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.
Monday, March 30, 2020
Saturday, March 21, 2020
The slope of hope
The SPX is down a horrific 32% in the past 30 days wiping out 3 years worth of gain. Let that sink in. 3 years gone in 1 month. With the global economy effectively shutting down, even clowns Mnuchin and Trump have now accepted that a recession is unavoidable. And this won't be just a run of the mill recession, it's going to be the worst since the Great Depression. The hope is that it will be a "flash recession" such that there will be a major bounce back in activity once the lights get turned on again. I certainty do hope that this will be the case but hope is not a viable investment strategy.
Given the jaw dropping damage to the market and looming sharp decline in economic activity you would figure that the sentiment data would have shown extreme bearishness but to my surprise it didn't! Put/call ratios are high, but AAII sentiment and fund flows are showing just moderate bearishness. I was quite surprised by this. Given everything that's happening we should be seeing extreme bearish sentiment which quite frankly would be justified. Bull markets climb a wall worry. Bear markets decline on a slope of hope. It seems like we are on that slope of hope right now. I think what we are seeing is a combination of shock coupled with over eager knife catchers from both bulls and bears a like. I can tell by my twitter feed that bulls and bears have been caught off guard with the ferocity of this decline. Bears closed out bearish bets far too early with some getting ran over trying to play for an oversold bounce while bulls got ran over the whole time thinking every big dip was a buying opportunity. Yes, there is some panic selling but that's to be expected to a degree. You got to expect selling when the world economy is grinding to a halt. New York and California have now locked down. Other cities/states will no doubt be following suit. It's over.
From 2009-2020 we saw a lot things that the market freaked out about to cause it to correct and most of the issues did nothing to ultimately impact GDP/earnings in a meaningful way, yet bearish sentiment was always quick to surge. This time around we've seen a massive drop in the market and are staring in the face of a massive immanent contraction in GDP/earnings yet bearish sentiment is not as extreme as it was during the correction lows we saw in the bull market which were due to issues that are tiny compared to what we face now. That's not a good sign for the market. Although there is some capitulation, it seems there's also too many people that are either still in shock and/or too eager to buy the dip thinking that the Fed/government will be saving the day.
I know that the authorities are scrambling to provide support to people and corporations and they are doing some huge things and they will do more...they will do whatever it takes to mitigate the damage that will be coming. I sure hope they are successful. I sure hope everything will turn out fine in the end, but as stated earlier, hope is not a viable investment strategy and bear markets don't end with hope, they end with despair and we're not there yet. When the ugly numbers start coming out maybe at that point we'll get there.
Maybe I got this all wrong and I'm too negative. Maybe my negatively will turn out to be the contrarian indicator that marks the bottom. Believe me I would GLADLY accept this! As a trader/investor I don't care which direction the market goes so long I'm on the right side of it but I when you're a market bear, you're expecting and possibly betting on bad things to happen to the economy and therefore to people and I don't enjoy that. I'm not a miserable SOB like so many permabears are.
As I stated before, what I think we need to see to provide any sustained relief rally is any kind of positive news that the virus is being corralled. Until then dead cat bounces and lower lows is what I'm expecting. It will be a treacherous trading environment so beware. For me, I'm pretty much sitting this one out as I have been for some time.
Given the jaw dropping damage to the market and looming sharp decline in economic activity you would figure that the sentiment data would have shown extreme bearishness but to my surprise it didn't! Put/call ratios are high, but AAII sentiment and fund flows are showing just moderate bearishness. I was quite surprised by this. Given everything that's happening we should be seeing extreme bearish sentiment which quite frankly would be justified. Bull markets climb a wall worry. Bear markets decline on a slope of hope. It seems like we are on that slope of hope right now. I think what we are seeing is a combination of shock coupled with over eager knife catchers from both bulls and bears a like. I can tell by my twitter feed that bulls and bears have been caught off guard with the ferocity of this decline. Bears closed out bearish bets far too early with some getting ran over trying to play for an oversold bounce while bulls got ran over the whole time thinking every big dip was a buying opportunity. Yes, there is some panic selling but that's to be expected to a degree. You got to expect selling when the world economy is grinding to a halt. New York and California have now locked down. Other cities/states will no doubt be following suit. It's over.
