going to have a hard time showing major weakness.

I mentioned about a month ago just before second wave fears surfaced, that fears of a second wave could serve as a catalyst for a correction but I felt such fears were at least partially discounted already because it was something people were already worried about to some degree, Maybe I was right about that because so far second wave fears have not done much to displace the market rally that began in late March. And it could very well be that second wave fears may actually end up prolonging the $600/week in unemployment benefits which is set to expire July 31. Such an extension would no doubt be market supportive.

Look folks,I know the market has issues. I know that it's primarly being driven by the FANGMAN stocks while other sectors like banks are very badly lagging, but  the bottom line here is that until enough people get back into the pool and not rush out of the pool at the first hint of trouble, the market is going to have a hard time gaining downside traction I suspect. By no means is the upside risk/reward ratio great at this point in time, but neither is the downside aside from 1-2 days hit and run type trade. The path of least resistance will be to upside.

Waiting game

Since my last post the market rebounded but then sold off again pretty much putting it back to where it was a couple weeks ago. Sentiment conditions haven't changed much. Put/call ratio data and panic/euphoria model suggested too much exuberance while fund flows and AAII sentiment suggest too much pessimism. You also got the VIX north of 30 which is historically high and only gets notably higher during a waterfall type of downside move. I think what we got here is a market that has to wash out some of the exuberance as noted above which is likely ST in nature, but there's still quite a bit underlying pessimism out there which longer term is bullish.

Fears are rising due to the second wave of COVID which is clearly extending the timeline of when we are going back to a pre-COVID economy. It's also pretty much a certainty that we are going to be seeing a wave of bankruptcies in the industries related to travel&tourism (i.e. hotels, airlines) and commercial real estate in the coming months. Back in 2009 the bears were warning about a commercial real estate shoe to drop which didn't happen. This time around it seems likely this is going to indeed happen. 

Remember, it's only been about 4 months since the COVID bomb went off. It can take several months before the full effects of something like this is felt. When the dot com bubble burst in March 2000,  it took several months before the market started to  rollover in a major way. Go back and look at the chart of the SPX to see what I mean. The market had a sharp drop in March rebounded sharply and traded sideways the entire summer near the highs before rolling over in multi-year downward spiral starting in September.  When the housing bubble burst in 2006 it was only until August 2007 when we saw the first major crack in the market but that didn't stop the market from fully recovering from that dip and making an all time high by October 2007. The bears must have been suicidal. A year later though, the true turmoil started and we all know what happened. 

If COVID  is going to end up being the type of bomb that hit the economy much like the tech and housing bombs of yesteryear, you have to understand how early we may be in this. It takes time for such a bomb blast to fully reverberate though out the economy and it's the norm for the market to drop sharply and then recover sharply and stay stick for months after the first major sign of trouble, especially when this time around the monetary and fiscal responses have been swift and quite large. But look, how can government policies prevent bankruptcies in the aforementioned spaces if we are going to see a long lasting change in attitudes towards large gatherings, attitudes towards people in enclosed spaces and the avoidance/limiting of  business travel? And what about all of those missed rent and mortgage payments? They have to get paid back soon or else get defaulted on..seems like we will get more of the latter. Of course, authorities will come up with measures to try and counter act all this but there's only so much they can do...or is there? Lol. 

Anyhow, my point here is that if you are a bear and you're convinced that this has to end badly you need to have the right strategy and patience to able to capitalize on it. You need to realize that it can take a lot of time for all it to play out.  Going back to the housing bubble, there were bears who saw the writing on the wall in 2006 or 2007 but very few of them actually capitalized on it because they didn't have the patience and/or correct strategy. Most of the bearish traders you see now a days on twitter can't hold a position for more than a month yet alone a year. They watch the tape day by day, tick by tick which will make a month feel like an eternity. They use bear ETFs or short dated put options which is NOT the way to do it. 

The jury is still out in my book if COVID is indeed going to end up being the same type of catalyst that the tech bubble bust and housing bubble bust turned out to be, because those 2 were endogenous shocks whereas COVID is an exogenous shock. I mean, if an effective treatment/cure to COVID is found, then the bearish narratives go up in smoke and this time around, the authorities are being super aggressive in their responses whereas they were slower to react before. But until we get an effective treatment/cure we could end up seeing something that resembles a longer term malaise where when we look back we see that the market ended up going nowhere for a couple of years rather than a devastating 50% + drop.  I'm keeping an open mind to all possibilities and taking the pragmatic approach as opposed to a dogmatic one. Somehow I think there is an eventual bullish resolution to all this but not before we see some pain first. 

Portnoy top?

Markets pulled back very sharply on Thursday because there's growing evidence that a 2nd wave is hitting the US.  Secretary Mnuchin insists there will not be any more lockdowns because of this but so far the market is skittish. Was the market just looking for an excuse to sell off because it had gotten overbought? I think so. Although I don't think there will be any more lockdowns, a 2nd wave will at the very least  cause the delay of phase 3 of the re-opening which is where everything gets opened up again as it was pre-COVID.  As such, it's going to inhibit the ability for the economy to hit full potential. Has the market already discounted this? What exactly is the market's discounting ability anyways these days? It's looking more like a casino. I mentioned more than once about the growing cohort of retail traders who have apparently hijacked certain parts of the markets, the junk stocks like airlines in particular.

You may have heard of this trader called Dave Portnoy who has become famous for his rant about how he's better than Warren Buffet claiming he's all washed up. Portnoy is sports gambler turned stock trader who got into trading when he was no longer able to bet on sports. He has a quite a large following. Let me tell you this, I've seen people bash Buffet in late 1999/early 2000 when back then tech stocks were all the rage, and for a few months they got it right, but when the music stopped, they got badly humbled. This guy will no doubt get humbled, it's just a question of when. Could his exuberance signal a market top? It may very will indeed, at the very least for the junk stocks.

Here's another tell tale sign of a top in the junk stocks. Hertz is looking to issue $1 Billion in stock which will very likely end up being worthless. It's quite amazing that this idea was even proposed yet alone may end up happening. It would be insanity if this ends up actually going through.

AAII sentiment continues to be stubbornly bearish but fund flows did jump very notably, but that was before the big drop on Thursday.  As far as the general market goes, I would suspect that this correction has legs but It's going to be very tricky to capitalize on. I expect day to day volatility to be high and erratic with lots of squeeze action.

