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Holiday Ending Soon

This has been a quarter to remember. The world hit pause. We same the BigFoot Macro’s break (sort of). And the markets tanked… then rallied… hard.

Recall earlier blogs and forum calls – the discussion was about how fundamental data didn’t matter. The reason was because the Fed and Congress were re-writing the rules of the game on the fly. Stimulus, loans, loan forgiveness… it was all on the table.

Well, the markets rebounded as trillions of dollars got pumped into the system. But you can count the weeks since the market low: 13 weeks in the book. One quarter.

During the economic shut-down, most companies got a pass on earnings, guidance, and just about anything other than a discussion about whether or not they would survive. Companies that were well positioned for work-from-home scenarios benefited. Others, not so much.

So here we are. The economy is re-opening… likely regardless of what happens with the virus. The American public is divided. Camps have been chosen. Resolve stiffened. And the markets play on…

History has shown us that markets tend to think a quarter at a time. Long-term investors ride things out longer. But professional money managers, while sometimes long-term thinkers, will tweak and rebalance in the shorter term (some shorter than others).

When everything hit the proverbial fan, quarterly data went with it. It left investors with little more than educated guesses as to how things would play out in the future.

Well, the collective ‘pass’ given to companies during the last quarter — that is to say, a pass on giving much data or guidance — is likely coming to an end. It’s been 13 weeks — one quarter — and it’s time to start reckoning with the world as it now exists. Will companies thrive, survive, or otherwise in the post-Covid world?

So as Spring yields to summer, and Q2 passes the baton to Q3, it’s probable data will come back into vogue. And the question buried in the data is, when will valuations come back into vogue as well?

The Fed’s money creation and bond purchasing has stabilized the fixed income market to a great extent. But it’s left risk-equivalent yields all over the board. Sooner or later, markets are bound to address this.

So enjoy this week. The patter is sideways. The 200-day moving average is still holding at support at 3018 for the SPX. And the big fat number 3000 has held up will just below that. Given the nature of this week — few earnings, still too far out for election to be relevant, and the end of the forgotten data quarter — things appear to be relatively benign this week.

If anything changes, we’ll update the blog. Otherwise, look for a sideways-to-slightly-positive bias to the week with neither up-side nor down-side breakouts likely at this point.

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.

Flirting with W’s

Last week volatility returned as markets took a turn south.

It’s difficult to discern just what caused the move. From a purely standard deviation basis the markets looked over-bought. But this is rarely a reason in and of itself to get markets to pull back.

Civil unrest? Maybe. Spike in Covid-19 cases raising concerns of shutdown 2.0? Maybe. Jerome Powell’s talk on future Fed policy? Maybe. Permanent job losses and higher long-term unemploymenet? Maybe. Over-ambitious estimates of 2021 economic growth? Maybe.

Pick what you’d like, whatever it was, the markets peaked Monday then went on an aggressive 4-day slide ending the 3-week positive streak.

The spike in volatility may bring technical analysis back into vogue temporarily as markets seek to find support.

Based on the last several weeks, support looks to be showing up in a few key areas: 2944.99 / 2903.24 / 2860.95

The 100 dma is at 2944.99, the 50 dma is at 2903.24, and the slightly more controversial low in the 4-week pattern for the 21-malg is at 2860.95. The malg (moving average linear regression) actually printed back in April. So we’re talking about a pretty aggressive slide to give up all of May and June’s gains to roll back that far.

Resistance isn’t really worth discussing right now. The discussion is about whether or not the markets will find a footing. And there are a lot of variables the markets are trying to price in right now. Pricing in structural changes to the economy can be tricky.

Last week definitely put a damper on momentum too. The BigFoot database seems to have stabilized as the trend of weekly additional buy signals flattened last week, showing no significant change from the prior week. This is an indication that momentum has flattened or turned negative.

The other macro economic indicators in the BigFoot system remain unchanged at this time.

For the week, look for volatility to remain high with pressure to the downside. This may be part of the “w” that many have called for during this recovery. Pricing has arguably been pretty high based on valuations and future earnings projections for a lot of large-cap stocks. A pull-back from these would not be out of character. The larger question is how long does the pull-back last, and how deep does it go? If this trend plays out anything like it has for the past few months, it could be a fairly quick and violent move with a similarly paced resolution.

If futures are any indications, we will see a quick drop at the open on Monday. How the rest of the week follows through will the interesting. Technical indications suggest we’ll see downward pressure most of the week, or until the SPX hits at least 2950 or so.

