Gold Rose & the VIX remained flat on Monday, despite all markets surging... not a common combination but one that shouts caution. A few are saying the recovery is in progress but most are saying "wait for the E of the PE before celebrating, more lows will be seen on reporting" Take your pick, I favour the latter Monday movement was fake buying, i.e. traders buying the Indices, not the stocks.
Here is a pice from J. Lander of ProC capital that just about encapsulates the situation starting from Feb to now:- "We believe markets are still overly optimistic and are failing to properly consider the ongoing challenges. As such, the current bounce may prove to simply be a bear market rally off the recent panic lows. In February, we warned that the coronavirus could be a significant issue, writing that investors were too complacent and that the coronavirus could prick the 'bubble in everything'. That bubble is now deflating, and the world has changed, as the delusions of the past struggle to remain relevant. The crash was incredibly rapid and alarming, highlighting both the nature of the shock and the fragility of markets. As we lay out in this wire, while markets are enjoying a relief rally, we believe that this crisis has only just begun and investors should prepare for a long, challenging period ahead." For the few that have a short memory, the virus did not drop from the sky in late Feb, news of the virus was around since early January Trading the Indices on Fundamentals and Trading the Indices on Fundamentals, but markets ignored all warning hitting new highs day after day till late February. Makes you wonder whether market players put their heads in the clouds during the good times and selectively chose the news they want to hear, paying attention only to the news that falls in line with their view rather than change their view based on the average of news... I guess that's why markets grossly overshoot time after time. I repeat what I said before... pure technicians trading only on technicals are lazy traders, good traders also pay attention to the fundamentals. Technicals only take-in the portion of the news that has been priced-in, fundamentals give a guide to the future price.
My best guess of the cause of the recent rally is that it is driven by short-covering of the extreme action taken during the panic sell-off of the 23rd March.... recent "better than expected" news on the limited success in controlling the virus has caused a re-assessment of which sectors/companies are likely to fair better, those sectors are being bought back to cover the across-the-board selling that occurred on the 23rd, some was forced selling to cover margin. Once the above is in balance, I do believe investors will focus on the damaged economy and recovery periods rather than virus news and try to determine fair value. My view is that the fair value will be substantially lower than current prices which will cause a renewed sell-down but in a more orderly manner than that of the 23rd. Until companies start giving forward guidance, no-one can know whether markets will revisit the lows or even exceed them, however, it is general consensus that the worst will be reflected in the 2nd quarter forward guidance and the 3rd quarter reporting, the bottom might therefore not be seen till after mid-year and a sustained recovery not till the end of the 3rd quarter. Until that point, 10% or even 15% false rallies will be common occurrences. A major wild card is the health of the American consumer... no-one knows at this point if this prime-mover of the US Economy will recover to its former spending power, how many will remain jobless? how many have lost their homes, used-up their savings? Indeed, how many will be willing to spend rather than save. The consumer is a major driver of the "E" of most companies and as previously said, until the "E" of the "PE" is known, and until official GDP figures are announced, we are all blind as to what fair-value is, thus the occasional false rally along the way to the bottom. I will be using any rally to increase or reposition my short hedges.
After last week's rally, the S&P500 PE multiple is back to 21, the "rich" level it was at the Feb high. This is based on pre-reporting figures of 1st quarter released by some companies. Two notable things to be considered: 1. the 1st quarter reflects 2 months of a booming economy 2. none of the companies that released/indicated figures were able to give forward guidance for the 2nd quarter. IMO, the rally is rather foolish at this juncture and would be sustainable only if the US economy was to reopen now, an unlikely event. Considering the financial and fiscal stimulus announced (over $5t), if the economy was to reopen now, it could probably continue from where it was, however, a "back to normal" environment now is unlikely. Further, although, on paper, the aid available to business looks impressive and adequate, reports indicate that, in practice, claims for the aid can take several weeks and the process itself is cumbersome, and, particularly the portion managed by the Fed, has strings attached. The only aid that appears to be immediate and automatic ($350b) is that given to the unemployed, although this helps the individual, it does nothing for business. My view is that despite the stimulus, by the time the economy reopens fully, the majority of companies that survive will be smaller and leaner i.e. a large unemployment number will remain effecting earning for quite some time. I think that investors will come to terms with reality and see through the stimulus, begin to focus on the damage the economy has sustained despite the stimulus and try to calculate how the recovery will look so as to determine the fair value of equities. I remain in the view that the fair value will be substantially lower than current prices and therefore a sell-off is much more likely than a continuation of the rally. To support this, the Buffett Indicator that compares capitalization of the S&P to GDP showed that as of Fri, the S&P is Significantly Overvalued standing at 139%. When actual GDP figures are released, it is likely that this ratio will go to 168%, the value it was at the Feb highs. .
