I’ll start today with where we’re at. Basically, after two days of selling we’re re-testing the 20-day moving averages of the SPY (S&P 500) and NDAQ (Nasdaq), and they found support at those levels. The IWM (Russell 2000) tested it’s 50-day moving average and closed above, and is the only chart still in the short-term bearish mode of having it’s 20-day moving average below it’s 50-day. Like the others, the GDX (Gold Miners) gapped lower to start near it’s 20 day moving average and shot well upward, taking out the previous day’s close.
One technical reason to explain the big selling on the 30th and 1st is simply portfolio rebalancing. Big mutual funds and pension funds saw stocks gain significantly in April while bonds stayed about flat – so they sold stocks and bought bonds to get their portfolio allocations back on track.
There is a solid technical argument that the upward trend will continue here, bouncing off support from a successful test of those moving averages. Investor sentiment is getting more bullish, and I see no reason for this to stop in the next few weeks as more of the US and Western Europe begin to relax the rules of their lockdowns.
According to this highly recommended read: https://www.mauldineconomics.com/frontlinethoughts/the-figure-it-out-economy
Fans of symmetrical bell curves will point out an economy that falls so fast can bounce back equally fast, particularly when monetary and fiscal authorities are injecting so much rocket fuel. We see this in the latest Barron’s Big Money Poll of 107 top money managers. Asked to forecast the stock market this year, 39% were bullish, 20% bearish, and 41% neutral.
So adding together the bullish and neutral, 8 out of 10 money managers see at least some chance of positive equity returns between now and year end. They are even more confident for 2021, with 82% bullish and only 4% bearish.
- Although worldwide trade and travel has collapsed, you now see normal travel advisories where just a week or so ago there was a level 4 alert not to travel internationally due to Covid-19 lockdowns. In fact, many areas are back down to Level 1: Exercise normal precautions: https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories.html/
- As places begin to re-open, you can monitor the traffic levels to compare to pre-covid here. Just type in your city (I started with Los Angeles): https://www.tomtom.com/en_gb/traffic-index/los-angeles-traffic/
- There have been a lot of positive stories on vaccines, treatments, and increased testing.
- The federal reserve has been extremely active from the start, pulling out it’s entire 2008 playbook at once and increasing their balance sheet by $2.5 trillion over the past 6 weeks – increasing nearly 60% from $4.2T to $6.7T
- The federal government has put out a massive $2T stimulus package to help the economy through the shutdown period.
- The unemployment rate is about triple that of the 2008 market bottom: https://wolfstreet.com/2020/04/30/week-6-of-the-collapse-of-the-u-s-labor-market/
- The massive oil oversupply situation is really unprecedented – a physical sign of how major the market disruption has been
- 70% of US GDP comes from the services sector, which got hammered during the shutdowns. How big of an affect will this have on GDP over the next several quarters?
- Many shuttered businesses will not re-open after the lockdowns. Unemployment may linger for a while as the economy re-balances to a new normal, likely involving face masks and distancing until vaccines are not only approved but widely available. As John Mauldin points out, most restaurants and retailers can’t survive if their business drops by 50% while their fixed costs stay the same. Consumers are going to be wary and saving rates will go up for quite some time as they worry about reduced economic security and possible new waves of lockdowns.
- How long will it be until we can attend large events such as fairs, concerts, and sports? How long until international travel becomes commonplace again? How long until Vegas casinos and cruise ships are back to normal? Without these, can we see GDP reach prior levels?
But the Fed will save us, right? Well maybe…
If the federal balance sheet shot up like crazy to fuel the recent rally, how long can that rally last when the balance sheet tapers off? If that fed money isn’t actively buying assets, then asset prices can easily drop. Will they respond to a market drop? They’ve certainly indicated that the answer is yes, but you also have to question how much they can really do this? There has to be some kind of limit, and if earnings collapse for most companies that should eventually bring markets down, at least in stressed areas.
If you think about it, it’s really a dangerous time to invest. With the fed rate at zero for a long time to come, there is no such thing as a risk-free return. You could easily go bearish, looking at the overall economic numbers while stocks regain their former highs on massive monetary intervention. Or you could go bullish and the market could correct downward the fed backs off a bit, perhaps (one would hope) realizing that blatant attempts to over-inflate asset prices end just end up harming small businesses and consumers who ultimately see very little of this money.
That’s the reason I’m currently betting the way I am – Long Gold Miners, Short Russell 2000, and a heavy allocation of cash. If the fed backs off and my gold miners lose value, the short Russell 2000 play will help. Then the fed jumps back in with big money and asset managers look to anything with solid earnings – including the gold miners who have the luxury of greatly reduced cost of production combined with a cash-like commodity in heavy demand.
One more thing to consider – how do we stack up compared to previous bear markets? I found this site with some absolutely amazing charts – you should check it out: https://barberfinancialgroup.com/comparing-covid-19-to-previous-bear-markets/
Note that we could easily see a re-test of the highs … with the WW1 and influenza chart in yellow, the highs were re-tested 24 months in, then dropped 20% in year 2, bottomed 25% down in year 3, re-tested the highs in year 5, and ultimately bottomed 51% down in year 9.
I tend to support the idea that we are similarly in a longer-term bear market. We will see many sugar-highs in the markets, fed by loose central bank policy, followed by ravaging drops as economic reality sets in.
This is a time to trade, not to invest. Here are some rough thoughts and pointers I came up with:
- If the technical indicators are against you, don’t be too stubborn to jump ship. Those who are stubbornly right at the wrong time will get crushed just like those betting on a housing collapse in 2006 or an internet stock correction in 1998.
- Use long term vehicles for your trades. Most of my puts dated between April and June ended up losing money – the April ones going to zero. My bigger bet on the S&P going down was dated November – so I was bruised a bit but not too badly when I jumped ship on that bet 2 weeks back. My current bearish bets on the Russell 2000 are dated Jan 2021 or Jan 2022 – and I don’t plan on holding them that whole time. If the market corrects downward in June I’ll sell them for a gain – if it continues strong through August I’ll probably sell the earlier ones while they still have enough duration to retain substantial value.
- Uninvested cash is not a bad thing – it gives you the ability to be the buyer of last resort in a market dump. I actually took advantage of this back on March 13, but dumped it all the next week figuring a much stronger correction was in order. In retrospect I should have held – most of the names I bought back then are worth substantially more today because I focused on a theme of safe yield. More opportunities will come, but only for those who have cash ready.
- Learn from your mistakes. When the market bottomed back on March 23rd, it didn’t look like a bottom. It never does at the time. Perhaps if I looked at the market sentiment after the initial jump, or even after the SPY broke through its 20 day moving average, I would have realized that the sentiment measures were a bit overly bearish. Even more important, when I heard the Federal Reserve talking about QE infinity I should have jumped on the bull train right away.
Good luck, and may the odds be ever in your favor.