Another Remdesevir Pump

They are milking this "miracle" drug for all its worth.  Its a crap drug, but they are getting a bunch of broad index pumping out of it.  This is another pre market pump on supposedly good news for this miracle.  Now everyone is free to go about their normal lives and not have to worry, with remdesevir, there is a backstop.  LOL. 

Of course, remdesevir is only part of it.  It is the eternal hope, the Fed, which is the reason that we were levitating higher in overnight markets because, Powell will be dovish and who knows, maybe he will hint at buying stocks in the future, or at least won't rule it out. 

Pension funds are rebalancing out of stocks and into bonds this week, and today and tomorrow should be the main rebalancing days.  It doesn't seem to phase stocks, as they keep going higher, as a combination of a big short squeeze ahead of the Fed and hopes for great things after the reopening of the economy rally stocks again. 

I have entered a short today, a little bit early as this thing goes higher even with the big gap up.  At these levels, the risk reward favors shorting.  I will probably close it out later this week, so not a long term short. 

Negative Oil Price Bottom

When you see oil futures going from $6 to $16 after the oil "experts" on CNBC and Bloomberg say oil prices are probably going to go back negative, I tend to listen to the market and not the analysts. 

You had a classic panic bottom in oil, as the biggest oil ETF, USO, panic dumped a huge chunk of open interest in the NYMEX June Crude Oil futures and rolled it into July and August, effectively selling at the bottom and buying back less (July and August futures are more expensive, so they had to buy less when they rolled over the contracts). 

What happened on Monday was panicked speculators in the May futures who didn't have enough liquidity to sell their holdings as there weren't enough end users who were willing to buy from them, so it was a game of hot potato until prices got so negative that producers who actually were short finally decided to close out their positions.  May futures actually ended up settling at 10.01 when it expired on Tuesday, so that is the price that producers were willing to pay to take delivery, a better indication of WTI oil prices than the negative numbers on Monday.  But the financial media loves to sensationalize everything, so they ran with the negative oil prices story, and figured that since there is very little available storage in Cushing, the same thing would happen in the June contract. 

But there are still several weeks till June, and producers are not going to keep pumping oil and sending it to Cushing when they have to pay to do it.  Its just more cost effective to just shut in the wells.  And that's what is going on right now.  And with the negative price fiasco on Monday, the producers will be even more urgent about cutting production to avoid losses. 

The price action from Tuesday to now, with June CL futures going from $6 to $16 is telling the truth, while the oil "experts" talk about negative prices and tank tops like it's the latest hot fashion. 

I am no oil bull, I'm long term bearish on oil, but in the short term, prices went down not because of fundamentals, but because of irrational fear of negative prices.  The fear of future negative prices makes it much less likely to happen, as now the producers will be cutting more production than they otherwise would have.  This week went a long way towards speeding up the equilibrium between supply and post coronavirus demand. 

But unlike some of the irrational USO buyers on Robinhood or newbies who think that oil is now the bargain of the century, what will likely happen is that WTI oil will have to stay under $20 to keep producers from pumping out too much, and its very unlikely to see negative prices as oil in Cushing will just be diverted to other storage facilities, or on tankers, if the price gets too low.  So that will probably keep WTI oil between $10 and $20 for the next few months.

However, if after the lockdown is lifted and coronavirus cases start going up again, then all bets are off, not only for oil prices, but for the SPX and global equity markets.  The threat of a second lockdown will induce serious panic among not only oil traders but equity traders, and that could actually push WTI oil to near zero and SPX to retest the lows in March at 2174.  

But that's looking a bit too far out, in the near term, the anticipation of lockdowns being removed and people going back to work will keep a bid under both oil and stocks.  Also, OPEC+ plans on having another meeting on May 10 to talk about further production cuts so that's also another positive catalyst for oil.   Definitely not recommending going long oil, but don't recommend a short here either.  Same goes for the SPX, wait for the right levels, we are in the middle of the new range (2730-2870), so not a good risk/reward for either side short term.  Neutral here.

Fed Will Not Save You

Those betting on the Fed saving them if the economy stays bad don't understand who the Fed works for.  Their main constituent is not retail traders, or even long term stock investors.  They are working for the money center banks, big hedge funds that dabble in Treasuries, MBS, credit markets, and now private equity firms that need their junk bonds bailed out.  Powell is a private equity guy, he will never let them down.  He will do whatever it takes to guarantee that private equity firm owners (not necessarily clients) get big bailouts after the dust clears.  Mnuchin is the guy who hand picked Powell for Trump, so they are in this together.  Mnuchin is a vulture, he will do whatever it takes to enrich himself, and that usually doesn't mean letting current shareholders tag along for the ride. 