After the long weekend markets closed Monday without giving much away at to their intended direction, US majors ended mixed, however, 3 things took my attention: Russell200 closed -3.5%, Industrials were down heavy (Cat -9%, Deer & GM -5%) while NDAQ was +1.5%, AMAZON returning to above $2,000, and Gold was +2%. Experts are also mixed with their views, most technicians say Consolidation then up (V recovery) but most Fundamentalists say down to March lows or beyond then slowly up, Goldman Saks says lower from here but higher than March 23 lows. Trump & Kudlow insist everything is under control while Medics say otherwise, fearing a second round of increasing infections mainly due to inadequate testing. I a nutshell, no one, including market players and the companies themselves, know. Many more companies have withdrawn their 1st quarter profit forecasts preparing markets for worst than anticipated reporting figures. My view remains that investors will come to terms with reality and see through the stimulus, begin to focus on the damaged economy and calculate the fair value of equities below current prices. I do not see normality within the market's 6-month horizon nor do I see a good unemployment figure for at least 18 months.
The rellies that were happening in Jan & Feb in the face of reported declining earnings did not make much sense to me however, they could be explained in light of the huge buy-backs and dividents being attractive compared to bond yields. The rally we had since March 23 not only makes no sense to me but I can't find an explanation for it. Buy-backs have ceased, dividends have been cancelled, forward guidance has been withdrawn and many of the companies that borrowed for the buy-backs are now in unsustainable debt, some with zero cash flow due to the shutdown, on top of that, most companies are saying they have no clear guidance for the 2nd quarter and perhaps beyond, plus, some are on life support which without it, they would cease to exist. I can't think of a period of greater uncertainty, yet markets are in rally mode. The only sectors that deserve to rally are biotech and tech, everything else is in retraction, yet the broader market is rallying, even the travel sector is going up (Expedia up 5% on Tue) All economic pointers tell of a deep (world) recession story so the current rally astonishes me, I will stay on the sideline until I can see some justification for the market's direction. My strategy is positioned for a return close to the March 23 lows, if this does not happen I will be doing nothing until I can see a justification for an up-move.
It is all a bit of a puzzle but it seems the market makers have a plan.... Maybe?? The upward trend is sitting right on top of my mid line so the upward momentum is not strong but it is still upward. The 29th of march looked interesting but the buy back on the 30th corrected that. Intraday we have calmed down quite a lot but it is still bouncing around its levels which is fine with me. If I see something interesting on the daily I will post a chart. For now, we are drifting up until we stop.
Industrial production and retail figures for March were released pre-market, these were the lowest on record, even below 2008. Markets reaction at the opening was muted in comparison (DOW -3%). Not sure what it will take for markets to align themselves to the economy.
Wed US markets ended slightly down despite the manufacturing and retail figures pointing to a severe downturn. Wall St is optimistic about the 2nd half of 2020 and so seems happy with current stock prices, perhaps the consensus is that earning will recover by mid yead and in the meantime, the massive stimulus is keeping companies solvent. I have difficulty agreeing with that view, no doubt the stimulus is massive but the number of companies claiming aid is also massive so the individual amounts received will barely pay the bills, further some of the aid given is conditional to the company keeping their payroll constant during the closure and after the economy reopens, and there lies the problem. Retail sales dropped 50% in March, and unemployment has already exceeded 10m, upon the economy re-opening, that (or worst) will be the starting point and there will be no more stimulus, extrapolating this to earnings gives a PE that is very, very rich (perhaps >30 multiple) with little prospect of the "E" improving for another 18 or so months when the unemployed begin to get absorbed into employment. In all, either Wall St knows something I don't or the collective IQ of these gurus is not as high as we think. If I got my facts straight, on average, it takes markets 3 months to reach bottom after the start of a recession, if history repeats, June will see the lows this time around.
Fxtrader, I came across your previous threads on Wpool forum, I got hooked and read them start to finish. With the benefit of having the charts up, I rode every rally and sell off with you. I was flying through each page knowing this recent sell off was coming, but refused to skip ahead and ruin the crescendo! ...Only to discover you'd left the forum and me hanging in the process. Thankfully I found this thread, grabbed the popcorn, and relived every trade in the last 54 pages. What an epic ride. Thank you for every post and contribution. It's been one hell of an experience to compress the last few trading years down to a week's reading, and with the benefit of hindsight adding that extra degree of interest, it was 'off the charts' marrying up your outlooks and predictions to actual events. Good to see Notknown is still around and posting. I'm sub'd to this thread and hope to see plenty more of both.