Additional thoughts

A realize that a lot of people out there, me included are stunned by this parabolic upside move in the market. The NASDAQ just made an all time high and it looks like that upfilled gap at about SPX 3350 is acting like a magnet destroying whatever bears are left along the way.  I get that the market is a  forward looking indicator, but it's very difficult to make the case that this move in the market is totally based on rational behavior.  You normally see such blow off moves during economic boom times not during times like this. In my opinion, there continues to be an element of woefully out of position investors/traders who drank too much of the doomer koolaid and are now being forced to cover or go long in combination with a speculative fever of newly minted millennial day traders. Remember back in mid May when the 3 bears Drukenmiller, Teper and Gundlach came out and bashed the market? They and all who listened to them have been  ran over and humbled and forced to cover shorts just adding more fuel to the fire. What I've been wrestling with myself to determine is just how legit this move is. Here's a breakdown of what I like about this advance and what I don't in terms of it being a sustainable move.

What I like:

• The underlying bearish/skeptical/skittish sentiment that's out there from both the "pros" and "retail" including a large portion of the amateur trading community which I like to call the permabear trading community because since 2009 the majority of traders out there have had a bearish bias towards the market. Although we may have seen a lot of the above give up or get blown out of bearish trades, they are not embracing the market at all. They just keep making sarcastic scoffing comments about the Fed and how everything is rigged and all it takes is the slightest of dips to get these losers excited about the downside. This is not unlike what I saw in 2009. Bearish/skeptical/skittish sentiment is the lifeblood of a bull run. Once everyone has embraced the market with most bears too afraid to bet against the market anymore, that's when the market is vulnerable for big trouble.
• Credit markets have dramatically settled down with investment grade bonds yields back to pre-crisis levels and junk bond yields on there way to that too. You can complain about the Fed intervention in these markets all you want, but it has worked and the Fed didn't have to do much heavy lifting, their verbal backstop was good enough. Maybe one day this all goes wrong and you can whine and complain all day about how the Fed is taking away "price discovery" and "free markets" but that's not going to do you any good. Either you embrace it or don't play. 
• The yield curve is normalizing. Although a rise in bond yields often puts the brakes on the market, yields are rising from ultra low levels and have plenty of room to unwind before they  become truly restrictive to the economy. A positive yield curve does wonders for the banks which have been battered for quite some time. It's also a signal of a healthier economy going forward.
• The large amount of cash on the sidelines via money market funds which is historically bullish. Once you have this much money on the sidelines and the market gains upside traction  to this degree and duration,  the market advance has had plenty of staying power. 

What I don't like

• The speculative action of junk stocks like HTZ. This stock is literally worthless and yet it has gone from $0.40 to $5.50. This is pure greater fool buying and short squeezing which means some of that behavior is most definitely occurring in general stock market too.  Believe it or not, it is not uncommon to see the worthless shares of bankrupt companies behave like this. I've seen it many times before. What it indicates is that in contrast to the permabear trading community, there is a growing cohort of naive permabull traders most of which are probably millennials who haven't experienced the massive pain of losses and therefore didn't become the embittered fucks that make up the generally older permabear trading community whom at one point in their life acted the same way as these naive millennials! Apparently, a lot of these traders are using Robin hood or other no commission brokers to make their trades. They are also buying equity call options hand over fist it would appear. For now these millennial traders are getting the better of the permabear trading community and even the pros but such action is indicative of speculative fever which is not sustainable. At some point you run out of bears to squeeze and longs to jump in and you get a collapse. But the speculative nature of these advances can go longer and higher than you thought was possible. Just look at run up of the bitcoin bubble before it burst.

• The gap and go nature of this bull run. This is simply not the type of normal behavior you see in a sustainable bull market. It is more indicative of forced buying from short,  panic buying and chasing. Again, such a run can last longer than you think possible but history shows that ultimately such runs get undone in a big way. 
• The parabolic shape of the rally. This again indicates an unsustainable panic buying situation. It's always difficult to know just how extended the parabolic move could go for but it's clear to me that it's getting late. That unfilled gap in the SPX could very well get filled first before it's over though.  
• There are plenty of unfilled gaps well below where the market is now. I'm not a believer that all gaps must get filled (they don't) but the fact that there's so many makes me believe that at least a few of them will. 

Conclusion

• You got to respect the upside momentum and there's a decent chance we see 3300-3350 before this ramp is over. Although the market is quite ST overbought now.
• When the inevitable correction happens, it will probably be a multi-month affair with at least 1 trap door moment. I will be watching closely to see how people react to it. If everyone runs for cover and the speculative excesses get washed way without too much damage that would be a good sign that the bull run has staying power. If instead people are eagerly buying the dip that would be a bad sign. 
• Despite some clear signs of froth there's still a bullish long term underpinning via high cash on the sidelines and a general distrust/ skitnessess  about the market. 
• If I was looking to make a longer term short bet I would need to see the following: AAII bulls/bears to hit 2:1 bulls vs bears, VIX sub 20, big spike in fund flows. Until then, I classify myself as agnostic. i.e. too late to buy, too early to short for longer term trades/investments. 
• Gun to my head: We get a minor dip and then rip higher one last time before we get a multi-month consolidation/correction.

The purpose of the market is to make fools of as many men as possible

There's a reason I made this the motto of my blog. How many times have we seen Mr. Market do this in the past 10+ years? It's incredible. First off, nobody, not even the giddiest of bulls could have predicted the market to be where it as to today. When I made my SPX 3000 call in mid April I wasn't nearly bullish enough and I'm not going to sit here and say that I called every wiggle correctly (pretty much impossible) and I was too bearish near the March low.  I didn't sense enough capitation at the time given the economic carnage that was taking place. Yes, there was indeed some signs of capitulation but I also saw what I believed was too much bottom fishing. Then what happened in April was that the sentiment conditions solidly improved. .Expectations for the economy and profits collapsed...and rightfully so. It was obvious what was coming...but that ironically is what did in the bears - it  was too obvious. As we got the oversold, stimulus bounce in early April, a lot of those bottom fishers sold into that big bounce while the permabear trading community, who came nowhere close to fully capitalizing on the March decline, aggressively built short positions and alas, the bullish wall of worry was rebuilt. But again not even the most bullish of bulls predicted the ferocity of this rally.  I read an article in early March which stated that a bear market which was caused by an exogenous shock resulted in an average decline of 35% in market and took 18 months on average before recovering all the losses. Well, we got the 35% decline but at this pace we'll be fully recovered in 5 months from the top as measured by the S&P!