From 2009-2020 we saw a lot things that the market freaked out about to cause it to correct and most of the issues did nothing to ultimately impact GDP/earnings in a meaningful way, yet bearish sentiment was always quick to surge. This time around we've seen a massive drop in the market and are staring in the face of a massive immanent contraction in GDP/earnings yet bearish sentiment is not as extreme as it was during the correction lows we saw in the bull market which were due to issues that are tiny compared to what we face now. That's not a good sign for the market. Although there is some capitulation, it seems there's also too many people that are either still in shock and/or too eager to buy the dip thinking that the Fed/government will be saving the day.
I know that the authorities are scrambling to provide support to people and corporations and they are doing some huge things and they will do more...they will do whatever it takes to mitigate the damage that will be coming. I sure hope they are successful. I sure hope everything will turn out fine in the end, but as stated earlier, hope is not a viable investment strategy and bear markets don't end with hope, they end with despair and we're not there yet. When the ugly numbers start coming out maybe at that point we'll get there.
Maybe I got this all wrong and I'm too negative. Maybe my negatively will turn out to be the contrarian indicator that marks the bottom. Believe me I would GLADLY accept this! As a trader/investor I don't care which direction the market goes so long I'm on the right side of it but I when you're a market bear, you're expecting and possibly betting on bad things to happen to the economy and therefore to people and I don't enjoy that. I'm not a miserable SOB like so many permabears are.
As I stated before, what I think we need to see to provide any sustained relief rally is any kind of positive news that the virus is being corralled. Until then dead cat bounces and lower lows is what I'm expecting. It will be a treacherous trading environment so beware. For me, I'm pretty much sitting this one out as I have been for some time.
Monday, March 16, 2020
Uncharted waters
What a week. The SPX and other major indices are now trading like a penny stock moving up and down 5-10% daily. This is what happened during the 2008 meltdown as well. Unfortunately the circumstances are similar in the sense that what we are experiencing is a black swan event. We have never had a situation where major economies of the world are one by one going into lock down mode with major business shutdowns/curtailments. Before it was Costco that had their shelves cleaned out and now it's all supermarkets. This is fucking bananas. In 2008 the crisis was focused on the banking and housing sectors with ripple effects hitting the rest of the economy. This crisis is effecting pretty much EVERYONE directly with travel and tourism related industries getting especially hit hard. The economic damage that we are going to see will be jaw dropping. Steven Mnuchin doesn't think the US will experience a recession. What a delusional clown. You got to be in deep denial to say such a thing. And speaking of clowns, Trump tweets how the stock market had it's biggest rally ever on Friday this after the market had been pounded by 25%.
The questions you got to ask yourself is this. Can world authorities do an effective enough job to prevent cascading effects, in particular, significant layoffs and a credit crisis? Well, the Central Bankers are certainty playing their part. Sunday night the Fed slashed rates to 0 and announced $700B in QE. Other central banks are likely to follow suit with similar aggressive measures. There will also need to be aggressive fiscal response and bailout/relief measures in place to support all who are effected, but the problem is as mentioned earlier, everyone is effected. It just seems like too tall a task to rescue everyone. Authorities will have to come up with something that is unheard of, they will have to embrace the concept of MMT which basically states that the governments of fiat based economies can print all the money it needs to fofill its goals. If the government wanted to, they could credit everyone's bank account by $1000 just like that. I'm not saying that's justified, I'm just saying it's something that the government can in fact do.
Look, we've got a market that is in full panic mode but to be quite honest, at least some of this panic is justified because the global economy is effectively freezing and who the fuck knows how long this is going to play out. How can the global economy cope with so many businesses shutting down and so many people staying at home? I did say before that once this shit blows over we can see a strong recovery as their will be pent up demand, but in the meantime the economic damage will be ugly, worse than any recession we've seen because in a recession the economy is still running just at a slightly lower clip and that's not the case here...we have an economy that is shutting down outright to a very large degree. I'm not going to be holding my breath thinking all will turn out fine in a few months. I sure hope it does, but I can't assume it will.
