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Listen to the Market

Perhaps the biggest challenge of the day is separating fact from opinion. Indeed, most stock market analysis is just opinion. Sure, the fundamental data is real. Earnings are earnings. Projections are projections. So, numbers be numbers. But what does the data tell us? And how does it inform as to where the markets are headed?

In the midst of a highly divisive social climate, much of our news has been colored with editorial. The major media resources require eyeballs to sell to advertisers. That means ratings. And that means appealing to an audience. You get the idea.

So discerning what is going on in the investment markets can be tough.

Dollar weakening? Commodities rising? Yields dropping? Do we have inflation on the horizon? Will we see a wave of evictions as renters default on payments? Will the real estate markets collapse as mortgages go unpaid as a knock-on consequence? Heck, are there even any jobs for the middle class to earn enough to pay rent?

And how about stimulus? Unemployment? Government programs and government shut-downs? What is essential in our economy? What is essential to Washington DC?

True enough, these are compelling questions. And they do matter. Ultimately, the answers will sway economic outputs and valuations for investors.

But today? It’s still a lot of noise and conjecture.

So what do we know?

We know what the market is signaling. Behind all the editorial chaos, major indexes have been climbing higher.

On any given day, there are pull-backs. But overall, the trend across most types of assets (except energy recently) have been recovering over the past three months.

The concept is fairly straight-forward. If the markets are a voting mechanism, investors are still voting in its favor. Sure, there are some bigger winners or losers out there. But overall, the trend has been recovery.

This trend is difficult to find confidence in given the general media narrative and backdrop of a pandemic. But make no mistake, since the March lows, this market has experienced an exceptional recovery.

The year-to-date figures for the major indexes are uninspiring. But the recovery from the lows is a different story. How one frames the story is important.

So, knowing there has been significant recovery from the lows, what now?

(In my opinion) There has been an underlying theme to this market for the past several years. Lots of variables underlie this theme, but in its simplicity, it’s only two things: don’t fight the Fed, and TINA (there is no alternative).

The Fed, really since the Bernake administration, has been highly transparent in its communication efforts. In effect, it has demonstrated it will take extraordinary measures to maintain a stable currency and economy. And, since Washington has been largely ineffective for the better part of a decade, the Fed has stepped in with significant monetary policy to bridge the gaps.

The transparency has been useful for the stock markets. It has also contributed to the TINA situation, since the Fed has taken such remarkable steps to keep treasury yields low. Investors have been left with limited options to place risk capital and expect any kind of return.

What this has done is kept a bid under the markets for a long time.

Today, we’re seeing interesting shifts in market behavior. For one thing, there are now winners and losers. The pandemic has seen to that, as ‘non-essential’ industries have been hammered (or perhaps eliminated) by government shut-down.

Expect airlines, travel, hospitality, and many small businesses to take years (or perhaps never) to recover from the Covid shutdown.

Meanwhile, other companies have thrived. The ‘stay and home’ economy has gone bananas (a technical term). And the largest of tech companies have grown into trillion-dollar behemoths.

So why discuss this at all?

Because the mega-companies have become such massive influences on the indexes… and also on politics and culture. They have massive and incredible sway over how everything now operates.

Understanding this can help us understand the future of the markets. Microsoft, Google, Facebook, and the like do not require the consumer to walk into a store at all. So whether the economy shuts down or not, they survive. And they are all massive components in all the major indexes.

So, can markets keep going higher? Arguably, yes… despite the concept that we have major structural changes in our economy and many jobs are not only lost but gone.

Understand, bear markets are still possible. In fact, they’re probable. But it is also possible this market recovers and goes on to all-time highs (like the NASDAQ already has) before investors abandon some of the lofty names that have lifted the indexes in this recovery.

This is more of a mechanical issue than an economic issue. The money that is getting invested is likely going into these areas of the market.

At some point, valuations will be so stratospheric the bubble will burst… even for an Amazon or Tesla… but when is that day? You need go no further than the nearest financial media outlet to get opinions.