The past is the past and what matters now if the future. So then what now? Well, coming into that gangbuster jobs report on Friday, although there were signs of froth in the options market and with NAAIM positioning who were 92% long , there was still a stubborn, cohort of stubborn bears out there reflected in AAII  sentiment and retail fund flows which have been negative for several weeks. This Friday report may have been a game changer for these bear holdouts. It may have have very well caused them to throw in the towel as we are finally getting "confirmation" of this rally with the data. I said in my last post that if you're waiting for more certainty to get back in the market, i.e. jobs, a cure, you're going to have to pay a higher price and that's exactly what happened. I'll be very interested in seeing what the sentiment data looks like Thursday. If we end up seeing a strong surge in fund flows and AAII bullish sentiment in the next couple of weeks, the market is going to be vulnerable as there will be no more "greater fools" to push it higher in the short-intermediate term at least. We're also seeing a notable spike in the 10 year yield which until now was a big holdout in calling for a top. I've said that tops are made when bond yields have had a notable rise as it signals economic optimism, the greater/longer the rise in yields the more significant the top.

At this point, I 'm just a spectator. I refuse to chase a parabolic run but it's too early to try to short it aside from 1-2 day hit and run trades which is not my style and I'm not in a position where I can be glued to my screen all day. However, that strong jobs number may actually be the bulls undoing (for awhile at least) if it ends up significantly ratcheting up expectations for next report and for economy in general.

As far as the economy goes, I can tell you that traffic in my area is pretty much back to normal levels. I believe that people are getting over COVID fears quicker than expected and that includes governments. People are realizing that this virus is not nearly as deadly as the media made it out to be and the solution to dealing with it is to isolate and protect the elderly and those with compromised immune systems as stats show these are people who are by in large representing the death count. The costs of a lock down in addition to serious economic fallout, leads to too much suffering including death and social unrest. I think most governments and people in general agree with this which is why if we get a second wave, there will be a reluctance to shut down again. Here in Ontario we are about to start Phase 2 of the economy re-opening even though the 7 day rolling average of daily cases is still above the target.

If we do get a second wave, which it appears we probably will as people are out and about again (accelerated by all the protesting), it could cause the market to get spooked serving as a catalyst for a correction as people fear another shutdown. Could this fear already be priced in the market to some degree? It's not like what I'm saying is something new. I think this fear is indeed priced in but to small degree right now. It's on the back burner but if it makes its way to front burner it would create angst even though it would ultimately end up been in vain in my view.

What else could cause this bull run to be derailed? We got to look at things that people aren't talking about much.  How about the fact that right now Joe Biden is presently a slight favorite to win the election when you look at betting odds? How about if we see inflation flare up as a result of all the fiscal stimulus being pumped into the system (notice I said fiscal stimulus, not QE which does not cause inflation)? Lastly, as I alluded to for several weeks, what if the pend up demand bounce we get fizzles out later this year as US government benefits stop at the end of July?

Let's look at bull case right now.  More fiscal stimulus is in pipeline which is going to come at a time when the economy is starting to open up and normalize as more and more people are getting over fears of COVID which has proven to have been overblown. This can end up creating the sort of V shaped recovery the market may be pricing in.  Although some people will continue to be skittish until there's a vaccine, the vast majority want to be able to live life as it was before willing to accept the risk of getting COVID using common sense preventative measures or simply just not caring about it at all. Speaking of vaccines, with the entire world in the race to develop one, it could end up coming a lot sooner than expected. If we get confirmation of a truly promising vaccine (not just fluff like what we've seen so far), it would be a huge nail in the bear's coffin. Despite signs of froth in some market indicators, there's still plenty of skeptical/cautious investors as evident by huge balances in money market funds and the underweight exposure of fund managers and although that may have shifted in the other direction on Friday, it usually takes several weeks if not months before these shifts swing too far in the opposite direction hence providing a longer term tail wind for the market.

There's certainly lots to consider here. I continue to take a pragmatic approach keeping an open mind to both bullish and bearish resolutions to all this. As already stated, I'm just going to be a spectator for now, as the market is simply too stretched and there's signs of ST froth. This risk/reward on the long side at this point in time is simply not good.  But as far a bull case goes longer term, the light at the end of tunnel is there which didn't appear to be there before and that to me stems from the notable shift in attitudes towards COVID such that there will not be anymore shutdowns even if there's a second wave. This is going to be critical if the bulls are to ultimately win.

Angry bears reminds me of 2009

Here we are at SPX 3000....and the trading community is angry. The trading community it seems has been on the wrong side of the market for better part of 2 months. Whining and complaining that the market is not doing what it "should be" or that it's "rigged by the fed" is all I see. I got to tell you, this is not unlike what I was sensing in 2009 as the market began a new bull market at  a time when the economic data was still horrible.  If you're one of these whiners it's time to stop this destructive behavior. It's not going to get you anywhere. First of all, if you truly believe the market is "rigged" why the fuck are you shorting it?  Think about how fucking idiotic that is. That would be the same as finding out that a boxing match is going to be rigged but you bet on the guy who is going to lose because he "deserves to win"".  YOU PLAY TO MAKE MONEY. That is the bottom line. If you actually really believe the market is rigged to go up, then you should be thanking the Fed for making it so easy to make money! But the bearish trading community won't do it because they are either too stupid or too stubborn. They refuse to go long and when they do, they are weak and get stopped out on just minor weakness.

By the way, I don't believe in this fed rigging, I'm just saying that if you do, why the fuck would you ever go short or stay in cash? You should be going all in long and have an autographed picture of Jay Powell hanging in your office. It seems to me that once people get a taste of the bearish koolaid they get brainwashed and closed minded, unwilling or unable to explore any positive points of view. This happened to me in the crash of 2000. Luckily I was able to snap out of it in time. If you got burned by the market as a "bull" don't be bitter about it. Learn from it.

Back in 2009, the market had a strong recovery despite the economy and job market still being in the shitter. Ultimately, growth and jobs returned and so the market did in fact anticipate the recovery. So, did the bearish trading community admit defeat? Nope.The narrative changed from "it's just fed liquidity rally" to "there's another shoe to drop, we'll get a double dip recession". When that didn't happen it became "we're just kicking the can, this will all end badly" and then it eventually changed to "valuations are so high" which becomes the default bear narrative when the economy is going well and stock markets are making new all time highs.  A major concern out there is the "2nd wave" which is equivalent to the next show to drop narrative...this is where we are in the sentiment cycle.

