Virus Fear is Back

With all the protests in the U.S., it put the coronavirus news into the back pages, but the coronavirus never went away.  It was just a period of coronavirus news fatigue, after months of nonstop Covid-19 coverage.  The protests are the distraction, the virus is what really mattered.

When you have such excessive speculation and froth that you saw in the past 3 weeks, payback is hell, especially when fundamentals are this weak. 

The thing about the short side is that there are more up days than down days, so you are often fighting the grind higher.  So to beat those odds on the short side, you absolutely have to ride it down for big gains on the downside, to make it a long term profitable strategy.  Taking one or two days of gains and breathing a sigh of relief after being down is the easy thing to do.  But with short selling, your wins need to be bigger than your losses, to make up for the times when you have to take small losses on grind higher moves.  You have to take your pound of flesh, a big T-bone steak, when the bulls are vulnerable, like now, and not be satisfied with a quarter pounder with cheese. 

The Fed will not come to the rescue at these levels.  They are already using so much stimulus, if they start doing more here, they will have to do a monstrous amount when we go even lower.   And I don't think even Powell is that much of a chicken little, although he is up there in the top 2 with Bernanke in the Chicken Hall of Fame.  

Sometimes people forget why the VIX is so high and just pile into stocks like they are a one way bet.  Investors' memories are short, and what happened in 2000-2002 and 2008-2009 are all but forgotten.  Or even what happened in March.  When investors start throwing caution to the wind during such fundamentally weak periods, they are setting themselves up for buying near tops of bear market rallies.  What we just witnessed was a monster bear market rally which convinced a lot of investors that a new bull market had started.  That's how the market tricks the majority into doing the wrong thing at the wrong time. 

These are risky markets with lots of uncertainty over the next few months.  Of course, coronavirus is the biggest uncertainty, but also the election in November and what policies Biden will enact when he gets into office.  I know its presumptuous to say that Biden will win but barring some Biden health issue from now till November, a win is pretty much automatic.  The polls show a giant lead for Biden nationwide, something Hilary never had, and in many of the battleground states, he has leads over Trump.  Even in Republican strongholds like Texas and Georgia, he is nearly even with Trump in the polls.

It even seems like the Democrats will take the Senate, and hold the House, which would make passing tax and spend legislation that much easier.  That is not a stock market positive.  

If there is one consensus among Wall Street, it is that Trump is good for the stock market and Biden less good.  I tend to agree, because Biden won't be pandering to stock investors and corporations by trying to do more tax cuts, which go straight to the bottom line for corporations and the wealthy. And Biden has already stated he plans on raising corporate tax rates to 28%, and closing tax loopholes, which would be an immediate 10% hit to post tax earnings for the SPX.

So there are lots of hurdles for bulls over the rest of the year.  The last 3 days is just a preview of bigger things to come.

I have covered shorts into this big gap down, as the market has reached my short term SPX 2950 target.  I plan on putting the shorts back on any bounce towards the 3040-3080 range.  In the short term, the selling has gotten extreme and fear is back, but with Friday opex and VIX opex on Wednesday, I don't think the market makers will let the market go into free fall here.  Could be wrong, but its rare to see big down moves during triple witching week.  There are still a lot of puts outstanding and market makers probably want to pin the SPX between 3000-3050.

I expect any bounce to be short lived and after triple witching Friday, there should be another leg down, perhaps to the 2800-2840 level.