Allergic to Staying HIgh

This is nothing like the V bottom off the December 24, 2018 low and the subsequent 4 month V shaped rally.  Back then, stocks would make new highs, but not give up much ground, have only tiny pullbacks, before going to even higher levels.  This market is making new local highs, but not staying at those high levels.  Instead, you get immediate substantial selloffs, either intraday or through gap downs like today and May 1st. 

As I have said before, the VIX is still very high considering how much stocks have rallied, which is a negative, because that isn't what happened during the past V bottoms and higher volatility with higher prices is usually a sign that markets are vulnerable to a sharp move lower (see December 2014, January 2018).

Top chart is from the VIX spike in December 2018, and the bottom chart is the one from March. 


Yeah, there was some bad coronavirus news over the weekend, but nothing that would really change the current global economic trajectory.  The market doesn't care so much about the coronavirus data as much as the government reaction to the data.  And right now, most governments are kind of sick of locking down and seem eager to move on to at least a partial reopening, even if there are still thousands of news cases daily. 

The bear case doesn't rely on governments going back to another lockdown, you just need to see new cases stay high enough to keep a substantial portion of the population from consuming normally and saving more to keep the economy weak.  It seems the US government isn't looking to hurry to a phase 4 package, so its going to take some stock market weakness to get more fiscal stimulus into the economy. And the only thing keeping the global stock markets up at these levels is government stimulus. 

I know there are some who think all this money printing and fiscal stimulus will keep the stock market going higher even with a weak economy.  But if the economy is weak and companies have much reduced cash flows, then the stock buybacks can't continue at the same pace as in the past, damaging one of the biggest sources of stock demand over the past 10 years.  Eventually, lower earnings and higher P/Es are going to make investors reluctant to pile there money into stocks when they notice that stocks are much more volatile without that big buyback bid backstopping them. 

I think most of that stimulus money will just end up being saved in money markets or safe fixed income assets.  Yes, that will provide a big potential source of equity buying power if earnings start to recover, but that's a long ways away. 

Let's not forget that we had a massive bubble in February, with investors near record levels of bullishness.  Investors are not bearish enough considering the economic realities.  The baseline level of investor attitude towards the stock market should be bearish, not the current attitude of economy sucks, but the stock market is different than the economy and the Fed has our back.  There is too much faith in the Fed and government put right now and people are not realizing that those puts have strike prices much lower than current levels. 

It is opex week, so usually you don't get big moves down.  However, with traders leaning a bit too bullish right now, I don't expect any big up moves either.  Probably a choppy week setting up a bigger pullback starting next week.  Waiting for the right setup to initial short positions.  We're almost there.