Stocks had another bullish day on Thursday after another weak initial jobless claims report, but also, right as that report was being released, the Fed announced more new programs aimed at lending out as much as $2.3 trillion to businesses and governments. Some of the indices went red by late afternoon, but another push higher into the close sealed another strong day and week, and the Dow added 286-points.
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This new Fed action could be a game changer and it certainly means that this won't play out as it might have if they not done this. But we are still in uncharted territory as far as where the economy stands with the a large portion of the country still not working, and normal public gatherings and travel still on the horizon. They can help businesses to pay for all of the employees to come back to work, but even while things improve with the virus, are people going to go to restaurants, sporting events, casinos, theaters, airports, etc., as if nothing had happened? So investors will continue to try to put a price on all of this.
What the market is doing now, in my opinion, is working off the extreme oversold conditions that the fastest decline ever has created. But why would that stop? Why not just move back to new highs if the coronavirus numbers are showing signs of improving?
I don't know if you remember in 2019 when I was talking about John Hussman's concept of how overvalued the market was by historical standards using "MAPE" (Margin Adjusted Price to Earnings ratio), yet it had been going on for years with the help of 0% interest rates. We were calling for, and waiting and waiting, for something to bring it back to normal valuations and, as bear markets tend to do, bring this to under-valued before the market bottoms.
Here's the chart that I posted last summer, and as you can see it was updated on 6/20/19 showing the extreme earnings ratio.
But there was another factor that Hussman talked about and that was investor sentiment. He suggested that 0% rates and an optimistic investment environment held off the inevitable decline for longer than anybody looking at valuations thought possible.
Of course stocks kept going higher after the summer of 2019, and this indicator went to those prior highs from just a year or two before in February when stocks were at their all-time highs. The decline in stocks has changed this chart, but not as much as you might expect. It is still about 41 - 42 now, so for the market to pull back to more neutral valuations we'd expect this to come closer to, or even below, 20, which would mean another 50% haircut for the S&P 500 from current levels to get there. Sounds crazy, right?
And now, interest rates are back to 0%, but there is one difference now than back in the summer of 2019. Investor sentiment. As Hussman talks about it, and I'm paraphrasing, he says as long as investors believe that the stock market can give them a meaningful return, above the 0% other investments are paying, then they are will to take that chance and buy stocks. But after a market event like we've had this year, how many believe a typical +10% return in the coming year is realistic? Many likely believe a 10% decline is as likely as a 10% gain, which is an obvious possibility.
Why is it obvious? Because the VIX (volatility index) is still above 40 and that means investors are expecting volatility to be very high in the coming weeks. A VIX at 40 does not mean they expect new highs soon, nor does it mean they expect stocks to be flat and quiet. They expect wide swings, and that means up and down, and a safe 0% return in that case is more acceptable, than if the VIX was 12.
Bear market rallies can be explosive - I know I've said that enough times in recent weeks, and this one has gone on longer then I expected, but it's not too surprising. The S&P 500 ran up to tag the 50-day EMA on Thursday, and that's quite impressive, but this is the area where a bear market might make its stand, as you can see in the 2008 - 2009 bear market chart under this year's chart. there is an open gap near 2900 that is another potential target.
The rally has become so enticing that mom and pop may be getting interested again, if they haven't already, and what do you think will happen to them if we test the lows, or worse, we get that 50% haircut back to "normal valuations?"
I thought I was hot stuff catching that first push higher off the lows, but just as I bought in too early when stocks started to tumble, I sold too early in this bear market rally. It's not easy. It's too early to declare winners and losers, but they won't be announced until the bear market is over.
For the record, this analysis has nothing to do with the coronavirus. It was going to be something that caused a market event like this. As that MAPE chart above shows, historically the market goes from overvalued, to neutral, to undervalued, back to neutral, etc.
The S&P 500 (C-fund) continues to climb off the recent bear market lows, and it made it through some tough hurdles, but now the 50-day EMA is in the way while it remains near the top of what looks like a large bear flag, and it has now completed a 50% retracement of the losses from the February highs. There is an open gap near 2900 that is a possible target, and then there's the 200-day EMA above that.
The weekly chart shows more of a "V" looking bounce, similar to the late 2018 bottom, since it weeds out the short-term wiggles. That 2900 - 2950 area is a possible upside target with that rare open gap on the weekly chart, and then the top of that long-term trading range zone between 2600 and about 2900 - 3000.
The DWCPF (S-fund) opens a new small gap below 1150 while filling another gap (blue) from mid-March. The 50-day EMA is within reach here for this index which has been outperforming, but had also been beaten badly on the way down.
The Dow Jones Transportation Index looks a lot like the other charts, but that looks more like a bear flag than the others. Does anybody really think that stocks like the airlines are going back to what they were just 3 months ago? The world is changing and investors have the job of putting a price on it.