Ok, let's discuss some positives now. During Thursday's jaw dropping 10% meltdown the VIX hit a high of 77.5. There was clearly panic in the air and you typically get rewarded for buying in a panic...eventually. You got to back to the heart of the 2008 meltdown to see a higher VIX which hit 90. History shows it's been always good to buy during extreme high VIX levels like this, however, you may not necessarily get rewarded right away. In 2008, the market still ended up making significant lower lows months after the VIX hit 90.. Given the huge amount of puts bought recently and all the government interventions that we'll get, we may be in a position to see the market get a rebound by the end of the week but from the looks of the futures so far which are limit down, that prospect isn't look good for so far. I don't believe we've seen a true capitulation yet as the indicators I track still say it's too early although there's enough to suggest that Thursday's low may end up being a ST low. I don't say that with much confidence however. I'm not going to trust any rally until I at least see signs that the virus is being corralled and that could take another month at a minimum. At the same time, I realize that vicious short squeezes tend to happen when the market gets compressed as it is now.
Here's the thing you need to remember. When you're in this type of rare black swan situation, technical analysis and concepts like "oversold" count for a lot less. Things simply don't work nearly as well as in normal conditions. In the heart of the 2008 crisis it felt as if the market had died. It felt utterly hopeless that we could get out it. We may very well have to get to that point of hopelessness before this decline is done for good. Do you have this sense of hopelessness or are you looking at every drop as opportunity to buy? Be honest with yourself. I'd love to read any comments.
The questions you got to ask yourself is this. Can world authorities do an effective enough job to prevent cascading effects, in particular, significant layoffs and a credit crisis? Well, the Central Bankers are certainty playing their part. Sunday night the Fed slashed rates to 0 and announced $700B in QE. Other central banks are likely to follow suit with similar aggressive measures. There will also need to be aggressive fiscal response and bailout/relief measures in place to support all who are effected, but the problem is as mentioned earlier, everyone is effected. It just seems like too tall a task to rescue everyone. Authorities will have to come up with something that is unheard of, they will have to embrace the concept of MMT which basically states that the governments of fiat based economies can print all the money it needs to fofill its goals. If the government wanted to, they could credit everyone's bank account by $1000 just like that. I'm not saying that's justified, I'm just saying it's something that the government can in fact do.
Look, we've got a market that is in full panic mode but to be quite honest, at least some of this panic is justified because the global economy is effectively freezing and who the fuck knows how long this is going to play out. How can the global economy cope with so many businesses shutting down and so many people staying at home? I did say before that once this shit blows over we can see a strong recovery as their will be pent up demand, but in the meantime the economic damage will be ugly, worse than any recession we've seen because in a recession the economy is still running just at a slightly lower clip and that's not the case here...we have an economy that is shutting down outright to a very large degree. I'm not going to be holding my breath thinking all will turn out fine in a few months. I sure hope it does, but I can't assume it will.
Ok, let's discuss some positives now. During Thursday's jaw dropping 10% meltdown the VIX hit a high of 77.5. There was clearly panic in the air and you typically get rewarded for buying in a panic...eventually. You got to back to the heart of the 2008 meltdown to see a higher VIX which hit 90. History shows it's been always good to buy during extreme high VIX levels like this, however, you may not necessarily get rewarded right away. In 2008, the market still ended up making significant lower lows months after the VIX hit 90.. Given the huge amount of puts bought recently and all the government interventions that we'll get, we may be in a position to see the market get a rebound by the end of the week but from the looks of the futures so far which are limit down, that prospect isn't look good for so far. I don't believe we've seen a true capitulation yet as the indicators I track still say it's too early although there's enough to suggest that Thursday's low may end up being a ST low. I don't say that with much confidence however. I'm not going to trust any rally until I at least see signs that the virus is being corralled and that could take another month at a minimum. At the same time, I realize that vicious short squeezes tend to happen when the market gets compressed as it is now.
