I have a contractor coming this morning. So I will get a little info posted now and add to it later. I'm digging into see a little more about where all of the"smart" money is tight now in the markets. It's kinda like betting on football when all of the sharps out in Vegas come in on Friday afternoon with the big bets.
My hypothesis at this point is :
The big boys were caught with their pants down in March and could not get out of all of their positions fast enough. Once the Fed came in it started the bear market rally, everyone quit selling. Retail investors from around the world have jumped on the euphoria train and have driven this rally. The higher it goes, the better chance the big boys will have to get out of any positions they don't like at much higher prices. I'm convinced that they will pull the rug out at some point, but I am not sure of when and how far it will fall.... But I am just as capable of being wrong as anyone else, so I will still trade the market, but when the rug gets pulled out, it will be a swift fall and I will have a safety line ready.
This chart shows our current trend up to the next resistance line at 3100ish (could be 3075 up to 3150.) You can see the trendline is set to cross the resistance in the next week or so. As long as we stay above the trendline, I have a bullish bias. If we cross the resistance and stay above the trendline, it would seem next stop is all time high from February. The trendline has us reaching the all time high on July 8th... Right before Q2 earnings season... Interesting.
View attachment 16312
On this chart I added in the Fibonacci Retracement levels. You can see how the market fights to break through each if these levels. The last level is at 78.6% of our Feb high and is right in line with the resistance I have near 3100.
View attachment 16313
ETA. Completion of market analysis.
As of today. The S&P 500 today is exactly where it was on November 1st of 2019. That was coming off the report of a September unemployment rate of 3.5%, a 50 year low. News was breaking about the phase 1 trade deal in China. The fed had just lowered interest rates the week before and committed to not raising rates until inflation really started heating up. Oil was at $56 a barrel. The Naionals had just won the World Series. Joe Moorhead was about to go hang a 54 spot on an SEC West rival on the road. And stadiums, arenas, restaurants, offices, and malls around the country were packed to the brim. Life was good. Markets were a little overvalued at an S&P500 forward PE ratio of 17.5, but hey unemployment was at record lows. No risk of interest rate increases. And we were nearing an end of a trade war with the 2nd biggest economy in the world... The market was looking forward.
As of today we are currently trading the S&P500 at 24 times forward earnings (how much the earnings are expected to be for each company over the next 12 months.) That's higher than its been since the .com bubble. That's bad enough, but who is projecting those forward earnings? It's not the companies, they all cancelled guidance. So where does earnings come from?
Let's break it down the revenue exposure of US Public Companies
10% Government - I don't know about you, but I wouldn't count on much of that going forward. The Federal govt just spent 3 years of budget saving the economy during the lockdown. And state and local governments are teetering on the edge of bankruptcy.
35% B2B - Well, some businesses are doing okay and money is cheap... But nearly every healthy company is loading up the balance sheets by cutting capex and reducing inventory. Many others are heading to insolvency. By the way, thats just in the US... International markets are just as bad if not worse. Not a lot of growth going that direction.
40% Domestic Consumers - 25% unemployment is offset with some nice stimulus and unemployment. Unfortunately that is running out quick and most people are (rightfully) saving as much as they can during this time.
15% International Consumers - Not a lot of international trade going on these days. Much like international B2B the international trade is going to be quite a bit worse than domestic. And selling to the 1.4 billion in China... fuhgetteaboutit.
So with all of these headwinds, how do we get to a forward looking economy, based on earnings over the next 12 months that looks as healthy as it did on November 1st... Its not possible. Earnings are going to get slashed. Price to Sales ratio of the S&P 500 was at an all time record high in February. I like price to sales because revenues are can't be manipulated with smoke and mirrors like earnings. Revenues take time. When they fall, it takes a while to build it back.... A long time usually. Because most businesses have competitors. Competition is fierce. When demand is low and revenues are down, price wars start. Lowering prices hurt margins. Lower margins equal lower earnings.
This is all stuff that is absolutely going to happen. I personally do not think anyone is accounting for these risks properly. Then you factor in the possible risks that will play out the rest of this year...
#1. Sustained unemployment and paycuts.
#2. Short term deflation that leads to long term inflation that can only be managed by higher interest rates.
#3. Election/Higher taxes/Anti capitalist sentiment
#4. Serious trade war with China
#5. Long term consumer behavior change that takes a while to work through the markets (saving, staying home more, less discretionary spending.)
#6. 2nd Wave of Cornonavirus (yep, this far down on my list of risks right now and the only thing talking heads are discussing)
#7. Continued civil unrest.
So back to my hypothesis, why is the market going up... Well its because of people like us. The peasants. We historically buy high and sell low. We are in a momentum market right now and are all diving in head first...
View attachment 16317
View attachment 16318
I will try to find a little bit more information, but the Lipper Fund Flows show big money moving into taxable bond funds for the last few weeks from mutual funds and money market accounts. That makes me think the institutional money is busy "following" the Fed. Not many retail investors interested in bond funds these days, we are all in on equities.. FOMO fosho...
So if this is not the V shaped recovery, what is it.... well I think its a bear market rally. A huge one, boosted by the Fed and fast stimulus... But a Bear Market rally none the less. Today makes the 45th day the markets were open since the bottom of the market. Below are the duration and advance percentage of previous bear market rallies... Weird seeing that 47 in there twice recently.
View attachment 16319
Anywho... I have no idea when or how far, but I am ready for the big pullback. Tomorrow is turn around Tuesday, so I expect a small pullback since we were up today. If I seen anything wild, I will let you all know. But much like an earthquake... When the big one comes it will be fast and earth shaking. It won't take a few months to find the next low it will be days.