In the short term, I'm not going to chase the market. It's simply too extended regardless if it's a bull market or bear market.  However, it's becoming clearer to me that this rally that began in March can still have legs because there's a bedrock of ingrained bearish sentiment that's not going to  lift easily. If you're waiting for more certainty, i.e. a cure, jobs to come back, ect. it's going to come at a cost i.e. much higher prices.

You would have to think that there's going to be at least one more "scare" in the market during the next few months. So long as the current bearish sentiment underpinning is still in place, that scare should not be a  devastating blow to the market (i.e. no retest of low)  and therefore such weakness could be bought....we'll see.

Whipsaw city in a still high headline risk environment

There's a certain trader I follow (who shall not be named) who writes a column on a financial markets website. Throughout the years he's served as a great proxy as to how the typical trader was feeling. Throughout most of the bull market of 2009-2019 he was a serial bear at heart. He was a reluctant long always looking over his shoulder for the bear to return as he was quick to head for the exits at any hint of a correction while taking quite a long time to embrace the ensuing rallies. I would have to say that this behavior is what characterized the bull market for the most part. It was as I would call it, the most hated bull market of all time. Then I would say around November- December I noticed this trader notably changed his tone. He became notably more bullish with his "trend is your friend" ,"bears are wrong" narrative. When the crash in March happened, he basically reverted back to his bearish mindset, but has been flipping to bull or bear  anytime the market appears to be on the verge of breakout or breakdown respectively getting whipsawed repeatedly. Just last week he was talking about "the next leg of  the bear market" after the 2 day decline and today it's "forget about the index just focus on your individual stock holdings". It's OK to be a flip flop.  Everyone get's it wrong and you should never have a loyalty to either the bull or bear side and be quick to change your mind if warranted but this guy is just simply deferring to the day to day moves in the market whereby headline noise/emotional behavior often dominates.  Like today for instance. If you trade/invest that way, you're going to get whipsawed more often than not as you'll be a weak holder. You got to have a certain level of conviction.

Market is up strongly today as there's supposed good news about a potential vaccine from Moderna and also oil prices are firmly positive. Great. We also had similar news back in mid April regarding Remdesiver which caused a big market pop that got totally undone a few days later. As the market breaks out here, it's causing more weak longs to enter and more bears to get torched for the umpteenth time.

 As I type this the put/call ratio is quite low. Based upon all that I posted last time, it would now appear that we are in a position to either see a false upside breakout or the final blow-off  rally from the March low which is going to truly and utterly destroy any remaining bears, while simultaneously sucking in sidelined longs who just will not be able to take missing out anymore. If the latter happens I expect to see the SPX close firmly above 3000.

But let me just say that this market action is not healthy in the sense that it doesn't resemble the action you typicaly see in sustainable bull market. In a real, sustainable bull market advance,  volatility is low and the market climbs in a slow but steady, relentless fashion punctuated by sharp but short lived corrections. What we are seeing now is a highly volatile, whipsaw  headline driven market that's had an upward bias because of the ingrained, overly bearish positioned traders which for now have outweighed the greedy behavior being shown by millennial momo traders of Robin Hood and others.  Yes, the market is forward looking and things will improve as the economy opens up but it's only natural to improve on the margin from such depressed levels as there is  pent up demand.  I've speculated before that we might end up seeing the true downside of the market sometime in the late summer or fall after the pent up economic bounce runs its course and we start getting a true sense of what the post lock down economy looks like in the coming year or 2. There's also a looming wave of bankruptcies that are in the pipeline. There has to be.

For now I'm being pragmatic. Until there is a clean set up, I'm  not going to get overly excited or get FOMO when the market goes up or all doom and gloom when it goes down especially when I sense the SOB permabear types doing victory laps and getting orgasms.

Mixed signals

Market pulled back early in the week which wasn't too surprising as I had noted the bear capitulation on Friday but the market did manage to recover partially by the week's end. Market has essentially gone sideways the past couple of weeks. So now what? Is this a consolidation or a top? It's a tough call because there's mixed signals. AAII sentiment once again showed bears outnumbering bulls 2:1. You usually see such readings near market lows. The funny thing about AAII sentiment is that it's been more bearish these past few weeks than it was near the March lows. You got NAIIM sentiment backing off from 78% long a couple weeks ago to 58% as of Thursday. The VIX is above 30, fund flows are still negative and my anecdotal measure of sentiment still indicating a decidedly lack of trust in this rally. All of this to me is not indicative of a top. But on the other hand, put/call ratios are starting to signal complacency and the speculative action in some of  the tech stocks du jour is not healthy which also indicates greed/complacency by retail trader types.  City Group's panic/euphoria model is in euphoria territory as well. This indicator has been money as of late and is not worth betting against. So, what I think could happen here is we get a false breakdown whereby it looks like the market is heading towards the lows but it won't get there. The reason being is that there's still too much underlying pessimism and although here was notable bear capitulation on Friday, they haven't changed their stripes. They are still miserable, bitter, SOBs who are itching to get short again. Any trader types who on Friday were saying " can't fight the fed" have quickly tucked tail and got shaken out by Wednesday morning no doubt. If you're going to play the long side with such weak conviction, you will lose. Better not to play at all.

The bottom line is that we're in a tricky spot here as I see conflicting signals at a time when the market is going sideways. I'm looking for the market to throw the bears a bone here before ultimately going back higher but this is not a high conviction call.

More on Buffett...Is Value due for a comeback?

I just read a scathing article on Buffett for which he was subject to criticism for the losses he took on the airlines, his refusal to buy anything in March and his lack of tech exposure. Many are essentially calling him a dinosaur, an old man who's lost his way. Let me tell you something...I remember hearing the same thing in 1999 during the tech mania as people were critical of Buffet's "old economy" stock picking. Ultimately Buffet was vindicated. In 1999 just like now,  large cap growth, tech in particular,  was trouncing value in parabolic fashion. When the tech bubble burst in 2000 it all reversed.  Value, small caps in particular, trounced growth for 7 years.  In 2007 the trend reverted back to growth over value and has been in place since, especially during the last 4 years. Since COVID, growth over value has gone parabolic placing us in a similar situation to 1999 right at the time when Buffet is getting slammed yet again.

Is history set to repeat? Are we close to the point where value starts to outperform growth in a big way?  We may very well be but I need to see evidence of a shift happening before making a move. I would like to see at least a 6 month period where value is outperforming growth and doing so in a stealth-like or scoffed at manner. In the past couple of years anytime value showed any hint of coming back to life there were plenty of bottom callers eager to claim the long awaited turn was upon us only to get egg on their face. I wouldn't want to see such behavior.

