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.
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