Stay frosty gents.
My hypothesis at this point is :
The big boys were caught with their pants down in March and could not get out of all of their positions fast enough. Once the Fed came in it started the bear market rally, everyone quit selling. Retail investors from around the world have jumped on the euphoria train and have driven this rally. The higher it goes, the better chance the big boys will have to get out of any positions they don't like at much higher prices. I'm convinced that they will pull the rug out at some point, but I am not sure of when and how far it will fall.... But I am just as capable of being wrong as anyone else, so I will still trade the market, but when the rug gets pulled out, it will be a swift fall and I will have a safety line ready.
This chart shows our current trend up to the next resistance line at 3100ish (could be 3075 up to 3150.) You can see the trendline is set to cross the resistance in the next week or so. As long as we stay above the trendline, I have a bullish bias. If we cross the resistance and stay above the trendline, it would seem next stop is all time high from February. The trendline has us reaching the all time high on July 8th... Right before Q2 earnings season... Interesting.
View attachment 16312
On this chart I added in the Fibonacci Retracement levels. You can see how the market fights to break through each if these levels. The last level is at 78.6% of our Feb high and is right in line with the resistance I have near 3100.
View attachment 16313
ETA. Completion of market analysis.
As of today. The S&P 500 today is exactly where it was on November 1st of 2019. That was coming off the report of a September unemployment rate of 3.5%, a 50 year low. News was breaking about the phase 1 trade deal in China. The fed had just lowered interest rates the week before and committed to not raising rates until inflation really started heating up. Oil was at $56 a barrel. The Naionals had just won the World Series. Joe Moorhead was about to go hang a 54 spot on an SEC West rival on the road. And stadiums, arenas, restaurants, offices, and malls around the country were packed to the brim. Life was good. Markets were a little overvalued at an S&P500 forward PE ratio of 17.5, but hey unemployment was at record lows. No risk of interest rate increases. And we were nearing an end of a trade war with the 2nd biggest economy in the world... The market was looking forward.
As of today we are currently trading the S&P500 at 24 times forward earnings (how much the earnings are expected to be for each company over the next 12 months.) That's higher than its been since the .com bubble. That's bad enough, but who is projecting those forward earnings? It's not the companies, they all cancelled guidance. So where does earnings come from?
Let's break it down the revenue exposure of US Public Companies
10% Government - I don't know about you, but I wouldn't count on much of that going forward. The Federal govt just spent 3 years of budget saving the economy during the lockdown. And state and local governments are teetering on the edge of bankruptcy.
35% B2B - Well, some businesses are doing okay and money is cheap... But nearly every healthy company is loading up the balance sheets by cutting capex and reducing inventory. Many others are heading to insolvency. By the way, thats just in the US... International markets are just as bad if not worse. Not a lot of growth going that direction.
40% Domestic Consumers - 25% unemployment is offset with some nice stimulus and unemployment. Unfortunately that is running out quick and most people are (rightfully) saving as much as they can during this time.
15% International Consumers - Not a lot of international trade going on these days. Much like international B2B the international trade is going to be quite a bit worse than domestic. And selling to the 1.4 billion in China... fuhgetteaboutit.
So with all of these headwinds, how do we get to a forward looking economy, based on earnings over the next 12 months that looks as healthy as it did on November 1st... Its not possible. Earnings are going to get slashed. Price to Sales ratio of the S&P 500 was at an all time record high in February. I like price to sales because revenues are can't be manipulated with smoke and mirrors like earnings. Revenues take time. When they fall, it takes a while to build it back.... A long time usually. Because most businesses have competitors. Competition is fierce. When demand is low and revenues are down, price wars start. Lowering prices hurt margins. Lower margins equal lower earnings.
This is all stuff that is absolutely going to happen. I personally do not think anyone is accounting for these risks properly. Then you factor in the possible risks that will play out the rest of this year...
#1. Sustained unemployment and paycuts.
#2. Short term deflation that leads to long term inflation that can only be managed by higher interest rates.
#3. Election/Higher taxes/Anti capitalist sentiment
#4. Serious trade war with China
#5. Long term consumer behavior change that takes a while to work through the markets (saving, staying home more, less discretionary spending.)
#6. 2nd Wave of Cornonavirus (yep, this far down on my list of risks right now and the only thing talking heads are discussing)
#7. Continued civil unrest.
So back to my hypothesis, why is the market going up... Well its because of people like us. The peasants. We historically buy high and sell low. We are in a momentum market right now and are all diving in head first...
View attachment 16317
View attachment 16318
I will try to find a little bit more information, but the Lipper Fund Flows show big money moving into taxable bond funds for the last few weeks from mutual funds and money market accounts. That makes me think the institutional money is busy "following" the Fed. Not many retail investors interested in bond funds these days, we are all in on equities.. FOMO fosho...
So if this is not the V shaped recovery, what is it.... well I think its a bear market rally. A huge one, boosted by the Fed and fast stimulus... But a Bear Market rally none the less. Today makes the 45th day the markets were open since the bottom of the market. Below are the duration and advance percentage of previous bear market rallies... Weird seeing that 47 in there twice recently.
View attachment 16319
Anywho... I have no idea when or how far, but I am ready for the big pullback. Tomorrow is turn around Tuesday, so I expect a small pullback since we were up today. If I seen anything wild, I will let you all know. But much like an earthquake... When the big one comes it will be fast and earth shaking. It won't take a few months to find the next low it will be days.
Stay frosty gents.
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