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.

Still Rallying… for Now

In spite of the various structural elements still unresolved in the economy this market continues to climb.

At this point, even the BigFoot Market Macro would flip positive if June ended today.

Both the S&P 500 and the NASDAQ have algo buy signals. The BigFoot database is 70% long right now. Only the DJIA is yet to flip to a buy signals… and momentum is close to triggering that positive as well.

In short, despite the job figures and supply chain stresses of the past several months, the stock markets are caught in a wave of momentum.

Call if FOMO. Call it TINA. Call it irrational. But it is what it is. The trade has been risk on. Money has been moving into beat up names like the airlines (wow) and beat us sectors like consumer discretionaries and risk-on factors like small-caps.

Whether or not it makes economic sense is not the question. This is what momentum and sentiment can do.

Will it last forever? Probably not.

Will it collapse at some point soon? Maybe.

But for now, here’s what is technically unfolding:

The SPX is set to challenge the 3275.87 this week. This was the ‘crest’ of the 50-day moving average in this pattern — the high-water mark of that indicator before the markets collapsed in March.

If we breach that, it’s highly likely we’ll re-test the all-time highs for the SPX.

There is very little down-side momentum right now. Futures are indicating another positive open for the markets. This should set the tone for this week. If there is a pull back (unlikely until later in the week) look for the first level of support around 3130.

The Fed appears to have purchased this market… or at least rented it for a bit. And you know what they say: don’t fight the Fed.

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.

To Infinity, and Beyond!

The economy no longer matters. As long as we have money from helicopters, the stock market can go higher… and higher… and higher… And if you’re one of the chosen ‘essential’ businesses, your stock can go to ALL TIME HIGHS!

The reality is, things don’t make a ton of sense right now. Economically, we’re fractured. Unemployment is setting records, yet the indexes climb. Companies withdraw guidance, yet the indexes climb. Governments talk about extending or re-instituting shut-downs, yet the indexes climb.

You get the theme here? The indexes want to climb. This is momentum playing out in front of us.

In truth, Indexes are a bit of a conundrum for the markets right now. The entire market is not so healthy, but indexes would lead you to believe this is not the case. Underneath the eclipse of just a few mega-stocks, a market actually exists; a market with winners AND losers.

The larger question is, will the indexes ever re-sync with the economy? In short, maybe not. Since the indexes – particularly the S&P 500 – have become so top-heavy, there may be a decrease in correlation to economic activity… at least for a season.

Here’s the issue though – if a handful of stocks drive the indexes up, that same handful can drive them back down. And, at some point, valuation will matter again. Perhaps it is not until we get some semblance of economic stability again – perhaps, for now, money flows into the mega-caps because it feels safe. But, when things begin to function again, will the stratospheric valuations be justifiable?

We’ll see. But for now, the them is simple: earnings don’t matter (yet), and the Fed is printing money. So don’t fight it…

For the week, the trend is actually sideways. Futures point to a sharply higher open this Thursday. However, it’s a shortened trading week, so volatility tends to be higher.

We’re over-bought by all the measures we typically use in this blog. This market is trading on hope and momentum. We’ll see how far it carries us.

For the week, here are the key numbers:

S&P 500 support levels: 2943 / 2907 / 2887

S&P 500 resistance levels: 2999 / / 3027 / 3060

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.

I Don’t Get It, But That Doesn’t Matter

I’ll admit it: this market baffles me sometimes. Here we in the midst of an economic shut-down — unemployment has exploded; bankruptcies are popping up all over the place; profits are in the tank — yet this market charges higher.

Even the BigFoot Database has shown improvement as the number of total long positions has climbed over 33%. That’s up 50% from a week ago. So clearly there’s some momentum under this thing.

The question is, is the action healthy? Not if we look at earnings, which, according to JP Morgan are down over 47% on average for companies reporting.

It’s fine… markets are forward looking… the economy is about to turn back on and thing will go back to normal.

Yeah, right…

The economy might turn back on, but social distancing policies have become a real thing. And large parts of the economy will not be the same… especially restaurants and entertainment.

Also, markets failed to render a new intra-day high last week. Could be nothing — just trader activity — Or… could mean we’re running out of buyers and this is the price level for a while.

As discussed in prior blogs, we’re at a resistance point technically. Markets have drifted sideways for the last few weeks as the 2950-ish range but are yet to close above or ‘beak out’ from this level.