Here's the thing you need to remember. When you're in this type of rare black swan situation, technical analysis and concepts like "oversold" count for a lot less. Things simply don't work nearly as well as in normal conditions. In the heart of the 2008 crisis it felt as if the market had died. It felt utterly hopeless that we could get out it. We may very well have to get to that point of hopelessness before this decline is done for good. Do you have this sense of hopelessness or are you looking at every drop as opportunity to buy? Be honest with yourself. I'd love to read any comments.
Thursday, March 12, 2020
Just when you think you've seen it all
I vividly recall the turmoil of 2000 and 2008 and prior to those busts there were signs of danger which I did manage to see. These busts were driven by something that went wrong with the economy internally as is the case with pretty much any major market downturn in history. The oil shock downturn of 1973- 1974 is probably the only notable case where something external was the trigger and that's the type of external shock we are experiencing right now but we've never seen anything like this before. Yes, we've had pandemics but we've never had lock downs/shutdowns on a global scale like this. First of all, I will admit that I was very, very wrong to be as dismissive as I was about COVID-19 initially. Although I did adjust my view point and advised avoiding to buy the dip, I was woefully behind the curve in terms of how fast this crisis has escalated. I'm not alone on this but that gives me little comfort. It's nothing short of stunning to witness the world go from ho-hum into lock down mode in just 2 weeks. The US announcing the travel ban to Europe last night is just another WTF moment to add to what has been tsunami of WTF moments. Investors have been paralyzed and dip buyers have been brutally ran over.
It's pretty much a certainty now there will be a global recession. This is rapidly being priced into the market. The question now becomes as I postulated in my previous post, will this be short lived or will it lead to a credit crisis and a more severe and prolonged downturn? It's going to up to government authorities to somehow provide lifelines to businesses and financial institutions during what is rapidly becoming a self imposed global shutdown of the economy. Memories of 2008 still linger and this is 2008 again in terms of the urgency that's required.
In terms of sentiment, I am seeing enough capitulation to suggest a bottom in what you would see in a normal correction, but these are clearly not normal conditions and as such, it's probably going to require full blown capitulation for this market to bottom at least on on medium term basis. I think this type of capitulation happens in the next few days as the US banning travel to and from Europe is no doubt going to make people come to terms with the notion that the global economy is being shut down.
To get a sustainable rally and at least a medium term low what I think we need to see is signs that the growth rate of the virus is leveling off. Authorities also need to play their part with major stimulus and counter measures to prevent a credit crisis. The ECB meets on the 16th and they will have to deliver on this. Be mindful of expectations. If there's too much hope being placed on authorities to save the day, the market may not have had the sufficient capitulation needed to mark the bottom and any rally would be fleeting.
Skate to where the puck is going to not where it's been. Questions to ask yourself are this. How much worse can things get in the short to intermediate term? Have expectations been decimated to the point where any little bit of good news sparks a major rebound? Here's a glimmer of hope to keep in mind. In China where this whole mess started, they appear to have got this thing under control and life is returning back to normal there. Given the extreme measures we are seeing globally perhaps we will see "peak corona" quicker than what everyone's fearing. But don't hold your breath. Let the numbers speaks for themselves. I been visiting this site daily https://www.worldometers.info/coronavirus/
I stated before that you'll know it's a good time to buy when it makes you feel sick to your stomach doing so. I don't know about you but looking at the futures for Thursday's open I'm feeling sick thinking about it now.
It's pretty much a certainty now there will be a global recession. This is rapidly being priced into the market. The question now becomes as I postulated in my previous post, will this be short lived or will it lead to a credit crisis and a more severe and prolonged downturn? It's going to up to government authorities to somehow provide lifelines to businesses and financial institutions during what is rapidly becoming a self imposed global shutdown of the economy. Memories of 2008 still linger and this is 2008 again in terms of the urgency that's required.
