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.