If this market were to follow a more typical pattern from here, we’d expect a pull back to at least 2800 or so (and more likely 2650ish). I use these vague levels because… frankly… this market is making up new rules as we go, fueled by mind-boggling Federal Reserve intervention and Government stimulus.

That rocket fuel has done a solid job stabilizing the bond markets and keeping hope in the economy. But… it’s been a while. And rocket fuel burns off. The Fed can keep buying bonds, but what happens next? How long can we pay people not to work?

Of course, these are rhetorical questions. But they do have a bearing on the stock market. For a season now, these markets have moved based on how the fight against Covid-19 has been going. That’s shifting though… reality is going to have to creep into this thing. And the big unknown is whether or not all this new debt of Uncle Sam’s will have any unintended consequences.

Meanwhile, we will deal with our moment-to-moment day-by-day analysis. And futures say the market should head lower… of course, it looked like they said this last week as well. What we ended up with is more of a sideways pattern.

The 200-day moving average has declined to close to 3000. If this market manages to close above this area by month end we could actually see a macro re-purchase signal. But this is a long ways off, and 3000 is currently much more of a resistance level than a support level.

Pricing patterns suggest a sideways-to-negative bias this week, with 2950 continuing as resistance, and 2873 as support. But like I said earlier, I don’t get it… this market has done with it sometimes does: prove the greatest possible number of people wrong at any given time.

My take – I still think this thing is over-baked and we’re trading on hope. And I think we can (and probably will) move lower in this trend. What I hear from a lot of folks is desperation – as if they missed the bottom and somehow missed their chance on this thing.

Maybe… But typically, right about the time you throw in the towel is when the market knows. At some point, data will matter again… then again, I don’t get this market (but that doesn’t matter)…

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.

Inflection

After about a month of melt-down this market has spent almost the next month melting up. This week that upward momentum may finally get challenged as the S&P500 is at a significant resistance level. A number of technical resistance indicators are coalescing around the 2900 level.

Of course, to seek order in this market is to court insanity. There is a lot of guessing still going on. Do you fight the fed? How bad is the economy going to get? How out-of-whack are PE ratios? How much more will oil fall?

The truth is, we’re caught somewhere between Federal Reserve helicopter money and a depression-inducing deflation cycle. The Covid debate is becoming the side show as the stock market continues to yo-yo.

Did we already put in a bottom? Is this a v-shaped recovery? Don’t fight the Fed? The stock market is not the economy? Stocks are a leading indicator?

Or is this just a bear-market bull run? Stimulus-filled hope? The bright flash of an economic supernova before we collapse into an economic black hole?

I don’t know the answer. But I can tell you futures were steadily down all Sunday evening, without much whip-saw… Just a slow and steady decline.

For this week, if the trend is negative, markets want to test SPX 2675.

The reality is the numbers easily justify a decline back toward the 2350 level. But this market isn’t exactly playing by valuation right now. We’re dealing with momentum and projections now. Those are tricky masters.

If there’s a small silver lining (which really, this is a rounding error, so not really), the BigFoot database went from only 18% long to 20% long. None of the macros changed from their previous dispositions either. Credit and Market indicators remain in the negative. The Economic macro, while fading, is still in the green.

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.

Keep Your Eye on the Ball

We don’t have to re-hash the story that is this virus and what it’s done to the markets. We know we had one of the fastest market drops in history. We also know last week was the largest one-week rally since 1974. And the bounce back from ‘the bottom’ has been remarkable.

The challenge now is figuring out how to make sense of everything. Are we in a V-shaped recovery? Or is this a bull-run in a bear market?

The truth is, we don’t know yet. But here is some editorial opinion on what seems to be taking place.

First, this thing is moving faster than anything I’ve ever seen in the markets. It took 23 trading days for the S&P 500 to fall almost 34%. In the past 13 trading days it’s rallied up nearly 25%. That’s some pretty huge moves over the past six weeks.

Why such massive moves? In a word: guessing.

The major narrative has been one of fear and speculation about the spread of Covid-19. In particular, markets appear have latched onto the news out of New York as the primary indicator for success or failure over this virus.

As both headline fatigue and political manipulation (yeah, I said it) become more significant in the New York story, the markets are starting to shift to the next important thing: earnings. And earnings season is right around the corner now.

Here’s where the rubber will start to meet the road. The market is not as sensitive and caring as you might hope. No, it’s a mercenary predator seeking ways to discern price and locate opportunities. And if the news out of New York isn’t going to drive the heards one direction or another, the economic realities that start to show up in earnings will come into play.

