The stock market was able to regain about 2/3 of its early morning losses by the close yesterday…as the technology sector was able to rebound nicely during the day (after it declined in the morning on several ratings downgrades on stocks like MU, TXN & MXP…as well as some target cuts on AAPL & GOOGL)……This morning, the futures are trading more than 1% higher on a positive response to earnings reports out of several banks as well as JNJ (who also raised their dividend).
This further bounce in the S&P futures (assuming it holds) will lead the S&P 500 cash index to open very near the 2811 level which would signal that the SPX had retraced 50% of its sharp February/March decline. As we have been highlighting a lot in the last week, every bear markets that included a recession of the past 50 years has involved a VERY strong bounce that retraced 50% of the initial decline…only to roll back over and make new lows. In other words, every decline of 20% or more since the 1973/74 bear market…except for the 1987 crash…has played out in this fashion. This does not mean it HAS to play-out this time around by any means, but it does indicate that this bear market has not played out any differently than past bears so far.
However, it’s amazing how quickly the consensus has moved away from the call for a “retest” of the March lows over the past four or five days. Strategists for quite a few large and medium sized Wall Street firms have changed their tunes. We’d also note that sentiment among futures traders has changed dramatically over the past few weeks…as the DSI data shows that bullishness for the S&P 500 has risen from the single digits to the mid 40s. In fact, despite yesterday’s 1% decline in the SPX, bullishness actually rose from 44% to 46%.....We readily admit that 46% is not overly bullish at all, but it does show that the extreme level of bearishness has completely disappeared.
Early last week, we said the one thing that concerned us about out cautious stance is that too many other people shared that opinion. Well, that is not longer the case. Therefore, even though the stock market looks quite strong this morning, we are actually now more comfortable with that stance……Remember, we told investors to raise cash in preparation of a substantial decline in the stock market back in January and the second half of February…when bullish sentiment was extreme. Then, during February and March decline, when most pundits were say the decline was a great buying opportunity, we told investors to sell any bounces. THEN, as we moved past the third week of March…when everybody was calling for the end of the world, we said the stock market had become WAY TOO oversold and over-hated…and thus it had become incredibly ripe for a strong sharp rally.
With all of this in mind, we believe the big shift we’ve seen back towards the bullish side of the ledger over the past few days, we think investors should become much more cautious as the S&P moves back above 2800. Of course, the rally could definitely move slightly above the 2811 level we highlighted above, but we believe that given all of the uncertainty that still exists surrounding the coronavirus (and the impact it will have on the economy)…and the massive (and historic) levels of debt that exist around the globe that will be difficult to service in the post healthcare crisis time-frame…we believe that investors should NOT chase the stock market up at these levels.
Our renewed cautious stance is also emboldened by another narrative that seems to be emerging around the Street right now. The “moral hazard” of bailing out industries like the airline (and other industries) is becoming a popular topic for debate. Don’t get us wrong, this is an intriguing issue for public debate, but when it comes to the markets, it misses the point. Most people would agree that bailing out certain industries from time to time is important…and very acceptable in a capitalistic system.
However, too many people are only looking at the situation that exists today with a small number of industries like the airline industry. The REAL issue is that this has been going on since the financial crisis 12 years ago!!! The real issue involves the “divorcing of asset prices from their underlying fundamental values”…and how this has become so wide-spread. The capitalist system can work just fine if certain companies and/or industries are bailed-out for the benefit of the entire system…especially when that company or industry is having severe problems through no fault of their own. (Duh.)
However, we would argue that capitalism will not work very well over a long period of time when HUGE swaths of the economy have their asset prices buoyed in an artificial manner…in the way they have been for the past 12 years. Supporting asset prices in an artificial manner is not definitely not something that ended after the banks were bailed out during the financial crisis. Low single digit annual GDP and earnings growth do not justify a 400% rally in the stock market.
If we rely on the government, the Fed (and multiple expansion) to determine the level of asset prices…rather than their underlying fundamentals…the current type of capitalism that is being practiced in the in the U.S. today will eventually fail.
This bear market and this recession will provide a great opportunity for the Fed and other global central banks…and the governments of capitalistic countries…to provide a safety net for the financial system…while still letting asset prices adjust back to their real fundamental values. If they do this, our economy and financial system will be in much better shape 25 years from now…even though it will mean that investors will not be able to profit quite as much over the next 3-5 years as they have in the past decade.
We actually believe this scenario is on the Fed’s radar screen. We believe that many people don’t understand that one of the key reasons the Fed engaged in a tightening cycle a few years ago was to slow down the rise in asset prices far beyond their underlying values before it got out of hand. (They certainly did not start to tighten over inflation concerns…which were non-existent.) If this is true, the Fed just might not be as aggressive as many people they’ll be to push asset prices higher. Instead, they’ll merely provide a safety net below the market…that will keep the situation from endangering the financial system. If this is the case, it will throw a wrench in the works of many bullish scenarios.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.