Sentiment Percolating

Starting in the middle of November 2019, stock market sentiment went from bullish to giddy and then greedy before all was said and done. It had done that before in early 2017, 2018, mid-2011 and clearly during the Dotcom Bubble in 1999 and 2000. Sentiment alone is not a reason for markets to turn although we usually see that ingredient at extremes. Sentiment is also not a perfect timing tool. Remember the old adage that markets can stay irrational longer than you can stay solvent.

From downright greedy in early 2020, markets ran the full spectrum to fearful, panicky and despondent in March. No surprises there. The masses were in full fetal position as this wasn’t just a market event, it was a full blown health crisis where people feared for their lives.

Fast forward just two months and we find investors certainly getting bullish. Giddy and greedy? No. Let’s take a simple look at what options trades have been doing lately since they are usually wrong in sum total, especially at extremes.

Below is a chart of the S&P 500 on top and 10 day average of the put/call ratio which is just the total number of put options (looking for lower prices) versus call options (looking for higher prices). With stocks steadily marching higher, options trades have become increasingly more positive as you can see from the lower chart which is trending down towards the area of Q1. Just looking at this in a vacuum has to make bulls a little uneasy.

 

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Initial Jobless Claims – A Look Since March

Thursday is upon us and weekly jobless claims will be reported at 8:30am. The stock market has met every horrific report with intense buying. Many forget that the single worst week has been right around the market bottom on March 23. Since then, weekly new claims have plummeted, but I guess that between PPP and businesses staying open, there are only so many people who could additionally file.

The real number is continuing claims which looks like it’s plateauing because it covers a running total of people filing claims minus those who go off unemployment. I thought the chart below from USA Today was a really good one to see what’s happening week to week.

My big worry is what happens when the PPP money “loaned” to companies ends on June 30 and companies no longer have to keep workers. Most will have satisfied the covenants for loan forgiveness and will be free to begin layoffs.

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More Good News as the Trading Range Breaks Higher

As I mentioned in Friday’ post, not much happened last week after Monday’s sharply higher open. Stocks essentially treaded water and bullishly digested the gains. You could also say that has been the case since mid-April in the major indices with the exception of the NASDAQ 100 which is in a world of its own. Below is the Dow Industrials and you can see the trading range I have been discussing bound by the two horizontal blue lines.

A few comments about the range. First, I would not be surprised to see the first move out of the range be a fakeout. In other words, because the range is so widely watched and obvious, many times you will see the computer driven algorithms push an index above a certain price to force investors to chase prices. Very shortly thereafter, the market will move back into the previous range and then quickly visit the other end of the range, confounding both bull and bear alike. You can see this on the far right of the chart depicted by the dark blue arrows.

Given that stocks closed the week well and the positive news over the weekend about another clinical trial beginning for Novavax’ Corona vaccine, I would expect the Dow and the other major indices to poke above the trading range as the new week begins on Tuesday. I do not expect this move to be the beginning of a new leg higher in the Dow towards 29,000.

High yield bonds have woken up a bit since the Fed announced their preposterous program of buying junk bond ETFs that are not trading at a premium to fair value. Below is a chart of a plain, vanilla, widely held high yield fund from PIMCO.

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Trading Range Showing Signs of Wearing Thin

Stocks had a great week so far. However, it is interesting to note that 100% of the gain was before the market even opened on Monday. Since Monday’s open, the Dow and S&P 500 are right around the flat line. Most of the major indices have been coiling up for a bigger move. Usually, that move is in the same direction as the current trend, which would be higher in this case.

However, as you can see in the hourly chart of the S&P 500 ETF below, it’s a little sloppy while it oscillates around the horizontal blue line. That line has essentially acted as a ceiling for over a month.

As you know, my thesis has been that stocks are in a trading range, except for the NASDAQ 100, and that range will continue until proven otherwise. I also have been cautious that we could see a move above or below the range that fakes people out and then quickly reverses to the other end of the range.

To me, stocks look a little tired. Options traders are a little giddy. Participation in the rally has weakened in the very short-term. If the bulls can hold on for another week or so without any damage, I will have to reassess and look at an upside breakout sooner than I thought. However, if the bears make some noise, we could very well see the first real pullback since the March 23rd bottom. Regardless, I do believe that there will be a tradeable decline before Q2 ends.

Have a safe and sane long holiday weekend!

I am so looking forward to three days without the market being open.

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Moderna Has Some “Splaining” to Do

Lots to cover, but I will try to brief.

