Update 86: Stock Market- A Bounce Back Now April Showers?
March 27, 2020 OPINION & OBSERVATIONS
OK…not hurting for news this week huh?….we just had the biggest 3 day rally since 1931 & the best weekly rally since 1938 (all after the Great Depression) and we had the biggest jobless claim number ever (by over 4X) and we had the biggest QE (ridiculously bigger than ’08) and the biggest Congressional relief package (bail out) ever again by a ridiculous multiplier. Let’s put our common sense hats on here and guess why such a big bounce back? Well in about 1 month the S&P fell about 35% and took with it the financial system. We saw forced liquidations, huge volume, panic selling, a stampede into bank deposits & money markets ($400-$500 Billion), credit markets freezing and the fastest pace ever drop into bear territory (19 days). Now this week the Fed goes nuts with QE and Congress goes with $2 Trillion…plus they can leverage part of that (as much as 10 to 1)…we are ridiculously oversold so of course you are going to see a rip to the upside on short covering, algos & book squaring into a no seller scenario. Friday we got a reality check as the market snap back ended after we got about an 39.1% (Fibanocci) throwback toward 2650 area. A possible rally for the last 2 days of March (Mon/Tues) could coincide with EOM re-balancing as 60-40 stock portfolios got out of whack and so adding stock at the end of Q1 here is possible unless it was primarily done this week. We stated many times as long as the VIX is elevated (still in the 60’s) expect wild swings/wide ranges. As we get into the first 2 weeks of April we will tear the band aid off this bad situation and get a peek as to how bad is the resulting wound. Earnings, PMI’s, Jobs Data will be coming shortly and while 3.3 million unemployed in the first report some believe was “discounted” it was accompanied with the over the top Fed & Congress action. When we started this decline @ 3400 S&P the valuation was way more than in 2007…and if you take the market cap-GDP ratio measurement….we may still have a lot of re-valuation to do. Some Fed guys look for a quick return back while others see a longer run. We got a shot in the arm last week but shots wear off/leaves recovery values. The world has gone nuts printing money issuing debt credits or whatever you want to call it. We are not certain if this is Christmas in March or Global Desperation and maybe desperation doesn’t end well. At the end of the day Stocks & Bonds have valuations….how do you valuate? .Lots of things hitting the fan in April and we will glean more information of which to answer questions such as Virus status, PMI’s, Earnings, Credit Markets, Govt programs, Return to Work projections, Consumers & more. While some say 90% of major stocks may have seen lows..not our Kool-Aid.
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Let’s start with some perceived positives….insiders (corporate executives) have been buying up a storm….do they believe in their companies or is there an ulterior motive? Some names Dell, Oracle, EQC, Alliance Data & CIT and many others. Cash has been ripped out of the stock market and landed in bank deposits & money market ($400-500 Billion). This can be a positive if it comes back in but we don’t know how old these investors are and have their risk appetites may have changed…this is the 3rd crash in 18 yrs (’02, ’08,’20) and for some it could be getting a bit old (Patriot Act/then QE/Now Unlimited QE). But the Fed game of kill the saver-force risk taking is ON! Banks supposedly have good payout ratios for their dividends and their debt was wobbly until the Fed came into IG and now near back to normal. The bank’s P/E ratios are 1/2 of utilities which are also getting lots of bids.With the market selling off some say it’s time to re-balance your asset allocation (add stocks) if you believe in the longer term (3-5 yrs out). Consider high quality brand names, 5G, Cloud-Edge comp cyber security. Digital transformation like MSFT & CRM–AI like GOOG–Uber LYFT could see many more drivers with the unemployed….be careful…VIX is very high still. & we just had a house of cards crumble…early to say lows are in & one scenario we discussed is a wide trading range of 2850-3000 top 1800-2100 low and swing around there until moving averages settle in with new prices & the VIX settless down to a reasonable 15-25 range…it all takes TIME!
