Corona virus is becoming more of an issue

When news first broke out of the Corona virus in January I said it would be a weak excuse for a sell off and as such would be short lived. That position was correct for several weeks however it would appear now that its impact may matter more in the short to intermediate term because more than a few major companies have now indicated that there's going to be a material impact on Q1 earnings and as such expectations are being lowered accordingly. In addition, the outbreaks are spreading to other countries and they are taking major precautions. Italy is imposing draconian measures to stop the outbreak even though the reported cases are are only about 150. I was looking forward to watching the Inter vs Sampdoria game today but it was cancelled to due virus fears. South Korea is another major country that's raised their alert to red. So, it would appear that there's potential for a notable hit to global GDP as a result of all the lock downs taking place across the world. But like I said before, any lost growth resulting from these lock downs will be temporary and made up for once things go back to normal. It should also be worth noting that on Friday there was a poor reading released pertaining to the service sector in the US on Friday which may have very well contributed to the downside action.

So, as I pointed out last week, the market was ripe for a modest to moderate correction due to the conditions of sentiment indicators alone. A possible weak patch in growth caused by corona virus and/or other factors may be serving as the catalyst to trigger the correction. But there's a silver lining to this for the bulls. The virus is creating the type of worry/fear you need to keep it ongoing. It prevents the bull market from entering the euphoria phase which ultimately kills it and it keeps government authorities accommodating.  As noted previously, there was froth in the option market that needed culling and there's also a handful of stocks like Tesla which was showing pockets of froth but there hasn't been widespread froth as per equity fund flows which continue to show little to no participation of mom and pop investor for several months. Bond flows on the other hand are surging to record inflows and inflows have been strong for several months. You can see it being reflected in long term government bond yields which are  hovering near last year's lows. Again, this is ultimately supportive for the stock market.

I have obviously changed my perceptions on the impact of the Conora virus. I have never had a problem changing my mind when evidence suggests I do so unlike the majority of pundits or "experts" who stubbornly stick to a view and never change it even when it's clear they are wrong. It's as if doing so would damage their precious ego. They will either give the "I'm not wrong I'm just early" excuse or "the market is irrational and I could not have accounted for that" excuse. This is typical of the legion of permabears out there who have been beyond laughably wrong about the market for several years and yet STILL have the audacity to make doom and gloom predictions showing little to no humility for being so horribly wrong. I've said this before many times and I'll say it again. It does not matter if the market was to crash starting tomorrow, the permabears have been wrong for way too long to claim any sort of victory. And now they have been pathetically clinging to the corona virus threat from day 1. This just goes to show you what kind of miserable SOBs they are. They are constantly looking for any and all negatives to support their doom and gloom predictions and miserable outlook on life in general. Don't listen to these fucking losers. The name of the game is to make money and that requires one to be objective and pragmatic not dogmatic. Fuck your pride and ego when it comes to the market because the market is an uncertain and ever changing animal which means your forecasts can't always be right and must be changed when the evidence suggests doing so. It also means that methods/statistics which worked well in past may no longer work in the future.

Extremes

For at least a couple of years I've come across articles/commentary about how value has under preformed growth so much that it's just a matter of time before this trend reverses in favor of value. But it  hasn't happened and the disparity of growth outperforming value has carried on. We saw last year in September though a brief hiccup where growth got sold off in favor of value because in retrospect you could see that too many actively managed funds were leaning in the same direction. This tends to happen now again wherever there's been a strong trend in place. Even if the fundamentals are still supportive of the trend, if too many people get on board you will get a violent shakeout/rug pull to clear out the excesses before the trend can resume. The problem with value stocks in general is that they simply have had chronically weak fundamentals in general. The largest space in the value sector is financials which have had their margins squeezed due to the flattening yield curve over the past few years. You also have industrial and materials names which have been hampered by lack luster manufacturing and low commodity prices respectively. Meanwhile on the growth side led by tech, you have primarily service type businesses that have been growing steadily year after year, not impacted much by the slowdown in manufacturing and benefiting from low interest rate environment on all parts of the yield curve. The value proponents will say that at some point these trends have got to reverse and so you have to buy now. The problem is that they've been saying this for at least 2 years and have been getting run over in the process. When I studied for the CFA designation they discussed something called chronic inefficiencies which basically means that an asset can be mispriced for a very long time, long enough to make the endeavor of trying to profit from the mispricing fruitless or even worse leading to ruin. Extremes can get to ever further extremes....there's really no limit as to how long or how high a trend can go on for. Just look at bitcoin as an example. Which is why if you are looking to make a bet on a long term trend reversal you need to see evidence of the turn taking place which means you may very will miss out on the first 6 -12 months, but that's OK because the new trend will likely last for several more years. And here's a little secret....when the long term trend does reverse it will be met with heavy skepticism and most of the bottom callers will probably had given up making bottom calls as they were burned so many times. At the bottom of a multi-year downtrend there will be silence, there will be apathy.

Sentiment not favorable for bulls but still not truly frothy

Bears are throwing hissy fits because they can't believe the stock market is ignoring the corona virus. As I said before, this is old news now and even with the latest "jump" in reported cases the stock market simply doesn't give a shit and rightly so in my opinion because ultimately, this is a temporary problem which has nothing to do with underlying economic fundamentals. Any disruptions caused by the virus are not permanent and so once things go back to normal, any kind of production that was delayed will be made up for and there will be a surge in activity. Second of all, the Chinese central bank is stepping up to ensure there are no liquidity crunches. The lessons of 2008 are still imprinted on the brains of the authorities.

