Update 83: Stock Market-We Were Right
March 7, 2020 OPINION & OBSERVATIONS
Last Week was a continuation of a relatively probable opinion that we’ve had for some time. Let’s recap….when we went on that ridiculous Oct ’19 to Feb ’20 run based on weak GDP, lackluster earnings & revenue growth, massive overvaluation (Market Cap to GDP) and with more technical warning lights flashing like a Christmas tree plus an almost 400 point premium to the 200 day moving average on S&P…we felt the odds were not favorable and the market could see exhaustion going into 3400 ass we felt it had no business breaking above 3100 in the first place. We discussed various ways to reduce risk in portfolios (among them- option strategies like Collars, Married Puts, Covered Calls & asset allocation adjustments-such as if you are 80% Stocks/20% Bonds or the ever popular 55-60% Stocks 45-40% Bonds….one might adjust the weighting as to increase the Bond % while reducing the Stock % but of course consult your brokerage firm/broker, taxman ect to determine your own route to follow as one approach is right for everyone. There is a risk in taking action and sometimes there is a risk of not taking action. We started in Oct 2020 in the S&P 2800-2900 range and so far we have essentially wiped that the ill-deserved rally. Two areas that we harped on that kept us out of the wildly bullish camp were the Dow Transports & Russell 2000 (RUT) both of which failed to take out their 2018 highs and have since rolled over-DJTA big time! The world (Germany Italy France China Japan (VAT tax)) all had flat-down-shrinking growth numbers BEFORE the Virus so imagine what the numbers will be now?? China announced PMI numbers at about 35-….shocking…USA? We said that a VIX 10-15 is bullish…15-20 Neutral…20-25 favors bears above 25-40 usually means the abyss…stubbornly high can mean up 1,000 down 1,000 days like last week. We are here NOW….so let’s opine on GOOD NEWS BAD NEWS……as we go on remember our main feeling is that if the Virus in gone within a few months (summer)…the odds the pullback is a BUYING opportunity increases substantially….but if we must wait 18 months for a vaccine then we are looking at a horse of a different unknown color. Our opinion is that the GOOD news starts with the fact that we’ve had an unprecedented drop (although 6x in history we’ve had a 10% drop) and 3 mos later and 6 mos later the market had good advances. The VIX spike has been the highest since 2008/2011 and we also saw a historic number of 90% DOWN days ((90% of all stocks down) which have coincided with important lows with the exception of 2008. Deleveraging to a great extent has occurred but a decade of passive investing could get unnerved without stabilization soon before those March statements go out. GOOD news is the FED & Central Banks worldwide are on the move and if fiscal or targeted injections of liquidity materialize…more good news. Now we believe this interest rate drop and printing money bonanza at the FED is not totally unwelcome and needed to be done anyway as the Dollar was to strong due to our yield advantage (going going gone) and the deficits are going through the roof and will be financed by substantially lower borrowing costs..good. More GOOD is that the millennial generation is now employed, finance a home for about 1,000 bucks a month fixed ( household creation yeah!), maybe re-fi that student debt or since we’re printing overtime maybe seek forgiveness. USA debt to GDP ratio was at between 100-110…you can expect that to rise hopefully not to the level of Japan (236)! Many Sectors have been hammered (Energy-Airlines-Cruise cos.), some corrected (Financials-Transports-Disney-JP Morgan) but many still sub 20%. Internationally; many country ETF’s are near their Dec 2018 lows so we’ll see how it plays. NOW…we turn to the more worrisome side which of course starts with the premise that the Virus is not transitory (done by summer) and that business comes to a halt not a pause. The Dow Transports have taken out their Dec 2018 lows and since they were a key factor in our avoiding the top it may be a key factor in us getting back in prematurely. The all important Tech Sector has a long way to go if we are to retest that low area and since MAGA (MSFT-AAPL-GOOG-AMZN) are at the top of many index lists….it’s scary. Also valuations returning to their lofty levels is not assured but with interest on Treasuries so low that game could return. Supposedly Buffett values the Market Cap to GDP ratio (Russell 500 to GDP) and that relationship is concerning as it is at the same level as 2000 and 20% higher than 2008. He’s not sitting on a hoard of cash for no reason. If you’re Bullish you better hope with Treasuries so low that our darling T.I.N.A. (there is no alternative is more alluring than the bean counters who actually must calculate how much to participate. One other GOOD thing potentially is the Dividend paying stocks that have current Free Cash Flow Yields above 10% (ability to pay) and whose yield range from 3.5% to above 8%. High Yield spreads are in and around 500 so historically 600-800+ has been an area of interest. Some just like one stop shops like QQQ, SPY, IWM FXI TLT when it’s time. Fed’s worried about system & consumer freeze up…..me too. Contact us at [email protected]