Notable bear capitulation on Friday...some thoughts on MMT

The US reported 20.5  Million Job losses which was the worst on record....and the Nasdaq closed up 1.6% and is green YTD making bears absolutely furious as yet again the market rallied on horrible news. This time I can sense the towel was thrown by a lot of bears on Friday.  "No point in fighting this when the Fed is buying everything". That's the typical, lame, loser response I see.  Not much different from what I heard in 2009 from bears who kept shorting all throughout the spring of that year. Put/call ratios have declined notably and along with the bear capitation it re-enforces what I said last week that the low hanging fruit of this rally is gone. There is however quite high bearishness still being shown by AAII sentiment. Bears outnumbered bulls by 2:1 on the last week and bears have been greater than bulls for about 2 months now. That's a solid bullish contrarian underpinning. Fund flows have also been negative the past 2 weeks which is also contrarian bullish. This seemingly conflicting picture in sentiment to me suggests that the market will either a) keep on grinding higher albeit at a slower pace or b) go through a consolidation phase with any dip not being greater than 5% unless we have a major shift in sentiment this coming week which may end being the case after Friday's market reaction.

One thing you can't do it chase this market. You don't go long after a move like Friday's no matter what. One of the troubling and frustrating aspects of this market advance is the gap up and go nature of it. That's indicative of emotional, short squeeze action which once runs its course can leave the market vulnerable to an air pocket/trap door downside move. The bulk of the moves in the market is happening after hours.

Although it's arguable as to what's driving the market advance, it not because of "Fed buying".  It's probably a combination of over-eager shorts/hedgers getting squeezed in combination with FOMO buying at a time when the market may be sensing at least a temporary revival of the economy. One thing that's not getting enough attention is the fact that those who are getting unemployment benefits in the US are getting the equivalent to an annualized salary of $51K. That's probably way more than what the average salary these unemployed people had when they were working! These juiced up benefits are going to stay in place until Aug 1. There's a ton of other fiscal responses by the US which on aggregate although not perfectly administered is quite large. And there's more fiscal responses coming. This might explain at least partially why the market has been able to do what it's been doing. It's the fiscal response not so much the monetary response. Any fiscal response adds to GDP. But will there not be a consequence to all this deficit spending or so called "money printing"? Maybe one day, but that one day could be well into the future and the market doesn't discount what's going to happen 5 years+ from now.  There are permabears who have been warning about the calamity of deficit spending since the 1980s. And what if turns out that there is no serious consequence to all this spending? Are you going to wait 10-15 years to find out or are you going to take a more practical approach?

There's an interesting theory out there that's getting more recognition as of late called Modern Monetary Theory (MMT) which basically suggests that countries that use a fiat based monetary system can engage in deficit spending indefinitely as they can simply print money to fund it. This money printing will only become inflationary when the economy is close to economic capacity which at that point too much money is chasing too little goods. MMT says that there's really no such thing as government debt in the sense that you and I view debt, as you and I don't have a printing press. Therefore, all the fear and doom and gloom of large government debts is misplaced. If they wanted to, the government could simply print the money to pay for any maturing debt, but instead the government simply refinances maturing debt with new debt and has been doing this indefinitely. Hence there is no need for our "grandkids" to pay for this debt. I don't agree with all the tenants of MMT but a lot of what they say makes sense and is worth looking into.

Buffet gives thumbs down to the market

He didn't say it outright, but from what I gathered from Buffet's commentary over the weekend he pretty much gave a thumbs down to the market. During his address to shareholders of Berkshire over the weekend, I'm sure there were many investors hoping to hear Buffett wax bullish on the markets and mention how the decline in March was an opportunity to - as the phrase coined by Buffett himself -   "be greedy when others are fearful". But that was not the case. In fact, Buffett was actually selling not buying. Specifically, he dumped his entire positions in airline stocks and claimed it was a mistake to have owned them. The funny thing is I remember Buffet saying for years how he hated airline stocks and for whatever reason this time around he decided to own them and obviously got burned.

 The $137 Billion cash war chest of Berkshire was not used to buy any "bargains" during the March rout because according to Buffett, there wasn't anything attractive enough. He also stated something that I'm surprised the financial media didn't latch onto. He more or less hinted that there's high risk of more shoes to drop when he mentioned Fannie and Fredie Mac going into conservatorship in early Sept 2008 was a sign of worse things to come (that wasn't actually the first big shoe to drop. For instance, the collapse of Bear Sterns happened in March 2008).  This is maybe why Buffet hasn't deployed that cash yet. It could very well be that Buffett expects to see more shoes to drop.  After all, were are still relatively early in this crisis when you think about it.

Buffet provided his usual "don't bet against America" spiel but actions speak louder than words. He's not buying America unlike when in October 16, 2008  he wrote on op-ed piece in the New York times titled "Buy America. I am". It should be noted that when he wrote that piece the SPX closed at 946 which meant it still declined another 30% from there before hitting bottom!


As far as the market goes in the short to medium term, I was calling for SPX 3000 a few weeks back and we almost got there Wednesday. The low hanging fruit from this rally has been picked in my opinion, but I'm not expecting the market to suddenly collapse just yet. The window is still open for SPX 3000, but sentiment conditions did deteriorate somewhat heading into Thursday right at the point when the market got ST overbought and so it was not to surprising to have seen this pullback. Let's see what happens from here. If the market can hold it together for the next day or 2 and not fall apart, the bears could very well shit the bed again and we'll indeed hit SPX 3000 at some point.

What is the market trying to say?

Based upon what I'm seeing on twitter, the financial media and anecdotally speaking to colleagues, there is a great sense of frustration and confusion about the refusal of the market to roll over. How in the blue hell can the market be down only about 15% from the all time high when we have all this massive economic damage? This is pretty much the question that is being asked. So what's the answer? Here are 2 possible explanations:

1) The market is forward looking and is pricing in a very sharp but short economic contraction because the threat of COVID has peaked and.authorities through their massive fiscal and monetary stimulus responses, will end up  preventing a financial crisis and prolonged economic slump. Although there will be a massive drop in earnings, they should bounce back rather sharply as this was an induced recession as the result of an exogenous shock rather than an internal problem with the economy i.e. excesses/imbalances  that need to be worked through. But what about the changes in consumer behavior in the post COVID world (i.e. social distancing, fear of traveling, ect)? Won't that be a major drag on the economy?  The market may be saying this will not be a long term issue and since stocks are a claim on the cumulative cash flows of all future years, one write off year doesn't matter much as earnings will bounce back. Even if earnings don't bounce back to where they were prior to COVID right away, so long as they are not significantly impaired for several years, it shouldn't matter much especially in an ultra low interest rate environment where the alternatives will be beyond piss poor. Low inflation/interest rates makes the value of future cash flows worth more and right now interest rates are literally rock bottom.


