Stocks rallied on Friday despite the worst jobs report in almost 100 years. The number wasn't much of a surprise and, at -20.5 million, it actually came in lighter than the 21 million or so that was expected. Some estimates were closer to 22 or 23 million. So it gave investors and traders a reason to keep the upside momentum going. The Dow gained 455-points and closed near the highs of the day. Bonds pulled back giving up much of Thursday's big gains.
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The content of this commentary is more of a macro view and will not likely not change in the coming days. That said, I will be out of the office and on the road most of Monday, after the TSP's IFT deadline. I'll be back only in time to post a quick update for Tuesday to comment on any new developments. Thanks.
There's no doubt that the economy is likely to improve going forward, but it is improving from the debts of despair that the coronavirus took the economy and the stock market. There is still a concerted effort to keep the economy from fully reopening for safety reasons, as well as political reasons as the divide to open or not can be drawn almost directly along party lines. Whatever happens, it's not going to be an instant fix. People are still worried and they won't be going out and doing things that they may have done a year ago. This weekend Treasury Secretary Mnuchin said that not reopening could cause, "permanent economic damage to the American public.” And that brings us to the problem of stocks moving up toward their old highs.
Let me preface this analysis with the fact that we do have to consider the massive Fed asset purchasing and 0% interest rates, which could throw a wrench into my theory because we've never seen trillions of dollars thrown around like this before in our country's history. It is arguable that what they are doing may not be legal - perhaps violating the Federal Reserve Act of 1913 by buying corporate bonds in a roundabout way, but they're doing it. Liquidity, liquidity, liquidity, and we've been told not to fight the Fed. Terrible economic conditions, questionable charts, and people too scared to go out and spend money -- but the Fed is in the house. So, perhaps we can't gauge this current situation using the "normal" historical examples that I will show down below, but instead this money supply chart may be all we need to know.
If nothing else matters, then you can probably stop reading. Otherwise...
Stocks were at all time highs in February of this year - just 2+ months ago. But a lot has changed since then. How can anyone justify stock prices (overall, not individually) being priced at the same valuations as they were back then? By historical measures, they were overvalued in February. Now earnings estimates, if they are even giving guidance at this point, are quite a bit lower then earnings were in February. The only way stock prices can go back to where they were in February would be if valuations went to off the chart levels, and under these circumstances, who would think that is a reasonable possibility?
At this point it's momentum and FOMO (fear of missing out) that is driving the market, and those are valid reason why stocks are going up. But it's probably not sustainable and more likely nearing another peak. When, is the question?
Things always look great right after a big rally - and awful after a severe decline. The S&P 500 has rallied more than 30% above the March lows over the last 7 weeks. Doing some technical analysis, I saw three possible trends being created.
The blue channel below represent the best case scenario where the support and resistance lines are moving up at about a 45 degree angle or there about.
The purple trading channel is newer and maybe closer to a 30 or 35 degree upward angle.
And then there's the red channel which is looking more like a possible rounded topping formation.
All are still valid, intact, and in play as possibilities as far as I can see.
I've posted these next charts before (I believe it was in both the Plus premium report and the public market commentary.) They show the 2008 era bear market and the one below that the dot com bear market. Everything we are seeing today, although perhaps magnified because of how steep and quick the decline was, looks a lot like the action that led up to the peaks of impressive bear market rallies in those years.
As the S&P 500 comes back up to test the 200-day EMA again, and investor sentiment gets more bullish as people are more comfortable buying and letting FOMO get the best of them, you have to ask, what were investors thinking in similar situations in these other bear markets?
In May of 2018 (above) when there was a big two month rally back to the 200-day EMA - which actually broke twice, investors had to be doing what they're doing now. Those who initially didn't believe the rally were giving up on that idea and jumped in with the FOMO buyers. The market then rolled over for the next two months -- and there were a couple of other similar situations.
In the dot com bear market we saw similar tests of the 200-day EMA, and look at the size of some of those rallies that took them there. Surely when they poked above the 200-day EMA investors knew the worst was over, right? They were wrong. Time after time the bear market dug in and took, not only the gains from that bear market rally, but proceeded to make lower lows.
Is that what is going to happen this time? If you think this market and destruction to the economy is just going to heal itself in a few short months and go back to the old ways, forget it. Maybe a year or two from now we'll be getting closer to normal, but a lot can happen in the next six months, especially with the election on the horizon, that will keep stocks from going back to their old highs anytime soon.
The S&P 500 (C-fund) looks like it is getting ready to tag the 200-day EMA for a second time, and once again that will be a test of the bulls' strength when up against bear market barriers. History suggests that the upside could be limited from here. The question is whether this current market event was similar to that of the financial crisis and dot com bubble bursting, or if this was an anomaly that could just come and go in a matter of a few months?
The weekly chart shows the S&P 500 sitting near the top of that core trading range (blue) between about 2600 and 2950, so it is dealing with some resistance, but as we've seen before, the chart can exceed those levels and become extreme in either direction before snapping back.
The DWCPF (S-fund) has come back to life recently with some big days, but when it's down it tends to be down hard. In a bear market environment with volatility already elevated, the S-fund moves as if on steroids - but in both directions.
The Dow Transportation Index jumped on Friday as some of the beaten down airline stocks caught a bid. We've seen support break on this one and now it is moving back up and looking to test the bottom of that old support. The 50-day EMA is crossing a couple of other trend lines in the 8400 area, so that may be where the battle is won or lost for the bulls.
The EFA (I-fund) rallied on Friday and managed to pop back above its 50-day EMA. It is also coming up to test one of the old support lines, which it had broken below on May 1.