For a lot of the big banks, having companies restructure their outstanding loans and  debt so that banks get a big cut of the equity at the expense of current shareholders is very much in play for a lot of sectors such as energy, travel/leisure, restaurant chains, retail, commercial RE, etc.  The Fed will not come to the rescue of those shareholders when the money center banks stand to benefit from the fallout of these fragile broken companies. 

This stock market is whistling past the graveyard as the investing crowd has been conditioned over the past 11 years that any dips are buying opportunities and eventually it goes up, to new all time highs.  But the toxic combination of high valuations and horrible fundamentals in the stock market is not something even the Fed with unlimited QE can save. 

We are back to the US/China trade war angst levels of August 2019, or even worse, the FOMO "hot" economy top on January 26, 2018.  This market is expensive, and a lot of firms are facing solvency risk on a scale that hasn't been experienced since the Great Depression. 

There will always be doubters who get scared of shorting after big rallies, expecting an even bigger rally.  All I can go by is years of experience trading SPX based on news flow and gut feel.  Last Friday's opex euphoria in the overnight session on a "miracle cure" for the coronavirus did it for me.  The scale has been flipped from fear and loathing to irrational exurberance.  SPX 2880 was close enough to 2900 for me to enter the short side, especially with the opex peak usually followed by the post opex hangover as put protectionless equity holders suddenly realize that their portfolios are no longer hedged to potential huge downside risks in this bailout dependent crap economy and In Fed We Trust rally. 

Wall Street and newbie traders are putting lipstick on a ugly fat pig, rationalizing the rally with Fed unlimited QE, Congressional bailouts, and a V shaped recovery in the 2nd half.  Rushing the reopening of the economy is the worst thing Trump could do, because that will just keep the coronavirus lurking around, ever present, without ever really getting of the threat.  Doing a half baked lax lockdown is the worst of both worlds.  Killing the economy and not eliminating the virus. 

Trump's short term thinking will probably mean the economy reopens in May, which the equity market, with its own short term thinking, believing that will help the economy in the long run.  But apparently no one learns from history.  Here is the infection graph for H1N1 in 2009: 

 With the coronavirus more widespread now, the second wave of infections will probably be even greater than the first wave if the economy reopens and people go back to work.  This risk is definitely not priced in at current levels, and it will be absolutely devastating for investors to see countries go back into lockdown, and under such a scenario, a big revaluation lower in stocks would occur.

The last 2 big rally days have been followed by big gap downs in the SPX.  You think the suckers are gonna push their luck again and try to squeeze the market higher to see if there are greater fools up there willing to buy?  I wouldn't put it past US stock investors, they seem to be the most resilient group I've ever seen.  But with the biggest buyer of US equities over the last 10 years (corporations) suddenly looking more cautious when it comes to stock buybacks, the supply/demand picture for stocks is suddenly looking a lot worse than at any other time over the past 10 years.

Of course, Wall Street will never tell you that, and say that expect a V shaped recovery based on pent up demand and Fed/Congress bailout money, never mind that millions of small businesses will be closed with masses of unemployed workers, and the global economy will be just as bad, putting a big dent into international earnings for the multinationals. 

Fundamentals are so bad, and downside so big, risk/reward is very lopsided in favor of shorts here.  We probably chop between last week's lows and last week's highs (~2730-2870) for the next couple of weeks, get bulls complacent, and then roll over to lower levels. 

Remdesivir Euphoria

I thought I had seen it all, but this excitement over a coronavirus drug ramping the SPX futures overnight into hyperspace was totally out of the blue.  If the market wants to get euphoric so quickly, then so be it.  I will gladly oblige to provide liquidity by taking the other side of the trade.  I shorted SPX overnight and looking to cover around the 2800-2810 level.   

A lot of the move has been exacerbated by delta hedge buying leading up to SPX options expiration which is at the cash market open today.  Just a short term trade here, looking for a gap fill. 

It has surprised me at how quickly the market has gone from fear to euphoria.  Actually, from euphoria to fear in February/March was also shocking, just because of the magnitude and quickness of the selloff.  This is just a manic market, that trades with absurd momentum on both sides. 


I am now off the sidelines looking to get back to work on SPX, this pig is just too fat to resist.

Volatility After a Big Rally

This volatility after such a big rally intrigues me.  It is not common.  A VIX at 41 after a 30% rally is unusual to say the least.  This time is different.  This is no V bottom.  It is a massive short squeeze + FOMO rally with questionable fundamentals.  After a 30% rally, how often do you see 3% daily ranges? 

