The Narrative
The narrative continues to morph from "it's the end of the world as we know it" to "all is well because the Fed will not allow the market to crash again."
Does the Fed have enough tools to prevent another crash? Bulls say yes and bears say no. I reckon we'll find out soon enough.
Let's go through the charts
Last week we had two bad days, two mediocre days, and a good day on Thursday. The net result was a loss of 2.26% for the week. What I think is significant is the stalling of upward momentum.
Drawdowns and their trend
Next we have drawdowns. After dropping like a stone by 34%, the market has recovered half of that loss. But the trend is still lower when it comes to drawdowns. Where to next? It's anybody's guess, but I'm not ruling out a retest of the lows.
The Death Cross
Next we have the dreaded Death Cross. The market on a daily scale looks pretty good, but on a moving average scale it looks pretty bad.
The Dip Buyers
Next we have the dips, and those who are buying them. It takes courage to buy the dips in a market like this, and the first to step in and buy were what I've called the Sweet Doomed Angels. These are the folks who buy every dip, and with the exception of late 2018 they have been handsomely rewarded almost immediately.
But this time around they are under water. The dip buyers who waited until mid March are in much better shape. They made a "last stand" and they are up substantially. As we move higher up the rally track it's getting harder for the dip buyers to commit more capital. I think they know that we've come a little too far, and too fast. I further think they are taking a break to reassess their strategy.
The Compression of Daily Volatility
Lastly, we have the compression of daily market swings. Two months ago we were seeing daily swings of 6-8-10% in the market. Now we're down to 1% or 2% daily swings.
Final Thoughts
Is it safe to get back into the market? I'm advising clients to limit their exposure to equities until we know more about how this reopening is going.
While it's true that the stock market is forward-looking, I'm not at all sure that 2021 will usher in a return to anything resembling normal. What's more likely is a market that lurches between optimism and pessimism as we learn more about where we may be headed next.
Financial analysts have not yet fully factored in the impact of the pandemic on consumer spending. Earnings estimates for 2020, 2021, and 2022 are still too high in my opinion. As they come down, the ceiling on the S&P 500 will become harder to penetrate.
But the floor seems to be somewhere around 2500, thanks to Daddy Fed.
I have other ideas to share, and I'm going to put them in my upcoming Monthly Intelligence Report. Check it out here.
Buy the dips, as I have said for weeks. This market is going much higher. The Fed and all the central banks have the money printing machines running 24 hours a day. They are buying corporate bonds even below investment grade bonds. Where is all that money going?
Into stocks and bonds.
Smart money and large funds know this and are buying the dips.
And the day a vaccine is confirmed the market will have an enormous rise. And you will be out waiting for a test of the March low.