Well this one was falling apart before the Lone Ranger showed up (the Fed). Remember that Bonds trades thru dealers and if a house is on fire the dealers are NOT going to throw their check book into the blaze…..they wait for the Fed to become the bid (let them torch their money it’s only stuff they created out of thin air anyway). Short example of what happened as commercial paper, treasuries, corporate IG, munis, mortgages, etf’s and much more needed someone with cash and reckless abandon to step in front of the tsunami of liquidation and redemption runs which we spoke of many many months ago ass a possible resolution the ridiculous continued QE the Fed policy makers kept us on long after the ’08 crisis. They created the asset bubble cheered by the administration (30,000 DOW) got stuck with it’s consequence…now the Fed adds trillions of dollars of debt on top of a debt crisis commandeered by temporary employees leaving a lasting legacy for future generations. Is there a risk to helicopter money (more like B52 money), extending credit to broke business, telling banks CECL (loans) suspended , using leverage on money set aside for relief…we’ll see. Munis had it’s biggest rally since ’82 and IG corporate got a bid…let’s see if HY & asset backed-securitized debt plus so much other debt not supported plays out. We hear some say value is in Sovereign emerging market debt and watch for downgrades and especially in the crowded BBB space. Energy, travel, cruise ship, car rental, hotels remain out of favor…stay tuned. In short…the Fed seems to be buying IG, Munis, ETF, Treasuries..MMKT.
Our view was that the range for the Dollar was about 100 to 95 and it stayed in their for a long time. We felt a break above 100 could see a pop to the upside and we saw just that to 103. Now we have a 98 handle because the Fed & Treasury & Congress have decided to allocate credit at such a enormous level & the Budget Deficit is exploding to such a degree that the dollar is being faded again. Looking to the BP, Euro, Yen has begun to lure investors away the dollar…struggling currencies CD AD & other oil and commodity based currencies could have a better 2nd half if things turn. The whole world is printing and we’ll be watching to see the future of fiat currency evolve in front of our eyes….could we ever see another Weimar? The dollar hit 120 during the Dot Com boom and if we blow out 105…look out. If this over the top extension of credit to anyone who can walk & chew gum ends badly then 90 & 80 is not absurd….follow money flows…be careful
Our view is that he Saudis said they will pump thru May and they weren’t kidding. USA was supposed to talk and Russia was supposed to scream uncle but neither has occurred. According to reports the Saudis are ok at 15 per barrel pre dividend with ARAMCO & 3 bucks out of the ground so that 15-20 in the first half of the year appears in the cards…2nd half may be a horse of a different color which is why we like XOM & CVX (who sounds like they’ll honor dividend) will come out as relative winners & worth a look. Canada sand guys (SU) & our shale guys are in big trouble as well as debt laden firms…could be a batch of defaults coming down the pike. Watch other big guyss like RDS.A & BP, COP and others & the debt of OXY for clues.
Gold Silver Copper
OK looked at quite a few charts and came to the conclusion it’s getting to be High Noon for the Gold. If we can clear 1700 a fast move toward 2000 or so if backed by a good fundamental..why? well the whole world seems to be making a joke out of paper money as even questionable countries are coming out with relief packages in the billions. The one – two and three year moving averages look ok and the move to down to 1450 appears to be a garden variety pull back. HOWEVER…..the GDX has failed to sustain above 30 and we failed to take out 1900 so far so 1700 is a lower high. Also retail investors are buying up gold coins at the fastest pace on record in some cases. So if we slide under that 1450 area an acceleration to the downside not unlike we just saw in stocks could occur as Deflation from asset liquidation and a strong dollar could shock the gold bulls…Stay Tuned. Silver & Copper are industrial metals and have been caught in the slide.Clearing 15 Silver & 225 Copper would be helpful but downtrends.
Soybeans & others
Still waiting to see if Soybeans & other ags (believe they get money out of relief deal) will get news and be able to push thru resistance …need 950-10 to get beans in a place where they could accelerate….the season dead ahead.Brazil is such a mess…maybe USA not able to compete on price. Vanguard has a Commodity Strategy Fund VCMDX get a prospectus and learn more…bad return so far this year (like most)….a diversification??
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