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.
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