2) The stock market is anticipating at least a temporary bounce back in activity and/or the rebound has been "sticky"  because the market got very oversold in March and expectations got too low. There's been a shortage of sellers and an overabundance of  bearish bets coupled with FOMO and technical buying. The more the market shrugs off bad news and embraces any glimmer of hope, the bolder FOMO/technical buyers get and the more frustrated and angry the bears get. Eventually we may get to the point where expectations notably rise and most of the FOMO/technical buyers are in the pool with bears having been wiped out. It's at that point when the market will be vulnerable to rolling over again, probably right about the time when the rebound in economic activity starts to fizzle out or the damage in earnings becomes too hard to ignore anymore.

The 2 above scenarios are not necessarily mutually exclusive. It could be that 2) plays out first i.e. a retest or minor break of the March lows at some point after we've seen the re-opening of the economy and the pent up demand bounce fizzles out,  and then things stabilize and recover from there.  I do realize that I'm making a lot of guesses here. I'm personally going to take the pragmatic, open minded approach and for now assume scenario 2 is in play now. That means that there's room for this market to advance further before the rebound is over, but I will not chase and I'll error on the side of caution. If it turns out that scenario 1) is indeed playing out I should hopefully be able to transition to that view as the evidence presents itself.


The thing that is most suspect about this rebound is how very narrow it has been. The tech sector is by far the largest contributor to the bounce with financials, small caps and value badly lagging. These were trends that were in place prior to COVID for years and they simply got amplified even more post  COVID.  We're seeing the resurgence of speculative activity like the action in stocks like TSLA and SHOP which is also not good. It's as if the bull market got resurrected and is in a zombie, hyper accentuated state of its former self.

Black holes

Well, I stand corrected again. I thought I had seen it all during the March meltdown in the market and in the economy but apparently I didn't. WTIC collapsed to an inconceivable price of $-50 or so at one point. If oil hit $0 that would be mind blowing enough but to not only go negative but go negative in such size is....there's no word that would do it justice. Apparently this had to do with looming front month expiration of WTIC contracts tomorrow. WTIC futures contracts are settled by physical delivery and apparently there's very little of such buyers willing to take physical delivery as storage is all tapped out and so when long speculators were looking to close their positions there was nobody to sell to and sheer panic and madness ensued. At negative prices, anyone who had the ability to take delivery of oil could been paid to do so, and then sell it risk free in a month at $22 by selling June futures against it. It's fucking pure lunacy.

Asset prices going negative is not supposed to happen...it like breaking the laws of physics. Einstein came up with equations and theories that explains how the universe works, however apparently his equations break down when it comes to black holes. Black holes are the extreme objects of the universe as not even light can escape their gravitational pull. To form a black hole a star has to be compressed to unimaginable extremes. To get an idea of how extreme, let's imagine if the earth was a star; to turn it into a black hole you would have to compress it to the size of a small plum. That's mind blowing stuff.

What we saw in the oil market today and with the stock market last month can only happen in the the upmost extreme of situations, which as we all know is the situation we find ourselves in now given the world economy being offline for a prolonged period of time. We aren't ever supposed to see a fundamentally essential commodity like oil have a negative price or be close to $0 in any way. It's inconceivable, incomprehensible yet it happened.

Bonds are another example of an asset being caught up in a black hole type environment with the US 10 year at 0.60% or so. Just like how light can't escape from the powerful gravitation pull of a black hole, bond yields can't seem to escape the powerful pull towards 0% and possibly below.

If we can see such crazy extremes with oil and bonds, what about the stock market? If shit gets ugly, it could end up really, really ugly. Worse than what the bears even think is possible. I sure hope that doesn't end up happening but quite frankly it can given the situation we are in right now. As stated last post, there's room for the rebound from the March bottom  to continue as there is a favorable sentiment underpinning, however, generally speaking there's very poor fundamental underpinning  and if the weak fundamentals become too hard to ignore, it will overpower any favorable sentiment backdrop. The action in oil today was a warning shot across the bow as to how fucked up of a situation we are in right now and bad things can get. Tread carefully.

Buying capitulation to S&P 3000?

In my last post I mentioned how the market could continue to ignore bad news and embrace hope and that's what has been happening. Friday's move was at least partially based on a potential effective treatment of COVID-19 based on a drug called Remdesiver. It didn't matter that it's nothing definitive yet, any type of postiive news relating to COVID-19 like this is being embraced at the moment. Trump announced a 3 phase plan to get the economy open again as well.

You can argue with the market all you want, cuss at the Fed or what have you, and it's going to get you nowhere.  With all the economic devastation going on why isn't the market going down like it should be right? That there appears to be problem - the cat's out of the bag already and investors/traders have made a big rush to cash and shorts/hedges in anticipation of bad numbers. The market is a discounting mechanism and it's already priced in bad news - that's what some people are saying, but to me it's more a function of Mr. Market doing what he does best which is to make fools out of as many men as possible.

What I'm seeing is a similar response to the rally coming out of the December 2018 low which is a relentless amount of put buying/shorting into strength. Initially there was FOMO buying as I had noted but it was able to sustain itself because it turned out that a lot of others looked at the initial rally off the low as an opportunity to make big bearish bets and now those bets have ended up going bust and the market has been climbing upon the broken backs of the bears yet again. Meanwhile, there's still a lot of sidelined money from the "pros" that is probably on the brink of buying capitulation. Look at for instance the NAAIM sentiment survey which shows that their members are still woefully under-invested at only 28% long.  AAII sentiment still showing more bears than bulls and the VIX at 38 is still quite elevated with plenty of room to unwind. I also read about a survey by BOA showing that global fund managers are holding historically high levels of cash and turned quite bearish near the lows.

All of the above on a stand alone basis is suggesting the rally has a lot of staying power. I know how crazy that sounds given the economic devastation. I also know that the rebound has been narrow  being primarily led by some of the big tech companies with some sectors like banks and small caps badly lagging (exacerbating the trend that's been in place prior to COVID) . Despite all this, you have to respect the action. If you've been short during this bounce you should be terrified how the market has been able to shrug off all this bad news and embrace any hint of good news. 