In terms of sentiment, I am seeing enough capitulation to suggest a bottom in what you would see in a normal correction, but these are clearly not normal conditions and as such, it's probably going to require full blown capitulation for this market to bottom at least on on medium term basis. I think this type of capitulation happens in the next few days as the US banning travel to and from Europe is no doubt going to make people come to terms with the notion that the global economy is being shut down.
To get a sustainable rally and at least a medium term low what I think we need to see is signs that the growth rate of the virus is leveling off. Authorities also need to play their part with major stimulus and counter measures to prevent a credit crisis. The ECB meets on the 16th and they will have to deliver on this. Be mindful of expectations. If there's too much hope being placed on authorities to save the day, the market may not have had the sufficient capitulation needed to mark the bottom and any rally would be fleeting.
Skate to where the puck is going to not where it's been. Questions to ask yourself are this. How much worse can things get in the short to intermediate term? Have expectations been decimated to the point where any little bit of good news sparks a major rebound? Here's a glimmer of hope to keep in mind. In China where this whole mess started, they appear to have got this thing under control and life is returning back to normal there. Given the extreme measures we are seeing globally perhaps we will see "peak corona" quicker than what everyone's fearing. But don't hold your breath. Let the numbers speaks for themselves. I been visiting this site daily https://www.worldometers.info/coronavirus/
I stated before that you'll know it's a good time to buy when it makes you feel sick to your stomach doing so. I don't know about you but looking at the futures for Thursday's open I'm feeling sick thinking about it now.
Tuesday, March 10, 2020
End of bull market or really nasty correction?
Just wow. Since my last post it's been nothing short of insanity. The 10 year bond yield has collapsed to a mind blowing 0.50%, the fed cut rates by 50bps, oil crashed by 25% and the market is in free fall. Unfucking believable! The world is in full panic mode regarding this corona virus. Italy just locked down the entire country banning any form of public gatherings and it's only gathering steam. Like a bunch of lemmings running over a cliff, everyone is going into lock down mode. Suffice to say I believe it's a ridiculous over reaction but it does't matter what I think.
Last time I posted I said I wanted to see more things line up before being confident enough to make a medium/long term buy. After today we're definitely closer to that point. I'm still not getting the all clear but when the market drops hard like this, an oversold bounce can happen at any time. The 7% drop in the SPX today was unbelievable and has the makings of forced liquidations and hedge fund blows. This very much has a 2008 feel to it. And the ironic thing is the bears who have been wringing their hands for years have not made much money on this decline. From what I can tell, they covered bearish positions way too early and I've seen some actually lose money trying to catch the falling knife for a trade. I also saw this happen in 2008 as well. In bear markets or nasty corrections the market tends to punish everyone.
So, is this the end? Is the bull market dead and we are going to see the beginning of a nasty bear market? Well, let me say this, bear markets don't typically start with waterfall declines like we've seen, that's how they have ended with. The only time a big bear market started with a crash was in 1929. If...and it's becoming a big if now, the economy can weather the economic hit we are going see from this virus such that it does't create a large domino effect (it has already toppled over some dominoes like what happened with Saudi Arabia) we are going to end up with a market that is deeply oversold, with short and long term interest rates at near 0%, massively reduced energy prices, stimulative fiscal and monetary policies and deeply ingrained investor pessimism. That's the ingredients for a massive bull run. If though, this lock down mentality goes on for too long everything could unravel into a vicious downward spiral. The credit markets could blow up, companies hit hardest announce lay-offs which eventually topples over the broad economy.