I am more bearish now than I was last Friday at the same price levels.  Volatile down day on Monday, followed by huge up day Tuesday.  And now a big gap down today on no news.  The volatile chop is one of the signs of a trend change after a big move. The sector performance also shows a narrowing of the rally, with mostly tech stocks and defensives leading the charge, while the financials lag and the energy stocks stay weak. 

It is a fund flow FOMO driven rally, a lot of the short covering has already happened, its desperate fund managers putting money to work, fearing that they will lag the indices even more if they wait it out. 

From a fundamental perspective, the aftermath of the pandemic will be grimmer than most think.  A lot of small businesses will cease to exist.  Bars/clubs/live events/conventions/airlines/cruises/hotels/casinos/restaurants will continue to suffer until there is either herd immunity or a widespread vaccine available, which is at least 12 months away.  That has a chain effect on other industries.  Also, the psychological effect after such an economic shock will result in consumers having an increasing propensity to save which reduces the velocity of money and lowers GDP growth. 

Reduced cash flows will present solvency risks for many companies which will either lead to outright Chapter 11 bankruptcy or massive dilution of current shareholders through either secondary offerings or conversions.  The duration of the recession will determine whether many of these public companies can make it without dilution or big debt burdens. 

At current valuations, none of these risks are priced in.  A near V bottom scenario is what is being priced in here, with many using the Fed and government intervention as a green light to speculate in stocks.  No, it is a green light to speculate in bonds.  The Fed's put option is much higher for bonds than it is for stocks.  In order for the Fed to directly come to the rescue, we will probably have to break the March lows to get their attention.  Since I expect that to happen later this year, the Fed will be coming in to rescue stocks, and I am sure Powell will go overboard like he's been doing. 

I am getting a sense that more and more investors are looking for this rally to continue for several more weeks, with the lazy view that the Fed and government will have their back.  That is a terrible investment thesis and shows a complete lack of understanding of what drives equity prices in the medium to long term (fund flows, valuations, future cash flows).  Companies are going to drastically cut back on stock buybacks, the biggest source of US stock buying over the past 10 years, and will have reduced cash flows, requiring either debt or equity issuance.  Those are negatives that many are ignoring for fear of missing the V bottom, and another 2019 like rally off the lows. 

The coronavirus is a game changer that is not only relevant for 2020, but will have lasting effects into 2021.  There will be more fiscal pork stimulus, but its only partially filling the economic hole.  Both production and consumption will be drastically reduced, something money printing will not solve. 

Positioning Vs. Fundamentals

After the furious rally last week that took SPX from 2488 to 2790 in 4 trading days (that's 12% in 4 days), a lot of investors are in shock and awe.  Usually you get these kind of explosive short term moves off of panic bottoms, but there was no real panic when the SPX went down to 2440 two weeks ago.

The one thing that last week showed was that there is a lot of risk capital available to be deployed, thanks to the the trillions that the Fed has already printed up and injected into the bond market.

Jerome Powell has decided to outdo Bazooka Ben Bernanke.   He is pumping out the various Fed giveaway programs with reckless abandon after receiving praise from his Wall St. friends and an endless pool of stimulus loving bulls.  The Fed syncophants believe the best way to solve a health crisis is to just print up a bunch of money and give it away to the Treasury and corporations.

Even during a pandemic, the US response has been trickle down, let the Fed and Congress give money to corporations and boost the stock and bond markets, hoping that eventually the money flows down to those waiting on the $1200 stimulus checks and who are standing in line at the food bank to pick up stale bread and years old canned food.

There has been a clear divergence between the real economy and the financial economy.  Just look at the SPX vs USO (WTI crude oil ETF) chart.  Over the past month, USO is down 27%,  SPX is up 9%.  

In the short term, the stock market movements are based more on positioning and fund flows and less on fundamental changes in future earnings.  Right now, most investors are not well positioned for further moves higher in SPX, and most funds will be forced to increase their beta in order to keep up with the averages, for fear of getting fired for underperformance.  Not many managers get fired for losing 30% when the SPX loses 30%.  But to lose 30% when the SPX is down 10% will get many fired.   Career risk is at the forefront of the minds of those fund managers who are chasing the SPX higher.

So in the short term, the motivations of the fund manager looking to keep his job is overwhelming the deteriorating fundamentals.  Yet while the SPX rocketed higher, the VIX didn't go down much, because even during the huge rally over the last 4 trading days, you had a big drawdown when the SPX gapped up to 2750 only to close at 2660.