It seems clearer to me now that we are on the brink of buying capitulation which is leading up to the re-opening of the economy which means S&P 3000 is quite doable in the next month or 2. That sounds so ludicrous I know...but that's probably why it can happen!  But it wouldn't be wise to chase strength at this very moment. Let's see if the market can consolidate a bit here to work off a ST overbought condition.  

Mr. Market won't make it easy for you

We've seen quite a rebound based purely on hope and Fed actions. Hope that we may be approaching the peak of COVID-19 in the US, hope that new therapies for treating the disease are effective and yet another Fed back stop of $2 trillion+ . The Johnny come lately bears I've mentioned last time have been moaning and complaining while getting their asses handed to them for shorting the rally. "The Fed is rigging the market! It's not fair!" This is the same bs I've been hearing for 12 years.  So, after missing the bulk of the crash in March and possibly getting burned playing for a long bounce, the bearishly inclined trading community has lost money again shorting the recent rebound. These trapped shorts now have the potential to provide underlying support and fuel for the market to go even higher before this rebound is over. In the very short term the bears might get thrown a bone as Trump opened his mouth again about the market's rise. Last time 2 times he did this the market pulled back. 

The bottom line though is that there is room for the rebound to continue or least chop sideways before the market makes a run for the lows again. With all the stimulus and Fed interventions that have been thrown at the market and hopes that the economy will re-open in a month or 2, it may stay afloat for time being as people may be willing to overlook the bad macro and earnings while bears keep getting squeezed. But eventually reality is going to take hold. The stock market is ultimately underpinned by fundamentals the main one being earnings which are going to be impaired for quite some time and so there's only so much short squeezing and greater fool buying will take you. I see a lot of market analogs out there comparing this decline to 2008 and 1929. I place little value in analogs as no 2 market cycles are alike. It could very well turn out to be the case that the market doesn't re-test or break the low until the fall of this year. If you look at the post 911 rebound in the market, you will see that it lasted for 5 months. By then enough bears had been wiped out and enough bulls sucked back in before the market rolled over again eventually breaking the 911 lows 9 months later. I have no idea if the market low will be re-rested 9 months from now or 9 days from now...my point is that a bear market rally can last months even when there's shitty fundamentals. For this to be a new bull market we must have not only seen the worst in the coming earnings collapse but that we're going to go back to how things were prior to when COVID-19 hit in short order once the economy is back up running again with no lasting cascading effects. That's quite a leap of faith to take.

Here's how I can see things could play out and I emphasize the word could.  In the next few months we're going to see the world economy gradually open up again. There's going to be a pent up demand boost in growth and warm fuzzy feelings of hope. As scientists around the world are searching for treatments, we may end up finding some effective ones. All of this could end up keeping the market afloat i.e. up to choppy sideways action. Then around mid-late summer the market is going to roll over again as we start to face reality and come to accept the permanent damage that has been done during this shutdown and the new post COVID-19 environment.  In the meantime, bears will be wiped out and bulls sucked back in. Sentiment indicators have plenty of room to unwind before hitting complacent levels. But like said earlier, we never did see the extremes in bearish sentiment that you find at bear market bottoms - they were only extreme enough for a bull market correction bottom which makes me think that ultimately the market is going to test or break the lows.

As usual I will adjust as events unfold....and I suspect a lot of events will be unfolding!

Give it time

I said I was going to discuss the bull case but I'm also going to discuss the bear case and where we may be in this bear cycle.  As far as the bull case, it pretty much goes like this: We are in a manufactured recession caused by an exogenous shock and so once that shock has passed we should go right back to where we left off as there are no excesses to work off like there was with the tech bubble bursting  in 2000 and the housing bubble bursting in 2008. In addition, we now have super accommodating monetary and fiscal policies put in place which are not going to be tapered off for at least 2 years. The 35% drop in the market has cleared away a significant degree of excesses and we've seen some indicators such as the VIX hit extremes which historically have occurred during a time of extreme panic which is where major market lows tend to form. We also have a multi-year low in energy prices which will be another tailwind for the economy and such low energy prices are what you tend to see closer to a bottom than a top.

I would really be on board with the bull case if the lock down that we are currently in was already over. Unfortunately, that's not the case and we're going to be locked down for at least another month and I believe we are beyond the point of no return whereby it's not going to be business as usual once we emerge from lock down and so the bull argument that we'll go back to where we left off doesn't hold water in my book. Until there is a vaccine for COVID-19 there's going to be a notable change in the way we do business and interact with each other. There will be a notable increase in the savings rate of consumers, seniors will be more likely to avoid vacationing and the like. To sum it up, there's  going to be a notable and lingering amount of skittishness in general in the post COVID world until there's a vaccine. Meanwhile, while we are awaiting the recovery, the economic damage is devastating and is increasing by the day. The cascading risks I mentioned a few weeks ago are unfortunately happening because the lock down has simply been for too long for many business/corporations to bear. I've read an article about how 10% of Canada's restaurants/cafes/bars are now permanently closed and this is only after 3 weeks of lockdown. I'm sure there's many other businesses suffering similar fates. It's only going to get worse as the lockdown is going to continue for at least another month it would seem and quite possibly 2. So, when we do get out this it's not going to be business as usual. Governments are trying to do whatever they can to mitigate the damage, but that's all it is - mitigation. How can they bail out everyone and make them whole again?  I know a restaurant owner who's business has declined by 60% which if not for catering would be near 0%. Is the government going to give him a cheque for all that lost revenue? No. However, if the government engages in massive deficit spending in addition to the wage subsidies and support they are providing the unemployed, it will indeed plug some of the gaping hole in GDP that is going to be lost, but certainly not all you can't hold your breath for that.  Before that happens or kicks in we're going to see the biggest plunge in corporate earnings ever and investors are going to have to face the grim reality of this. Yes, the market is forward looking at we're expecting to see bad news....perhaps this is best thing the bulls got going for them in short term. We could be in a situation where there's too many johnny come lately shorts at a time where others think there's "value" in the market and decide to ignore the bad news thinking it's already priced in while focusing on any glimmers of hope. We saw the same thing happen in late March 2001 and in late March 2008 where the market staged a multi-month rebound (almost identical ones)  only to succumb to new lows later in the fall of those years. Such a thing could very well happen again. I'm not saying I expect it but rather that it would not surprise me. If we simply tanked to new lows in the near future I'm not going to be surprised either because as it stands right now I don't believe this bear market is over. The reason I believe that really all boils down to this. We're going to see the biggest economic catastrophe since the Great Depression which as I discussed is not going to result in business as usual once things go back online and so I find it very hard to accept that a 35% decline in the stock market is all that we are going to see when history suggests otherwise. Once again, I would love to be wrong and I'll keep an open mind to all possibilities but I got to call it like I see it. I think ultimately the market will drop at least 50% from the peak which translates to a target of SPX 1700. Why 50%? Well, if the burst of the tech and housing bubbles created a 50% drop why can't the COVID crisis do at least the same when the economic damage will be far greater than the fallout of those 2 bubbles?  Ya, I get it, there will be a strong snapback in activity as there is pent up demand but a lot of damage that is being done right now is permanent which is growing every day we stay locked down. Some of that damage will be offset by fiscal spending but how much and when? Do you want to hold your breath thinking that the authorities can bail out the entire economy? I'm not. And as mentioned before do you think that it will be business as usual once the lockdown is over ? Not for a while it won't.


