European Covid Panic

European equities have been lagging the rest of the world for the past few months and its finally coming to a climax.  While the SPX is still above 3300, the Eurostoxx 50 has broken 3000, a big psychological support level, to make a 5 month low.  Back in the 2000s, the Eurostoxx 50 index value was actually about 3 times higher than the SPX.  Now the SPX has overtaken it and left it the dust.  

Clearly we can see that the main variable going forward is fiscal stimulus, because in Europe, there are no signals of additional government goodies coming down the pike, but in the US, especially if you get the most likely election outcome, a Democratic sweep, a big fiscal stimulus package is coming in early 2021.  

Both Europe and the US are Covid basket cases, with Covid cases raging out of control, unable to stop the virus like many of the Asian countries.  But for the stock market, the US markets are pricing in a lot of additional fiscal stimulus, but the European markets are not.  Unlike the US, Europe still actually seems to care about budget deficits, and that's limiting the amount of government spending.  While the US is already well on its way to being an MMT country and using the Argentina playbook of giving people what they want and not raising any taxes to fund it.  

I am sure there are still a lot of investors that are still fighting the last battle, as there always is, looking at the rear view mirror.  But the coronavirus is well known now, and most of the future catalysts will be positive in regards to it, because of all the vaccine announcements coming up.  

When I see tweets like this, along with the big gap down, it signals that there is some panic in the market.  Anytime you see trading tweets about riots, that a contrarian indicator.  When there is panic, there is opportunity, and I will be buying stocks today and selling vol as I expect that this selling will be short lived.  If this selling was happening in the absence of news or coming big events, then I would be more wary of buying the big gap down.  But its clear to me that the overbullish positioning from a couple of weeks ago is being pared down and that risk is being taken off ahead of the election.  By either tomorrow or Friday, most of the positions will have been reduced to sufficiently comfortable levels ahead of the big event.  That should give us a bounce from Thur./Fri. to Tuesday.