Bonds rallied nicely on Thursday, and the BND finally broke above that old support line / turned resistance, and it is now very close to its all-time closing high (just below 88), despite the intraday high being all the way above 89.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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[TD="align: center"] Daily TSP Funds Return
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[/TR]
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[/TD]
[TD][/TD]
[TD="align: center"]
[/TR]
[/TABLE]
This new Fed action could be a game changer and it certainly means that this won't play out as it might have if they not done this. But we are still in uncharted territory as far as where the economy stands with the a large portion of the country still not working, and normal public gatherings and travel still on the horizon. They can help businesses to pay for all of the employees to come back to work, but even while things improve with the virus, are people going to go to restaurants, sporting events, casinos, theaters, airports, etc., as if nothing had happened? So investors will continue to try to put a price on all of this.
What the market is doing now, in my opinion, is working off the extreme oversold conditions that the fastest decline ever has created. But why would that stop? Why not just move back to new highs if the coronavirus numbers are showing signs of improving?
I don't know if you remember in 2019 when I was talking about John Hussman's concept of how overvalued the market was by historical standards using "MAPE" (Margin Adjusted Price to Earnings ratio), yet it had been going on for years with the help of 0% interest rates. We were calling for, and waiting and waiting, for something to bring it back to normal valuations and, as bear markets tend to do, bring this to under-valued before the market bottoms.
Here's the chart that I posted last summer, and as you can see it was updated on 6/20/19 showing the extreme earnings ratio.
But there was another factor that Hussman talked about and that was investor sentiment. He suggested that 0% rates and an optimistic investment environment held off the inevitable decline for longer than anybody looking at valuations thought possible.
Of course stocks kept going higher after the summer of 2019, and this indicator went to those prior highs from just a year or two before in February when stocks were at their all-time highs. The decline in stocks has changed this chart, but not as much as you might expect. It is still about 41 - 42 now, so for the market to pull back to more neutral valuations we'd expect this to come closer to, or even below, 20, which would mean another 50% haircut for the S&P 500 from current levels to get there. Sounds crazy, right?
And now, interest rates are back to 0%, but there is one difference now than back in the summer of 2019. Investor sentiment. As Hussman talks about it, and I'm paraphrasing, he says as long as investors believe that the stock market can give them a meaningful return, above the 0% other investments are paying, then they are will to take that chance and buy stocks. But after a market event like we've had this year, how many believe a typical +10% return in the coming year is realistic? Many likely believe a 10% decline is as likely as a 10% gain, which is an obvious possibility.
Why is it obvious? Because the VIX (volatility index) is still above 40 and that means investors are expecting volatility to be very high in the coming weeks. A VIX at 40 does not mean they expect new highs soon, nor does it mean they expect stocks to be flat and quiet. They expect wide swings, and that means up and down, and a safe 0% return in that case is more acceptable, than if the VIX was 12.
Bear market rallies can be explosive - I know I've said that enough times in recent weeks, and this one has gone on longer then I expected, but it's not too surprising. The S&P 500 ran up to tag the 50-day EMA on Thursday, and that's quite impressive, but this is the area where a bear market might make its stand, as you can see in the 2008 - 2009 bear market chart under this year's chart. there is an open gap near 2900 that is another potential target.
The rally has become so enticing that mom and pop may be getting interested again, if they haven't already, and what do you think will happen to them if we test the lows, or worse, we get that 50% haircut back to "normal valuations?"
I thought I was hot stuff catching that first push higher off the lows, but just as I bought in too early when stocks started to tumble, I sold too early in this bear market rally. It's not easy. It's too early to declare winners and losers, but they won't be announced until the bear market is over.
For the record, this analysis has nothing to do with the coronavirus. It was going to be something that caused a market event like this. As that MAPE chart above shows, historically the market goes from overvalued, to neutral, to undervalued, back to neutral, etc.
The S&P 500 (C-fund) continues to climb off the recent bear market lows, and it made it through some tough hurdles, but now the 50-day EMA is in the way while it remains near the top of what looks like a large bear flag, and it has now completed a 50% retracement of the losses from the February highs. There is an open gap near 2900 that is a possible target, and then there's the 200-day EMA above that.
The weekly chart shows more of a "V" looking bounce, similar to the late 2018 bottom, since it weeds out the short-term wiggles. That 2900 - 2950 area is a possible upside target with that rare open gap on the weekly chart, and then the top of that long-term trading range zone between 2600 and about 2900 - 3000.
The DWCPF (S-fund) opens a new small gap below 1150 while filling another gap (blue) from mid-March. The 50-day EMA is within reach here for this index which has been outperforming, but had also been beaten badly on the way down.
The Dow Jones Transportation Index looks a lot like the other charts, but that looks more like a bear flag than the others. Does anybody really think that stocks like the airlines are going back to what they were just 3 months ago? The world is changing and investors have the job of putting a price on it.
Bonds rallied nicely on Thursday, and the BND finally broke above that old support line / turned resistance, and it is now very close to its all-time closing high (just below 88), despite the intraday high being all the way above 89.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