Last week the VIX remained elevated above 30 and spiked and the gyrations were in line with a high VIX….expect more of the same until the VIX settles in at least under 25 which may take time. We like to use market ranges and parameters rather than to play Nostradamus….so here’s our take…the ceiling has been established at S&P 3400 with the low at 2850 and the 50 day M/A @ 3250 area & the 200 day M/A @ about 3050….the rebound high was about 3125 and the lows of late Feb (3200) plus the gap at about 3275-3325 may be addition resistance. Importantly; we see support at the 2850 (about 50% correction of the 2350-3400 move) with slippage taking you to 2750. If that goes a last stop could be 2600 followed by the Dec 2018 lows around 2350. We expect volatility and price swing to remain wild as long as the VIX is unmoored. Should the Tech sector does a major fade on concerns about supply chains, demand- growth or valuation then we believe the odds of following the transports and international markets towards the Dec 2018 levels increase. We still believe the money for no interest & demographics & tax rates & deficits could finance a potential move toward 400O+ in years to come after we come out the other side. Lots of bargains potentially but selective over time is our mantra currently…technical & fundamental damage has been done.Careful….we have some bargains…more to come?
We felt the trend for rates was down of course no one imagined the parabolic speed that rate rates have collapsed. Treasuries look like they are on their way to ZERO but caution TLT (long term Treasury) is way above its 200 day moving average & everyone is on the easy money bandwagon. Felt a little like a blow off last week but the flight to sovereign debt is mammoth & historic…heck they don’t even pay interest or less in some countries..Mad. Right Now…Credit Spreads in the 500’s not really juicy yet and down grades could be on the way for BB & BBB’s…the health care & energy sectors are under the microscope as well as others…the FED is on guard monitoring the system as they remember from 2008 if credit/liquidity freezes-it could be game set match. Leveraged Loans & CCC’s and others are on the risk radar. Again..if business halts..some companies can’t afford the cash flow miss.Some believe in longer dated money center bank debt…we’ll see.
We’ve said for some time that the dollar is range bound between 995-95 where it has resided for some time..not buoyed by our “great” economy & growth but rather our yield advantage over other countries (Japan -China-Europe)..well that went out the window last week and the Dollar hit the skids..now putting it in perspective it just reversed a false upside breakout and put us near the lower part of the range at 96 but it’s downsside momentum is palpable and should we break 94-95 like a knife thru butter…then the door opens for 88-90. The Fed wants more inflation & growth & the admin wants a lower dollar/rates to compete..well you got it! Again all currencies look nutty with the Debt to GDP ratios very dodgy.
As we told you after ARAMCO sold all that stock the need to keep prices elevated went away and so did 60+ crude oil. Now OPEC can’t get cuts (Saudis acting as if they want to cut-they got paid on ARAMCO why do they care?).Russssia gets hurt under 40 they say..we’ll see..now if we hold 40 and reverse…are XOM,SLB,COP,CVX, HAL, BP, RDS.A good values or will they follow the oil companies who may default on debt due to low free cash flows? Stay Tuned it could get wild in the next 90 days.
Gold Silver Copper
We are a bit torn as Gold had a great week but Silver & the mining shares not so much…we have been all over the Gold since the break above 1350 rally to 1580 pullback to 1450 and subsequent rally to the Tudor Jones target of 1700…but since then not so much progress….so if we fail to get going a pull back could occur as the popularity of be bullish is out of the bag…Gold-Silver ratio spiked which historically did wonders for Silver historically…it could outpace Gold’s prices if historyy repeatss itself. Copper is hanging on for dear life at 2.50 area..stay tuned the metals could be ready for changes as nearby Vol of Gold options versus the back months is huge.
Most grains & softs still meandering and we feel the planting and growing season ahead may hold the key for future ability to break resistance or fail.
REMEMBER there is a substantial risk of loss in short tern trading and option trading and it is not right for everyone. Consult your brokerage firm, broker, advisor to determine your own suitability. Past performance iss not necessarily indicative of future results. USE RISK CAPITAL ONLY