I tell you what else I think is contributing to this hard sell-off in the market. It's the crazy amount of passive investing that is in the market. I mentioned this concern a couple of years ago. Just over 50% of money invested in equity funds in the US use passive investing which is up from 25% 10 years ago. This whole " buy ETFs and save on fees" has sucked in a lot of investors but now they got a taste of what happens when you are a hostage to the index. When all these indexers hits the sell button at the same time this type of meltdown can easily happen. Index investing makes sense because stats show that most active managers can't beat their benchmark but the problem is that when too many people embrace a particular strategy, sector or any particular investment because it had done so well in the past, things eventually go very wrong as per the motto of this blog. I always believed that the end of the bull market would be marked by the destruction of passive investing but I didn't expect it to happen just yet....I was waiting for the euphoria phase of the cycle. With the market getting sideswiped by the global panic reaction to the corona virus I've been really wresting with myself as to whether we simply see the euphoria phase get bypassed and this ends up being the end of the road. We've had a 11 year bull run and there were notable signs of a bull market peak (inverted yield curve, record low unemployment, high consumer confidence) but there were important hold outs too. I have to respect that possibility that it's the end of the cycle here, but as previously discussed there's enough to suggest that the bull market should not be counted out just yet. If the bull is still alive, it will take time to repair the damage. In the meantime I expect volatility and headline risk to remain very high and it's best to take an practical approach. Try to be as objective as possible. In times like this it's easy to believe the dogma of the permabears. Just remember that they've been saying the same shit for the past 10+ years. I'm still waiting for my indicators to give the green light for an intermediate term buy signal....will have to once again wait for Thursday to get more data but it's looking close so far.
Last time I posted I said I wanted to see more things line up before being confident enough to make a medium/long term buy. After today we're definitely closer to that point. I'm still not getting the all clear but when the market drops hard like this, an oversold bounce can happen at any time. The 7% drop in the SPX today was unbelievable and has the makings of forced liquidations and hedge fund blows. This very much has a 2008 feel to it. And the ironic thing is the bears who have been wringing their hands for years have not made much money on this decline. From what I can tell, they covered bearish positions way too early and I've seen some actually lose money trying to catch the falling knife for a trade. I also saw this happen in 2008 as well. In bear markets or nasty corrections the market tends to punish everyone.
So, is this the end? Is the bull market dead and we are going to see the beginning of a nasty bear market? Well, let me say this, bear markets don't typically start with waterfall declines like we've seen, that's how they have ended with. The only time a big bear market started with a crash was in 1929. If...and it's becoming a big if now, the economy can weather the economic hit we are going see from this virus such that it does't create a large domino effect (it has already toppled over some dominoes like what happened with Saudi Arabia) we are going to end up with a market that is deeply oversold, with short and long term interest rates at near 0%, massively reduced energy prices, stimulative fiscal and monetary policies and deeply ingrained investor pessimism. That's the ingredients for a massive bull run. If though, this lock down mentality goes on for too long everything could unravel into a vicious downward spiral. The credit markets could blow up, companies hit hardest announce lay-offs which eventually topples over the broad economy.
I tell you what else I think is contributing to this hard sell-off in the market. It's the crazy amount of passive investing that is in the market. I mentioned this concern a couple of years ago. Just over 50% of money invested in equity funds in the US use passive investing which is up from 25% 10 years ago. This whole " buy ETFs and save on fees" has sucked in a lot of investors but now they got a taste of what happens when you are a hostage to the index. When all these indexers hits the sell button at the same time this type of meltdown can easily happen. Index investing makes sense because stats show that most active managers can't beat their benchmark but the problem is that when too many people embrace a particular strategy, sector or any particular investment because it had done so well in the past, things eventually go very wrong as per the motto of this blog. I always believed that the end of the bull market would be marked by the destruction of passive investing but I didn't expect it to happen just yet....I was waiting for the euphoria phase of the cycle. With the market getting sideswiped by the global panic reaction to the corona virus I've been really wresting with myself as to whether we simply see the euphoria phase get bypassed and this ends up being the end of the road. We've had a 11 year bull run and there were notable signs of a bull market peak (inverted yield curve, record low unemployment, high consumer confidence) but there were important hold outs too. I have to respect that possibility that it's the end of the cycle here, but as previously discussed there's enough to suggest that the bull market should not be counted out just yet. If the bull is still alive, it will take time to repair the damage. In the meantime I expect volatility and headline risk to remain very high and it's best to take an practical approach. Try to be as objective as possible. In times like this it's easy to believe the dogma of the permabears. Just remember that they've been saying the same shit for the past 10+ years. I'm still waiting for my indicators to give the green light for an intermediate term buy signal....will have to once again wait for Thursday to get more data but it's looking close so far.
