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.