Post Bubble Reduced Cash Flow Environment

The psychological 3000 barrier has been broken, of course, in overnight trading.  They don't dare try to break that barrier during regular hours, due to the sheer amount of resistance that would have been there if the trading desks were all watching.  Like it usually happens, the big moves happen overnight, and its another short squeeze moment. 

Remember, this is both a post bubble and post crash environment.  There are 2 psychologies at play.  The post bubble psychology is the one that's leading the charge higher since March 23.  In early February, TSLA was going bananas, speculation was commonplace, and there was still the afterglow from the US China phase 1 trade deal.  A lot of investors were complacent and bullish.  It took many months for that to build up, and arguably took 10 years to get to the stage where an economic shock could take the SPX down 1100 points.  1100 points = 32% of the all time high. 

A post bubble environment is not one that is conducive to a continuation of a rally.  The rebound is quick, there is FOMO, and investors go back to thinking that the March crash was just another correction in an ongoing bull market.  It makes the market vulnerable to another waterfall decline.  

The post crash psychology is supposed to delay the rally, making up moves hesitant and accompanied with high volatility.  While the rally has not been delayed, volatility has definitely stayed high. 

Based on the past 2 months price movement, the post bubble psychology is the dominant one over the post crash psychology, and it makes this market dangerous for bulls now that complacency is being rebuilt, mainly based on price action, but also helped by "good" coronavirus news.  We got another one today with the NVAX vaccine trial news, which is meaningless, but used to try to explain a monster gap up when there is no other reason for it.  

Unlike the 2011, 2015/2016, or 2018 SPX waterfall declines, this one is happening in an environment where earnings will decline significantly and cash flows will be dramatically reduced.  As a result, stock buybacks will be reduced by at least 50% compared to years past.  These are huge fundamental changes to the supply/demand equation for equities, making it unlike any of the previous big corrections post 2008. 

Of course, the last time earnings took such a big hit and caused stock buybacks to go down so heavily was in 2008.

 It is no coincidence that stocks tend to go down in the US when buybacks go down. 

I know a lot of people think none of these things really matter when the Fed is buying up all kinds of bonds, including junk.  Thus flowing through to the stock market.  But money that goes to the bond market is usually going to stay in the bond market.  Money that goes into money market funds will usually stay there, or go to less risky assets like bonds, not stocks. 

The cash on the sidelines argument is baseless, and doesn't take into account the way capital is allocated.  Money is separated and sent into certain buckets, a non-risk bucket, a low-risk bucket, and a medium-high risk bucket.  Right now, almost all the money that the Fed is printing is going towards the non-risk and low-risk bucket.  Very little will flow into stocks, definitely not enough to outweigh the reduced buyback flow to come this year and in 2021. 

The best way to describe the current investor psychology is that the bulls are a mile wide and an inch deep.  The buyers in this market are looking for a quick buck, weak hands, not true believers who think stocks are a table pounding buy.  When stocks are held with low conviction, then its easy to shake them out. 

While the reopening and coronavirus vaccine news give the buyers courage here, it just sets up the market for disappointment when the economy is still not that strong after the reopening and people decide to save more instead of spend more. 

There are big hurdles coming up in the fall, a potential second wave of infections as kids return to school and workers return to the office, people go to bars/restaurants/etc.  And of course the election in November, where polls show Biden clearly ahead of Trump, and already Biden is talking of increasing corporate taxes and going after serial tax evaders like AMZN, GOOG, etc to collect tax revenue.

There is horizontal resistance from the summer 2019 highs of 3025, and this could be the fake breakout above 3000 that traps the bulls.  I remain bearish and will add to shorts this week.