Monday, March 2, 2020
Virus fears have gone viral
Last weekend I could sense a notable shift in attitudes towards the virus outbreak, but it became much more than a just a shift. The virus fear has gone viral (pun intended).It has turned into mass hysteria and paranoia which is being fueled by the media and the draconian actions taken by governments and corporations. Despite only what is a small number of cases reported outside of China, we're seeing country wide school shutdowns (Japan and northern Italy), cancelled business trips world wide and raids at Costco in the US and Canada. The raids at Costco is laughable. In the US and Canada there's only about 100 or so reported cases of COVID-19 which by the way isn't anywhere close to being as deadly as SARS given the 2% death rate mainly to those who are elderly. I am in the Toronto area where there are only 10 known cases of COVID-19 in our province. I play soccer with members of a Korean church and they have shut down the church and all activities for a month as a preventative measure. They claim that because some church members may have traveled to and from Korea, they want to take precautions. There's about 4000 South Koreans who are infected. South Korea has over 50 Million people. I would have a better chance getting struck by lightening twice in a week than catching COVID-19 from one of these church members. Talk about overkill.
As far as the markets go, the parabolic rise in fear translated into a parabolic pounding. The market has not had this much of a weekly decline since the 2008 meltdown. It was unreal. We went from a market that was ramping relentlessly to one that got pounded just as badly but in a much shorter period of time. The 10 year bond has plummeted and is just barely above 1%. This is madness.
Because of all the shutdowns, cancellations and hystaria, there will almost certainly be a sharp drop in global activity in Q1, As I've said before though, once this has blown over we will see an equally sharp rebound, maybe not quite as equal as some demand has been lost for good but clearly, there will be pent up demand. But will this crisis which at first appeared rather trivial in the grand scheme of things, create some sort of unforeseen spill over or domino effect that sparks an even larger crisis? It doesn't appear likely but we can't rule that out. In 2008 the subprime meltdown was the first domino which tipped over the broader mortgage market and then the broad economy. At first it was dismissed as being "a small part of the market which will be contained".Everyone is aware that there's going to be an economic fallout now, but if appropriate responses are not taken, i.e. people are encouraged stay hunkered down for too long, the fallout could gather momentum and feed on itself and we'll get a recession that could have been avoided.
The market was extremely oversold Friday and so the bounce we're seeing isn't too surprising. At the depths of the lows last week, the VIX hit 49 which has historically indicated severe panic/fear and accordingly has led to great medium/long term buying opportunities. The only time that didn't really apply was the 2008 meltdown, when the VIX hit 90. But be advised that even when the VIX did hit the 50 level it didn't always lead to the V shaped rallies like we saw in December 2018. More often than not there was a period of base building that was required whereby the market tested or even broke the lows. This was especially true when the decline seemingly came out of nowhere whereby the market was trending higher prior to it. Examples include 1987 crash, 1998 meltdown and 2011 meltdown.
The market is screaming for a rate cut. The bond market implies that it's a shoe-in that we'll get a rate cut. The 10 year yield is over 50bps below the fed funds rate...it's pretty much a guarantee they will cut at least 50bps at some point this year. Just like in early December, Powell and the Fed are like deers in the headlights, but they'll come around at some point. The economic data is going to be ugly in the coming weeks.
I can guarantee you that the vast majority of bears did NOT even come close to fully capitalizing on this decline given the severe gap down and drop nature of the decline. Bears were conditioned over the past 12 months or so to not hold positions overnight as they have been burned repeatedly doing so. This is also what happened in 2008 by the way. Headline risk will extreme in the coming months. If you're going to make any buys you better be prepared to ensure a lot of noise or you'll get whipsawed.
