Since my last post the market rose relentlessly higher for about a month and experienced a decent pullback the past couple of days. Is this just a correction or the start of something worse? I'm thinking the former for the main reason I've been saying for quite some time which is that we haven't seen what I believe would represent a full embracing of this market. Yes, there's been a speculative fever in the options market and in handful of momentum stocks like Telsa but generally speaking investors appear to be at least somewhat skeptical if not outright skeptical and many of those who call themselves"bullish" are reluctant bulls with a "hey don't fight the fed" or "just go with what works" mentality which makes them weak handed and therefore easily shaken out like what is happening right now. There may be more shaking out of such weak handed bulls in the days to come but with the VIX almost having touched 40 already and the sharp nature of this recent decline, it would suggest that this is just a correction. The last time I got the sense that investors were generally too bullish was coming into 2018. It was evident by fund flows and the general narrative/expectations. Ultimately that led to a 20% drop in the stock market. Since that's not the case this time, I would expect a correction to be in the 5-10% range as fund flows are still weak and AAII sentiment is still showing more bears than bulls, which is quite incredible...we haven't see a streak of bears outnumbering bulls like this even during the 2008 meltdown. Since the NASDAQ was where most of the speculative action has been focused on as of late, it is possible to see a 20% correction there but comparisons to the 2000 tech bubble are ill founded. As I mentioned last post, back then speculative fever was more intense and widespread. EVERYONE was embracing overvalued tech from the little guy to the big players as evident with fund flows and margin debt. To put it into further perspective I quote one of my favorite twitter follow ukarlewitz:
Nasdaq-100 ($NDX) has had a nice run, up ~50% in the past year and ~150% in the past 5 years. Into the 2000 top, it rose ~1000% in the last 5 years topped by ~120% in the last year alone.
Bloomberg had an article titled "Nasdaq Plunge Is Victory Lap for a Stable of Equity Naysayers". Victory lap? What a joke. The Equity Naysayers have been obliterated these past 3-4 months and so there can be no victory claimed. Where are all the 1929 analogs now with the S&P 500 making new ALL TIME highs just recently? I remember seeing so many of them on my twitter feed. Where did they go? Where's the mea culpa? For once, just once I'd like to see a permabear come out and say "I was wrong". But what I would really love to hear them say which will never happen would be this "I've been wrong not only now but a countless number of times for over a decade repeatedly calling for the end of the word. I'm sorry for being so dogmatic, so stubborn and with such an overinflated ego and I'm sorry for being such a miserable SOB which always make me view the world though dark shaded glasses"....but I digress.
Now, I did say months ago that if the bear case was to play out it would be because we see a return of economic weakness late summer/early fall after the pent up demand from the lockdown and the stimulus from government ran it's course. We will see if that will indeed play out but as it stands now it doesn't appear that will be the case. I could see a soft patch happening but again, because we have that underlying apprehension about the market and the economy I don't think things will unravel. Government authorities will not let their foot off the gas until we have clearly recovered and that is certainly not the case and likewise, investors will generally probably not fully embrace the market until the sky is blue again which by then will be too late.
Right now there are 9 Covid-19 vaccines in phase 3 trials. The historical success rate of a drug passing phase 3 is roughly 50% (from what I've read at least). Therefore the odds suggest that at 4-5 of them will be successful. Some of these companies such as BioNTech are saying that they will know if their drug is successful as early as October. I wouldn't hold my breath for that, but it does appear that we could get confirmation of a successful vaccine sooner rather than later...at the very least sooner than what was expected back in March. Governments are willing and ready to mass produce the vaccines the instant they get approved and so everything is being fast tracked. This would appear to be incredibly bullish and may be partially why the market has been grinding higher, yet you hear very little about this. Now, obviously we have no idea how effective any vaccine would be but do you think the market is gong to wait for that before responding? Most people are focusing on the negatives and the rear view mirror.
If we get an announcement of a successful vaccine or the market senses one is immanent, we could see a big surge into "epi-center" stocks i.e airlines, hotels, cruise lines. I'will be looking at some option plays to see if the risk reward is worthwhile.
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