But what the markets are telling us today — from a technical perspective — is pretty straight-forward. Last week showed a possibility for correction. Instead, the markets has a weak break-out to the up-side. While we are over-bought by some measures, the trading pattern is indicating a move higher this week, with the possibility the S&P 500 will break above its all-time highs this week.

A close at new all-time highs will likely lead to further up-side from here.

For the upside, look for SPX 3400+ this week. For support, look at 3268.

Don’t get too invested in media headlines at this time. Until there is a material shift in information, the underlying thesis remains: the Fed is standing on the short end of the rate curve, and investors have nowhere else to go. That points to a higher stock market… (until it doesn’t, of course.)

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

 

Risk Onff

Futures are soaring after the weekend. Presumably it’s over optimism for some type of vaccine to Covid-19. It illustrates the broader problem with trying to call this market: it’s emotional as hell and we have little more than hope to inform our analysis.

The indexes themselves present a challenge. As the economy continues to stratify the winners and losers, the winners are eclipsing everything else in the major indexes. The top 10 stocks of the S&P 500 are now more than 25% of the index’s weighting. That can mask a lot of underlying damage.

It’s the underlying damage that’s being ignored by this market. Stocks continue to climb on the optimism of an infinity background from the Fed. This infinity backstop has flattened yields and anesthetized risk takers. In effect, we’ve fueled massive oligopolies that are squeezing out everyone else.

The Covid response has pushed national unemployment to records in record time. What’s unclear is how many of these workers will find their way back to work. At this point, parts of economy have been functionally killed off… as in… not coming back. Many small businesses are — or will shortly — go under. Many governors have made outlandish statements like “our economy will not fully re-open until there is a vaccine.”

This is serious stuff.

The economic impact of cutting much of the service sector by 50% is definitely not priced into the stock market. The problem is, as many are now pointing out, the stock market is not the economy. This is perhaps more true than ever when we look at the mega-super-giant-cap companies and how much cap-weighting-real-estate they occupy in our economy. What’s become obvious is the wealth divide in the United States is not just among individuals – it is among companies as well.

If small businesses fail to rebound, expect unemployment to remain high. This puts both the Fed and Washington in a difficult position. Keep rates low forever and print money to provide universal basic income? It can be done, but it means huge portions of the economy must be reinvented. Which, again, can be done… but how, then, does the stock market not get impacted?

The answer seems to be the same thing we felt back in the Greek economic crisis… kick the can down the road. Just do it, stabilize things now, and trust that someone else will solve the future problems – today has problems of its own.

So perhaps this is the new normal. Central banks everywhere will continue to print money. The money supply will increase, some will creep into the hands of consumers, but most will find its ways into the hands of the winner-take-all oligopolies.

Regulation will likely do little to stem this trend. All it will do is make it harder for competitors to grab market share. It will place the lobbied politicians in the difficult position of needing to break apart their largest campaign donors. (So you know it’s unlikely we’ll see any bucking this trend in the near future.)

So what is one to do?

We have the unenviable task of trying to predict the future while navigating the present. For now, stock markets, in defiance of technical trends or typical data, are showing signs of placing a bottom in place and building towards a pricing recovery. It’s almost as if this is the elected theme, so it must happen, regardless of data.

We’ve thrown unimaginable money at this economy. Money that didn’t even exist three months ago. That money fill find its way into the economy in unorthodox ways. But what is clear so far is it hasn’t found its way into the hands of many consumer. Stimulus checks? Sure… but that pales in comparison to the bond buying and SBA corporate bailout money.

When the dust finally settles, the economy will not look the same. Travel, dining, education, and entertainment are all going through a painful forced evolution. And all of those are significant parts of what drives the overall economy. There will be an impact. The question is, will we be able to see it in the stock market behind the eclipse of oligopolies?