The main indicators I look at are all heading in the appropriate direction to suggest that most of or all of the damage has been done. I'll get a better feel for things Thursday as more data comes in. My gut says that it's going to take time to get through this but in the meantime it will be a paradise for day traders or should I say a meat grinder for day traders. If you're gonna buy now, don't expect a V shaped rally like December 2018 this time. At that time the market had been rolling over for 2 months prior to the low. This time around the market got hit with an unsuspecting punch to the gut. There are probably deer in the headlights type people out there who are paralyzed with fear and didn't have time or were unwilling to react. They need to be washed out. Bottom line for me is that I need to see certain things to pan out first before pulling the trigger on medium/longer term buys.
Here's a good test to know if you're making the right decision to buy. If it makes you feel sick to your stomach it's probably the right thing to do. If instead you get the "I'm so smart buying when prices are lower" feeling you're probably early or wrong.
As far as the markets go, the parabolic rise in fear translated into a parabolic pounding. The market has not had this much of a weekly decline since the 2008 meltdown. It was unreal. We went from a market that was ramping relentlessly to one that got pounded just as badly but in a much shorter period of time. The 10 year bond has plummeted and is just barely above 1%. This is madness.
Because of all the shutdowns, cancellations and hystaria, there will almost certainly be a sharp drop in global activity in Q1, As I've said before though, once this has blown over we will see an equally sharp rebound, maybe not quite as equal as some demand has been lost for good but clearly, there will be pent up demand. But will this crisis which at first appeared rather trivial in the grand scheme of things, create some sort of unforeseen spill over or domino effect that sparks an even larger crisis? It doesn't appear likely but we can't rule that out. In 2008 the subprime meltdown was the first domino which tipped over the broader mortgage market and then the broad economy. At first it was dismissed as being "a small part of the market which will be contained".Everyone is aware that there's going to be an economic fallout now, but if appropriate responses are not taken, i.e. people are encouraged stay hunkered down for too long, the fallout could gather momentum and feed on itself and we'll get a recession that could have been avoided.
The market was extremely oversold Friday and so the bounce we're seeing isn't too surprising. At the depths of the lows last week, the VIX hit 49 which has historically indicated severe panic/fear and accordingly has led to great medium/long term buying opportunities. The only time that didn't really apply was the 2008 meltdown, when the VIX hit 90. But be advised that even when the VIX did hit the 50 level it didn't always lead to the V shaped rallies like we saw in December 2018. More often than not there was a period of base building that was required whereby the market tested or even broke the lows. This was especially true when the decline seemingly came out of nowhere whereby the market was trending higher prior to it. Examples include 1987 crash, 1998 meltdown and 2011 meltdown.
The market is screaming for a rate cut. The bond market implies that it's a shoe-in that we'll get a rate cut. The 10 year yield is over 50bps below the fed funds rate...it's pretty much a guarantee they will cut at least 50bps at some point this year. Just like in early December, Powell and the Fed are like deers in the headlights, but they'll come around at some point. The economic data is going to be ugly in the coming weeks.
I can guarantee you that the vast majority of bears did NOT even come close to fully capitalizing on this decline given the severe gap down and drop nature of the decline. Bears were conditioned over the past 12 months or so to not hold positions overnight as they have been burned repeatedly doing so. This is also what happened in 2008 by the way. Headline risk will extreme in the coming months. If you're going to make any buys you better be prepared to ensure a lot of noise or you'll get whipsawed.
The main indicators I look at are all heading in the appropriate direction to suggest that most of or all of the damage has been done. I'll get a better feel for things Thursday as more data comes in. My gut says that it's going to take time to get through this but in the meantime it will be a paradise for day traders or should I say a meat grinder for day traders. If you're gonna buy now, don't expect a V shaped rally like December 2018 this time. At that time the market had been rolling over for 2 months prior to the low. This time around the market got hit with an unsuspecting punch to the gut. There are probably deer in the headlights type people out there who are paralyzed with fear and didn't have time or were unwilling to react. They need to be washed out. Bottom line for me is that I need to see certain things to pan out first before pulling the trigger on medium/longer term buys.
Here's a good test to know if you're making the right decision to buy. If it makes you feel sick to your stomach it's probably the right thing to do. If instead you get the "I'm so smart buying when prices are lower" feeling you're probably early or wrong.
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