Monday’s huge rally saw 90% of the volume going into stocks that were up on the day. That reversed the previous 90% down day last week and is another bullish sign for the intermediate-term. Interestingly, the most beaten down sectors led the rally. In other words, the “have nots” were all the rage. I am skeptical. Until proven otherwise, except for energy, my view is that big rallies in those sectors are selling opportunities.

Also on Monday, biotech company, Moderna, reported very positive phase I results in their clinical trial for a COVID19 vaccine. The stock has been red hot all year, soaring from $20 to $87. FYI, the company is a public infant, having only gone public in late 2018. My sense is that Moderna is run by scientists and not business people.

Why would I say such a thing about a company that could possibly cure COVID?

“Curiously” or “interestingly”, Moderna sold $1.34 billion of new stock in a secondary offering the exact same day the positive scientific news was announced. Hmmmmm. I am not accusing the company of manipulating the stock nor anything else nefarious, however, this whole thing just doesn’t pass the smell test. As Ricky Ricardo of I Love Lucy fame used to say, “they have some splaining to do”!

I was shocked that the financial media did not make this into a big story on Tuesday. If this was Tesla and Elon Musk, it would be “BREAKING NEWS” with a parade of analysts and lawyers weighing in.

Moderna may be different. Is the media giving them a pass because they are possibly “saving the human race” as I heard one person opine? It will be interesting to see if the SEC gets involved.

To matters even more interesting, on Tuesday afternoon STAT News released a report questioning the success of Moderna’s vaccine. That sent the stock lower and the stock market with it. Crazy times. When the crisis passes, there will be lots of people and companies with an awful lot of explaining to do.

Finally, as stocks lost all of their intra-day gains and then some on Tuesday, leaving a nasty looking print on the chart, this will be at least the 7th time we have seen this behavior since the March 23rd bottom. Only once has it led to what has been expected, further selling. With pre-market action indicating a 1%+ gain, the bears will have much work to do if they are going to see any follow through.

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Clorox Wipes. The World is Fixed.

I had about half of today’s post written early this morning before finding out that Target had a fresh supply of Clorox wipes in stock. So, I hurried over to grab a three-pack along with some snacks for the kids. When I came back, I saw that the economy was back to normal, COVID had been cured and all was well in the world again!

While stocks surged at the open I always tend to root for a down open to begin the week with firming during the day and strength into the close. That’s the old trader in me. With a little more than hour gone in the day, all signs point to a trend day where stocks finish near the highs of the day. Sooner than later, the major indices minus the NASDAQ 100 will once again test the upper end of the month long trading range. If that’s right now, I will be a bit leery that stocks break higher and don’t look back.

Historically, the more pronounced and obvious the trading range, the more likely it is to fake investors out before the real move occurs. I am not yet saying that this will be the case here. All I am saying is that it is something to be on the lookout for. My key stat today will be if we see at least 90% of the volume going into stocks that close higher.

I also want to keep a close eye on one of my favorite canaries in the coal mine, high yield bonds. With the Fed announcing a program to purchase them on April 9, they definitely screwed up conventional analysis, or at least the way I look it. I am sure there are people much smarter than me who have figured out how to normalize the action in junk bonds.

Assuming today ends as well as I think it does, this sets up a very interesting battle between the bulls and bears this week. One group is going to get run over. Perhaps, both do…

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Bears Get Their Opportunity as Trading Range Continues

I published a new video yesterday with three main topics. Our model’s view of the stock market. Warren Buffet and Berkshire’s underperformance. Why the stock market has been rallying with the economy in a tailspin.

As you know, my theme has been that stocks are in a trading range bound by Dow 25,000 and 22,000. I continue to believe that is the case. That translates well into the S&P 500, S&P 400 and Russell 2000 too. Just to change it up you can see the S&P 500 below.

Only the NASDAQ 100 is trading with a mind of its own as the masses pour into technology growth stocks that have the best chance of success during the crisis. If and when the market visits the lower end of the range I would fully expect the tech sector to decline significantly right before stocks bottom.

The deeper this pullback goes, the more calls I expect to hear about either stocks revisiting their March 23rd lows or breaking well beneath them. I said it in real time on March 22nd and several times since; the March bottom was significant and we saw a number of thrusts off that low to suggest a new bull leg beginning. I, however, did not see the magnitude of the rally being as great as it was.

The model for today would have the market forge its low for the day in the morning, preferably within the first hour. Seeing green during the day is what is supposed to happen although pre-market action is showing a loss of 1% early on. Stocks ending sharply lower today would be out of character and signal full control again by the bears.

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Tech Rocking. Junk Struggling. Range Continues.

