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.
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