There are estimates economic activity could decline by as much as 30%. That kind of number is not something most are ready to actually tackle. Consider this simple math: if S&P 500 earnings were to fall 30%, they would go from estimates of about 180 to 126. If we apply a 15x multiple to that figure, the S&P 500 would fall to 1890. That’s a decline from here of another 32%.

I could make the case things could get even worse than this. But then where would we be? Oh yeah… guessing.

We have massive government stimulus on its way. MASSIVE. TRILLIONS!!! And we have massive Central Bank intervention. Again, TRILLIONS!!! This most assuredly will have an impact on things. But it is yet unknown as to how much this will help actual corporate earnings. And ultimately, this is the story… stimulus, medical case tracking, shut-downs and target re-opens… all of it is just the market trying to get a sense of how earnings will be impacted.

When we break down the technicals, even they are struggling for clarity. The BigFoot Market Macro and Credit Macro are both in the Red. The algo database is at 19.54% long, with 49% of those positions listed as waits. All three major indexes have algo-sells. Only the Economic Macro has not gone negative so far, but it is on the decline.

So all the artificial intelligence shows signs of problems. Yet the market rallies. What going on?

Well, for one thing, pricing got really extreme on the downside. Then, when we weren’t looking at economic data and just hoping the economy would re-open, markets got real optimistic this thing would be over as fast as it started.

Now reality is starting to set in. While we will most certainly survive this event, there is no certainty as to how long it will last. Schools are closed and going to remote-learning models for the remainder of the year. Governments are already committing to ‘stay home, stay safe’ orders extending through May. Unemployment is skyrocketing. And consumer behaviors are shifting as the necessity of capital preservation becomes reality.

We’re starting to hear comparisons to the Great Depression…

This week we’ll also watch the fixed income markets closely. The government has played a dangerous game by all but encouraging people to skip rent, mortgage, and utility payments. For those individuals, it may help with cash flow, but the repercussions to the banking system may be significant.

And what does all of this mean? Pricing insecurity. How do we know how much a bank stock is worth if we don’t know whether or not its loan portfolio is stable? And even if the Fed backstops all the banks (which I suspect they will), how does the market price interest rates when payment on loans is inconsistent? If the loan hasn’t defaulted, but it’s not getting paid, how does one value the assets?

This is the world we live in right now. A world where economic rules are being tested, broken, or re-written on a near-daily basis. So sure, we can be optimistic that we’ll beat this virus… and we will… but between now and then, how does the market figure this out?

It’s hard to understand this rally as more than a technical bounce because of over-sold market conditions. When looking at the bigger picture of earnings and price stability, this market seems to be out over its skis and looking for a possible tumble.

If we’re to continue climbing from here, it would be towards the 50-day moving average. It’s hovering around SPX: 2900 value. That’s another 4-ish percentage points higher for the SPX. If the index were to fall from here, the likely targets are 2660/2575, or about 4.6-to-7.6% downside.

If futures are any indication, the market are likely to open down.

One thing to watch this week will be volatility. If the VIX continues to decline and the day-to-day price swings narrow, that’s an indication this market is searching for its footing. But again, there is still a ton that is unknown at this point.

Last week was a big week. We’re at the start of a new quarter. Rent payment for most tenants were due. So we should start to get a sense of how the consumer is fairing very soon. The rest of the month we should start to see the market discussion shift from infections and death rates to more economic data. My concern is that the medical data may be improving, but the economic data is failing. If so, the best-case scenario V-shaped recovery may be in danger.

(It should be noted, I mentioned the Great Depression language sneaking into the media narrative. This, in my opinion, is part of the politics of the day, and is part of how media keeps us glued to our screens. This is not likley to be a ‘Grapes of Wrath’ kind of depression. This is more of a ‘government nanny state with decent infrastructure and creature comfort, but very little opportunity and limited personal liberty’ kind of depression.)

For the week of 4/14/2020, look for the 50-day moving average
as resistance, and support around 2660/2575
Notice the S&P 500 is near its 50% Fibonacci Retracement level.
This may be a capitulation point. We’ll have to see if prices can hold here.

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.

More Guessing

The guessing continues as data evolves.

Don’t look now, but the BigFoot system flipped a circuit-breaker. We lost the credit macro.

If you’ve been following this saga the last few weeks you’ll know this is a tricky deal because the (St. Louis) Fed changed the way they calculate one of the data points that feeds this signal. This is a little like when the powers that be decided to remove food and energy from the CPI calculation… it changes things. We’ve manually reconstructed the data for the index for now, and the signal did, in fact, go negative.