Based on the extreme strength in the SPX last week, the fund managers have more money to put to work, a lot of them don't like to chase big up markets, so when things settle down, the "reasonable" fund managers will be there to support the market on any dips.  We bottomed on March 23.  The bear market rallies usually last 5-6 weeks, if it is really extended, it can go on for 8-9 weeks.  Right now, its been 3 weeks since the bottom, so there is still more time left to go in this bear market rally. It takes time to draw in the more reluctant bulls into stocks, which is why the counter trend rallies can last for several weeks.

Just looking at time, I expect a top to this bear market rally in early to mid May.  Looking at price, we've already hit the 50% retracement (2784) of the move from 3393 to 2174.  A 60% retracement would add another 122 points to the targe to 2906.  From a time perspective, you likely have 2-3 weeks more left in the rally.  From a price perspective, when you have already hit the 50% retracement with this much time left for the bear market rally, its likely that you will hit the 60% retracement level.

Short term over the rest of April favors the bulls.  May will be the time to try to play the short side for the bears out there. 

Longer term, over the rest of the year, bears have the tailwind and fundamentals working in their favor.  A lot of equity market strategists are still expecting a strong second half rebound this year, which is a fantasy.  That difference from consensus is what creates the opportunity.

I am on the sidelines, let the fund managers chase this sucker higher, and let the eager beaver bears get squeezed a bit before going in for the kill. 

Savage Face Ripper

Just savage.  They took a knife to the bear's heart in the overnight SPX futures Sunday and twisted it during regular market hours.  That last burst out of nowhere was probably a mixture of short covering and some pension rebalancing.  And now we have another monster gap up after a monster up day. 

This is why you cannot overstay the short side because of these vicious counter trend rallies after a waterfall decline.  This one in particular is one of the biggest face rippers I've seen in my trading career. 

If you can't understand why we're going up so quickly, then don't trade it.  I am not trading this one here, its not a typical post waterfall move, and it kind of sneaked up on the bears after looking weak last week.  Can't explain why this thing suddenly decided to break the 2450-2630 range with such savagery, but you have to stay out of the way when you are wrong.  Being stubborn and refusing to take losses in this business will destroy you. 

The last 36 hours of trade has wrecked my forecasts, and its back to the drawing board, to contemplate what's next.  My theory on why we're rallying so hard is the absurd amounts of Fed liquidity ($125 billion/day = $2.5 trillion/month rate) is lifting all boats, as the money finally goes out of bonds and cash and into stocks.  Plus, let's remember, the $2 trillion bailout is just giving people and corporations/small businesses free money and that money is looking for a home.  And when you can't spend it or would rather not go out, then its quite convenient for those who get the money to buy stocks with it. 

All these gigantic bailouts increase the money supply, because debt is not being repaid, in fact, debt is increasing and being monetized by the Fed, so it is helicopter money.  And the Fed isn't even shy or bashful about it, the Powell Fed is the most aggressive money printer in the history of the U.S., by a mile, and I wouldn't be surprised if the Fed became the biggest buyer of stocks if the SPX breaks 2000 and enters a steep bear market.  In fact, I would be surprised if the Fed DIDN'T buy stocks. 

Not easy to make sense of these rapid moves, so laying low for now, waiting for an opportunity to short again, but want to wait for the upward momentum to die down a bit. 

SPX 2450-2630 Range

Let the cows graze for a bit, no need to go for the kill right here.  Shorts: don't get too greedy just yet. 

This week has defined the supply and demand levels that will likely prevail until April options expiration (April 17).  Based on the trading action since the bottom on Monday, March 23, the panic zone is SPX 2200-2400.  The post oversold reflex rally range now seems to be roughly 2450 to 2630.  That means that we are close to the bottom of this range, and aggressive traders can either go long here, or for those more conservative and bearish leaning, cover shorts and wait for stocks to bounce again before putting on shorts again. 

For the next 2 weeks, based on the price action, it should be two sided trade without a big up or down trend.  You can thank (or curse) the Fed for bailing out the longs and extending the bounce for longer than it normally should last.  That is why I don't see another big thrust lower until you rebuild the complacency in the market. 

But the fundamentals will come to bear on this market.  The coronavirus has wrecked a lot of corporate balance sheets, future cash flows, and lowered the risk tolerance of institutions.  This is like 2000, 2007/2008, where institutions rethink the proper amount of long term risk that they will take and that long term positioning has yet to be purged to more realistic levels. 

The next thrust lower should be a realization of the new fundamentals of this market and a repricing of equities to a more reasonable valuation.  Let's not get ahead of ourselves, we need to chop some wood and create the potential energy for the next move lower.  Right now, it seems like most of the bear fuel was exhausted in the big down move over the last 2 days.  Neutral here, and recommend bears to cover their shorts to reload higher next week.