I've been repeating here for a long time that the purpose of the stock market is to make fools out of as many men as possible. In order for there to be a meaningful correction you need victims. You need enough people who have weak handed long exposure. The sources of such holders come from retail equity investor/traders, option traders and hedge funds. The less exposure these jokers have the harder it will be for the market to correct. As of now, retail equity investors have only very modestly been getting back into the market as there has been 2 weeks of modest inflows. Option traders have once again flipped back to buying calls hand over fist after getting shaken out a couple weeks ago. Same goes with the hedge funds, they have turned bullish again after getting shaken out a bit a couple of weeks ago. AAII sentiment is once again showing bulls outnumber bears but not by an extreme margin. So, all in all I would say that the market is only ripe for a modest to moderate pullback no greater than 5%. and most likely in the 2-3% range. The other scenario is that we simply keep chugging higher to DOW 30K and NASDAQ 10K without much of a dip. I believe those numbers will get hit at some point this year. It would be piggish to press long bets at this time but also still dangerous to go short aside from the very skillful and nimble hit and run traders. When the market makes a fresh all time high, more often than not it continues to make all time highs and so betting against the market in such case more often than not results in losses.

Keep an eye on the 10 year bond. So long as bond yields remain relatively suppressed, it is bullish for the stock market longer term as it implies underlying pessimism and justification for higher valuations.  The fact that the 10 year is so low right now is another sign that any pullback we do get from here will be modest.

Is Tesla a sign of irrational exuberance in the market?

Tesla was the talk of the town this past week given its meteoric rise. It was due to a combination of heavy short interest combined with a rush of cult like buying from novice investors due to so called  "good earnings news". Yes, the move in Tesla is a bubble but it may not necessarily be ready to burst just yet because from what I can tell, there's still a lot of short interest in the stock and there's no shortage of doubters looking at this big move up as opportunity to bet against Tesla because they know it's a bubble. The problem with these bears is that they often end up being their own worst enemy because they underestimate how long and how far up the run goes on for and end up capitulating which adds fuel to the fire. Tesla right now is very much a cult story stock which has captured the attention of novice retail traders and so until there's some significant bad news to derail it, it will probably go sideways or drift down a bit for a little while until the next "good news" announcement comes out to propel it up again. Only when most people are all in and the weak Tesla bears are cleaned out and too afraid to bet against it, will the bubble be primed to burst. That's my hunch. Some might argue that most people are  already all in. Maybe that's right but from my anecdotes, I'm not so sure about that. I think a lot of people have been wanting to buy but missed out. The other thing that could derail Tesla would be if the stock market in general sells-off hard. All in all, if I had to make a prediction I think there will be one last run up in the stock after perhaps some consolation.

So, does the bubbly action in Tesla represent the general sentiment towards the stock market overall? The answer is no in my view. Just like the moves in weed stocks and bitcoin, the euphoria is isolated i.e. not broad based. Once again, I will point to the fund flows and sentiment indicators. Flows into equity funds are still flat and AAII sentiment was quick to go from mild bullishness to mild bearishness with just a little dip in the market and as the market rebounded to hit new all time highs sentiment remained stubbornly bearish. As I mentioned last time, AAII sentiment only reluctantly turns bullish when the market has a strong move up but is quick to tuck tail and turn bearish with just the modest of declines. That to me says there's still a cautious undertone to this market overall which has bullish contrarian implications. In a bear market you will see the opposite. You will see bullish sentiment rise sharply on rallies and bearish sentiment rise stubbornly on declines.

Don't bet on the downside.

The corona virus sell-off was short lived as I expected. If you're bearish because of this, you better think again because the market has now had enough time to digest and assimilate its impact to the economy and the verdict appears to be that it will not be material in the long run. Meanwhile bonds have rallied quite a bit since then. People are pointing out how the strength in bonds are signalling bearish omens for the stock market.. We heard this argument last year but it turned out to be false because strong bond action (i.e. lower yields) although often a signal of slowing growth in the economy can also be an indicator of rash pessimism which tends to coincide with good ST entry points for the stock market. Just take a look at look at previous times in recent years when bonds had a strong upside move...more often then not it was a point when the stock market was near a ST low.

Slow growth may indeed be what's happening but so long as growth doesn't turn to outright contraction leading to a financial crisis, strong bond action tends to be a positive contrarian indicator for the stock market. Same goes with the oil price. Lower oil prices have generally coincide with good times to buy stocks. Why? Because low oil prices generally associated with rising pessimism about the global economy which provides a contrarian buy signal. Also, low oil prices implies lower inflation pressures and that too is a good thing for stocks in general as it implies low interest rates for longer.

Take a look at history to see when major tops were formed....it took place when bonds were SELLING OFF significantly and oil prices were spiking which implies high optimism, high interest rates and high inflation pressures all of which are bad for the stock market.

The path of least resistance for the stock market appears to be higher for now or at the very least, sideways action. You simply don't get big collapses when conditions are the way the are. If I had a gun to my head I say we are going to see new all time highs sooner rather than later.