Here’s where we’re concerned –

  1. the Credit Macro has been quite reliable over time as an indicator of economic health. Typically, if this thing fails (which is rare) this is the real deal… bad stuff typically follows
  2. The overall database of macro indicators actually added net-long positions (albeit only about 1%, so a pretty small number)
  3. Things are moving FAST these days, and government intervention has been swift…

What we’re saying is our typically ‘old faithful’ BigFoot Credit Macro has us watching closely because the government appears to be trying to manipulate things such that we could see a rapid stabilization in credit markets, thus whip-sawing this indicator. Yes, it’s out, but will it stay out?

There are some suggesting we’ve already seen the bottom of this market. Perhaps they’re right. Perhaps not. Since the total number of infected is essentially unknown, we’re in a statistical quandary… which data do we use to build our expectations?

Oh yeah… it’s still guessing.

So, for now, we’ll look at what the market seems to be giving us, which is about a 300 point SPX range between 2350 and 2650 until we get further clarity. Trying to do a lot more technical analysis on this stuff is, as I said, just a guessing game.

As the data changes, we’ll evolve. Until then, the word remains caution. It’s probably too soon to sound the all-clear on this one.

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.

In Search Of…

It seems we’re all in search of something right now. For most of us, it’s clarity in data. Will the markets pull back from here? Is there an all-clear to buy more?

The frustrating reality is that the rules of this game are being re-written mid-game. Somewhere between a pandemic and the largest global stimulus package in history is some truth. Unfortunately, we won’t know what the truth was until after it happened.

For now, we’re all taking calculated guesses. But to be clear, that’s what these are: guesses.

Technical pricing is all over the place. When you start having 10% daily swings in pricing, you’re no longer dealing with a typical market. So keep that in mind: nothing about this is typical.

When looking at the BigFoot data, we’re in a rough spot. Unless the markets rally about 25% this week we can expect the Market Macro to flip to sell.

Meanwhile, the Fed has been jiggering its own data reporting mid-crisis here, and they’ve altered the way data gets delivered to the Credit Macro (we’re fixing it, but still… really guys? now?).

The Credit Macro is still positive… barely. But there is no mid-point on that one. It’s either in or not in. So we watch with great interest as the credit markets have been seriously roiled in the past few weeks. (Don’t believe me, go check out the wild right in mortgage rates or high yield bonds.)

One bright spot is the economic indicator, which is still in the green. But even this is showing signs of shift as it has started to roll over.

The final big-picture concern is the database of algo’s. It is presently at the lowest level I’ve ever seen, with only 18.67% of positions long in the system (and of those, about half have wait signals).

Yes, folks, this is a mess. And trying to call it is a mess. A quick look at the futures tells us we’re likely to see a positive opening (futures gapped down at the open Sunday but then steadily climbed through the entire session). The question on everyone’s mind is, will this hold?

I don’t know. If technical price movement tells us anything, it’s that we’ve seen a major rally in the last week… unlike anything I’ve seen in my 20 years as an investment pro. So we’re literally in uncharted waters here.

If traditional analysis were to hold, there may be some additional up-side from here based on this push… we could get to perhaps a 50% recovery, which would be somewhere around 2750/2800 on the S&P500 (close to the original bear-market threshold). However, we’re close to a resistance area already by some measures, so a re-test of the 2400/2350 levels would not be unexpected.

But again, this thing is not functioning right now. Folks got all excited about stimulus — big stimulus — HUGE stimulus. But that stimulus is going to pick a lot of winners and losers. The bill was loaded with pork… and politics. We have no idea what the actual results of this thing will be.

As the details of the bill become knowns instead of hope, my expectation is we may see a pull-back again in the markets. This is just a hunch, but it’s based on the idea that this bill will likely only help some players.

Also, the virus has become a political football. The shelter-in-place orders will damage parts of the economy. The longer this goes on, the more difficult it is to assess the damage. Which areas of the supply chain are permanently impacted? Who wins, who loses?

For the week… we need to see what happens technically. If we push higher, it could be another 10% up this week. If not, about 5% down… Those are decent up-side/down-side numbers. Unfortunately, trying to game the odds of which one will happen may as well be a coin flip.

So for now, we’ll watch. As this unfolds, if there are material changes worth mentioning, I’ll update the blog mid-week. Until then, good luck gang…

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.