So enough of the editorial. I include it because so many ask me what is different this time? Why does fundamental analysis seem to be ignored right now? And the answer is, it is ignored until it is not… the economy can mask a lot of damage, and hope can lead us to ignore many details. It will not last forever, but it persists for now. So how are we to invest?

Clearly, large-cap domestic blue chips have been the winners. And tech and health care have been the darlings. It remains to be seen if we are seeing bubbles build here. In some respects, tech has been fueled by a 1999-like frenzy that forced many to purchase new computers to move into the digital world of distanced employment. But does that refresh cycle come with the same 2-year dip in tech purchasing afterwards?

We know the SPX is no longer representative of the economy. It may still prove a useful proxy for the stock markets at large though. So, for now, we’ll continue to look to it for guidance.

This week the futures are already signaling a possible break-out from trend. The SPX has been in a sideways pattern for several weeks. The optimism around a vaccine may drive us through the 2945 resistance area. The next area if resistance is 2980 at the 100-day moving average.

If we continue the daily whip-saws we look for a pull-back towards 2850/2794 (which may as well be 2800). Emotion-driven markets aren’t all that sophisitcated in terms of support and resistance sometimes… so big round obvious numbers get a lot of attention. Look for the 100 and 200-day moving averages to be up-side resistance for this market, with 3000 being a significant optimism level. It will likely start as resistance, bouncing a time or two at this level before pushing through and rallying perhaps to new all-time highs… and here’s the crazy part… it may happen all this year… so yeah, in the next 6 months… (If I had to make odds, I’d go about 50/50 on this one… by no means a guarantee, but definitely a real possibility if optimism starts to swell… we put a lot of money into this economy… it’s bound to go somewhere seeking a return… and it doesn’t look like it’ll be the bond markets)

For the week, Tuesday and Thursday are the ‘danger’ days. We’ll hear from Jerome Powell on Tuesday, and we’ll get another jobs report on Thursday. Powell’s testimony is unlikely to move the needle. The only reason it’s a ‘danger’ day is if he paints a much darker picture than the market expects. So far, he’s already hinted that things are rough, and likely to stay rough. So markets aren’t expecting much.

Look for a trader’s market today. Already, futures are indicating a big push higher on Monday. There isn’t much ‘new’ news… well, there’s new optimism on a vaccine. But that’s not really new… that’s just the current story. We’ll see if this move holds, or if it’s another opportunity for traders to make a few quick bucks while the markets keep oscillating in a sideways pattern.

So risk Onff… the economy looks bad, but markets look good. The BigFoot macros are all negative, but the algo database has climbed to 55% long. Joblessness continues to increase, but we’re re-opening the economy… sort of… So yeah… everything makes sense… except for the stuff that doesn’t.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

What a Mess

Pricing is basically guessing at this point. A stimulus package may completely alter economic modeling as we currently know it. From loan payment deferrals to utility bill deferrals, it’s all up in the air. And that means uncertainty…

Markets hate uncertainty. And now we get to add politics to the mix, as Congress can’t seem to get a bipartisan stimulus package pulled together… yet.

Meanwhile, each state is managing their viral response independently.

In short, everything in is flux. This is not a recipe for happy markets.

Despite the fact markets are already way down it does not appear the blood-letting is subsiding yet. As of the writing of this blog the futures had hit their 5% limits. This does not bode well for Monday’s market open.

It appears the self-fulfilling prophecy have declared 2000 to be the ‘target’ for this pull-back. At this point, the technical trend for the week shows an SPX lose of about 2085.

The problem is, there are some technical indications that is not the bottom. It could be 2000… it could also be 1810… or even worse, 1713. Shall I continue? (Probably not, honestly… about 40-50% appears to be the likely downside to this thing, but we need to see how the news cycle evolves going into April. Do we see massive spikes in death rates, or does this end up being over-blown?)

Whatever the case, the set-up for this week looks pretty negative. If a strong stimulus package emerges perhaps things will shift. Otherwise, momentum remains strongly to the downside.

Downside Target appears to be 2085 for the week
Here you can see some of the more extreme downside projections

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.