As I wrote about on Friday, almost every piece of really bad economic news has been met with a surge in buying, leaving a lot of people to scratch their heads. I am not that smart to understand why, but I always write that it’s not so much what the news actually is, but how markets react.Clearly, the markets have been squarely focused on a “V” bottom in the economy and stock market, something that hasn’t lined up with my thinking. That’s okay. This would be one case where I would love to be wrong.

Throughout Q2 so far, the bulls have been beyond impressive. There have only been a few small victories for the bears. This is all in the context of my thesis that stocks are in a roughly 10% trading range bound by 25,000 and 22,000 on the Dow. Last week, Monday began with the Warren Buffet bottom and ended at the high after another horrific jobs report. That puts the major indices within striking distance of the April peak.

When I look at leadership, it’s blatantly obvious that the NASDAQ 100 has a mind of its own. Software and Internet stocks are surging towards all-time highs. Semis, however, behave more like the rest of the market. Banks have gone from leader to the doghouse over the past 10 days. Discretionary acts well, but transports are clearly struggling, much to the surprise of no one.

High yield bonds, always one of my favorite canaries in the coal mine, have become much more difficult to analyze due to the Fed’s pledge to backstop this market and outright purchase junk bond ETFs not trading at a premium to their worth. Look at the chart below. Junk bonds haven’t participated in the rally since the Fed’s insane announcement in early April.

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Bad News is Good News for Stocks

Stocks are up this week as Friday is about to kick off. Yesterday, we learned than another 3+ million Americans filed for first time unemployment benefits. Today, we learned that the unemployment rate for April skyrocketed to 14.7% with 20,000,000 jobs being “lost” in April. Those numbers are unfathomably unthinkable.

I didn’t do the homework, but I certainly believe that almost every horrific economic report has been met with a big rally by the bulls. I have written about this for decades and repeat it on TV all the time. It’s not what the news actually is, but rather how stock react. In this environment, stocks are rallying on bad news. That is a positive no matter how much of a head scratcher that is.

Of interest this week has been the lack of energy by the bulls during the trading day. Almost all of the gains are occurring overnight, meaning that the market gaps up at the open and doesn’t add to those gains during the day. You can see what I am talking about in the chart below.

Look on the far right, the last three days. When you see a lot of green, that means stocks opened and rallied during the day. When you see a lot of red, it means stocks opened and went lower during the day. When there isn’t much color, stocks opened and close around the same level. That’s what we see on Tuesday and Thursday even though on the surface, stocks closed much higher.

I am sticking with my thesis that the stock market is in a trading range, at least for every major index except the NASDAQ 100. In my scenario, we won’t see a lot of green as the bulls are not firmly in control. However, it’s easy to assume that means a big decline is coming. I wouldn’t assume that either. In all likelihood, I think the market is looking at up a few percent to down high single digits.

I hope you are safe, healthy and sane!

Enjoy the weekend. 80 and sunny last weekend in CT. Rain, wind and yes, SNOW on Saturday. Spring in New England…

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Trading Range Continues. Bonds Thumped. Bulls to Win Today.

As I have been writing about, until proven otherwise which would mean I am wrong, the major stock indices with the exception of the NASDAQ 100 hit a ceiling last week and appear to be in a trading range bound by Dow 25,000 and roughly 22,000. On the S&P 500 that amounts to 2930 and 2630. The NASDAQ 100 is trading like it’s 1999 and all is very well in the world.

The longer the range continues, the more significant the move once it is broken. However, and this is a big one, oftentimes, the market confounds both sides with a fake move above or below a widely followed range before violently reversing and heading to the other end of the range where the real move begins. I know this putting the cart way before the horse, but it’s something to keep in the back of your mind.

Of important note from Wednesday, the bond market got hit very hard with the ugly stick. That’s something I have been expecting for over a month whenever stocks rallied hard. It has not happened as it usually does, causing a major divergence in opinion. Which market is forecasting a more accurate economy? Bonds have been saying that the economy will remain weak for the foreseeable future while stocks indicate a fierce recovery should begin sooner than later.

I love watching markets diverge. One group is famously correct while the other falls flat on its face. People wrongly assume the larger bond market is smarter, but the data do not support that claim. Twice last decade the bond market saw all-time low yields which would indicate recession or at least no growth. Neither materialized. For those curious, it was 2012 and 2016. We’ll see what happens here.

Stocks are set to open sharply higher. For the last two days, we saw early gains evaporate with late day selling. I would not expect that to occur today. The bulls should be able to enjoy a win today.

 

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