Here is one chart which gives a pretty good indication as to where we are in the sentiment cycle.

You can see that AAII investors have made a sharp move out of stocks and into cash but it is still not at the dark green level where it was near the bear market bottoms of 2003 and 2009. It suggests pessimism is high enough for a bull market correction bottom but not high enough for a bear market bottom. Again, I re-iterate, if this crisis is at least on par with the tech bubble and housing bubble busts, we should see a similar level of decline in the market from the peak and the extreme level of pessimism associated with it which means for the above chart to eventually touch the dark green line. If I'm right and we still haven't seen the final low, don't think Mr. Market is going to make it easy for bears to profit from it. The motto of this blog still applies. The bear market low could take several weeks or even months to play out which in the meantime the market would have all kinds of short lived rallies to punish bears and suck in bulls. We could very well see such a rally now if people decide to ignore the ugly economic reality for a few weeks and focus on any glimmer of hope of COVID slowing down.

So in conclusion, give it time and be very patient and be open minded. I'm leaning long term bearish short term neutral. If the bull case is going to play out, it would be more likely to see the market behave as it did after the 1987 crash or after the big 2011 drop whereby it spent a few months building a base. But unlike those 2 previous times, we have an economy that is collapsing and that's a very big deal because ultimately stock prices are fundamentally underpinned by earnings and that underpinning will be gonzo for a while and when it comes back it probably won't be as robust as before which to me suggests we're still in a bear market and the final low may not happen until later this year or even a year from now when expectations are sufficiently lowered in the post COVID world. As usual I may adjust my viewpoints as events unfold.

Delusional

I'm getting the sense that people are not fully appreciating the situation we are in. Although there is some fear and some capitulation, that's only natural given the situation we are in but I don't think we've seen true capitulation.  Last week's bounce brought out plenty of  FOMO buying and bottom calling from what I can tell. I was on webcast Wednesday where a fund manager was giving an update. On this webcast there was a dialog box where you could type in questions and see what other advisors were asking. There was more than one asking whether we had seen the bottom and if it was time to buy. Maybe these advisors are "savy" or maybe (and most likely) they are not giving this bear market enough respect. Funny that I say  that because all throughout the bull market I kept mentioning that it was never getting enough respect! I read a post of one trader type mentioning a "MACD buy signal". Are you for fucking real? You're going to put your faith in a stupid "MACD" technical indicator in a time like this when nobody is working (not literally nobody but you get my point) and earnings are going to collapse like an anvil through toilet paper? Folks, the market hasn't been going down because of a trade war spat, problems with PIIGS, the end of quantitative easing or some other relatively trivial matter that really didn't mean shit at the end of the day when it came to the economy/earnings.

At the end of the day stocks are all about earnings. If earnings are rising or at least stable, you got a bull market, when they are declining or in this case collapsing, you got a bear market. The earnings collapse we are going to see will be WORSE than what we saw in 2008 and we haven't even seen companies report the extent of this damage. Yet I'm to believe that the market has already "discounted all the bad news". Sorry I'm not buying it.

What we saw last week is very much likely a bear market rally. Can it still have legs? Yes. Can it already be over? Yes. It's always tough to know the extent and duration of such rallies but there's no fucking way I'm buying that the 3 day rally means the worst is over. The market dropped over 30% in a month and so it's entitled to a bounce regardless of fundamentals. If you're playing the short side you have to realize that after such a big decline, it's conceivable for the market to get quite a big bounce as well because you're going to have deal with FOMO buying and short covering from johnny come lately bears. Look at prior bear markets and you will see them littered with plenty of sharp rebounds lasting anywhere from 1 day to 6 months. Ultimately, fundamentals assert themselves and if fundamentals are deteriorating the market will be in a primary downtrend and hit new lows eventually. In the interim, it will destroy both bulls and bears alike which is why I said trading the market will be treacherous.

It would appear to me that we are going to be in lock down for another month. Do you think once things get back up and running that it will be like it was before? I don't. Yes, there will be an initial snap back in activity but I doubt things will go fully back to "normal" for some time. I think a lot of people will be licking wounds building  up their savings and/or reluctant to travel and go out as much which will result in slower than expected growth . We'll see. I admit that this is just a speculation. There's a long way to go before we can start talking about a recovery anyways, and that's really the point here....we're just at the beginning of what's going to be a really brutal economic period which is why any talk of a bottom is nonsense in my book. Yes, markets will bottom before the economy does but again, we have only just begun to see the horrific data come out, the first of which was initial claims for unemployment which was literally off the charts https://tradingeconomics.com/united-states/jobless-claims.

Some people will say that the market having dropped 35% from its peak at the recent low is already reflecting a lot of the bad news to come. Well, to that I would say a 35% drop is what you would expect to see in a run of the mill recession. Does this look like it's going to be a run of the mill recession given the unprecedented  shutdown of the global economy? I'm sorry but I can't make that assumption. Like I stated earlier, I'd love to end up being wrong and too pessimistic. Great. I'll be the sacrificial lamb to the trading gods. But I simply can't give the benefit of the doubt to the optimists here aside from a counter trend bounce. If I can intelligently play both sides of the market I'll do so but if in doubt I'm staying out.

In my next post I'm going to play the bull's advocate and given some arguments that would indeed suggest we may be close to or at bottom.