The Volatility Index has drifted lower ever since the sharp spike up on March 16. There is an open gap near 20, but it's the 200-day EMA that is being tested now that has my attention. That was resistance for a long time when we were in the bull market, so now it gets tested from the top side to see if it wants to act as support. It hasn't been below the 200-day EMA since mid-February.
The BND / F-fund has been chopping up and down within that flag formation for several weeks although it is descending. The 20-day EMA is being tested. With the 10-year yield still in the 0.6x% area, we have to wonder if they can go lower (bonds go up in value as yields fall)? I believe that the only way this chart breaks out of its bull flag (to the upside) is if the yield falls to 0.50% or below. It seems far-fetched but did anyone notice the unemployment rate? That's the kind of economic data that could do it.
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.
[TABLE="align: center"]
[TR]
[TD="align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"] [/TD]
[/TR]
[/TABLE]
[/TD]
[TD][/TD]
[TD="align: center"]
[/TR]
[/TABLE]
The content of this commentary is more of a macro view and will not likely not change in the coming days. That said, I will be out of the office and on the road most of Monday, after the TSP's IFT deadline. I'll be back only in time to post a quick update for Tuesday to comment on any new developments. Thanks.
There's no doubt that the economy is likely to improve going forward, but it is improving from the debts of despair that the coronavirus took the economy and the stock market. There is still a concerted effort to keep the economy from fully reopening for safety reasons, as well as political reasons as the divide to open or not can be drawn almost directly along party lines. Whatever happens, it's not going to be an instant fix. People are still worried and they won't be going out and doing things that they may have done a year ago. This weekend Treasury Secretary Mnuchin said that not reopening could cause, "permanent economic damage to the American public.” And that brings us to the problem of stocks moving up toward their old highs.
Let me preface this analysis with the fact that we do have to consider the massive Fed asset purchasing and 0% interest rates, which could throw a wrench into my theory because we've never seen trillions of dollars thrown around like this before in our country's history. It is arguable that what they are doing may not be legal - perhaps violating the Federal Reserve Act of 1913 by buying corporate bonds in a roundabout way, but they're doing it. Liquidity, liquidity, liquidity, and we've been told not to fight the Fed. Terrible economic conditions, questionable charts, and people too scared to go out and spend money -- but the Fed is in the house. So, perhaps we can't gauge this current situation using the "normal" historical examples that I will show down below, but instead this money supply chart may be all we need to know.
If nothing else matters, then you can probably stop reading. Otherwise...
Stocks were at all time highs in February of this year - just 2+ months ago. But a lot has changed since then. How can anyone justify stock prices (overall, not individually) being priced at the same valuations as they were back then? By historical measures, they were overvalued in February. Now earnings estimates, if they are even giving guidance at this point, are quite a bit lower then earnings were in February. The only way stock prices can go back to where they were in February would be if valuations went to off the chart levels, and under these circumstances, who would think that is a reasonable possibility?
At this point it's momentum and FOMO (fear of missing out) that is driving the market, and those are valid reason why stocks are going up. But it's probably not sustainable and more likely nearing another peak. When, is the question?
Things always look great right after a big rally - and awful after a severe decline. The S&P 500 has rallied more than 30% above the March lows over the last 7 weeks. Doing some technical analysis, I saw three possible trends being created.
The blue channel below represent the best case scenario where the support and resistance lines are moving up at about a 45 degree angle or there about.
The purple trading channel is newer and maybe closer to a 30 or 35 degree upward angle.
And then there's the red channel which is looking more like a possible rounded topping formation.
All are still valid, intact, and in play as possibilities as far as I can see.
I've posted these next charts before (I believe it was in both the Plus premium report and the public market commentary.) They show the 2008 era bear market and the one below that the dot com bear market. Everything we are seeing today, although perhaps magnified because of how steep and quick the decline was, looks a lot like the action that led up to the peaks of impressive bear market rallies in those years.
As the S&P 500 comes back up to test the 200-day EMA again, and investor sentiment gets more bullish as people are more comfortable buying and letting FOMO get the best of them, you have to ask, what were investors thinking in similar situations in these other bear markets?
In May of 2018 (above) when there was a big two month rally back to the 200-day EMA - which actually broke twice, investors had to be doing what they're doing now. Those who initially didn't believe the rally were giving up on that idea and jumped in with the FOMO buyers. The market then rolled over for the next two months -- and there were a couple of other similar situations.
In the dot com bear market we saw similar tests of the 200-day EMA, and look at the size of some of those rallies that took them there. Surely when they poked above the 200-day EMA investors knew the worst was over, right? They were wrong. Time after time the bear market dug in and took, not only the gains from that bear market rally, but proceeded to make lower lows.
Is that what is going to happen this time? If you think this market and destruction to the economy is just going to heal itself in a few short months and go back to the old ways, forget it. Maybe a year or two from now we'll be getting closer to normal, but a lot can happen in the next six months, especially with the election on the horizon, that will keep stocks from going back to their old highs anytime soon.
The S&P 500 (C-fund) looks like it is getting ready to tag the 200-day EMA for a second time, and once again that will be a test of the bulls' strength when up against bear market barriers. History suggests that the upside could be limited from here. The question is whether this current market event was similar to that of the financial crisis and dot com bubble bursting, or if this was an anomaly that could just come and go in a matter of a few months?
The weekly chart shows the S&P 500 sitting near the top of that core trading range (blue) between about 2600 and 2950, so it is dealing with some resistance, but as we've seen before, the chart can exceed those levels and become extreme in either direction before snapping back.
The DWCPF (S-fund) has come back to life recently with some big days, but when it's down it tends to be down hard. In a bear market environment with volatility already elevated, the S-fund moves as if on steroids - but in both directions.
The Dow Transportation Index jumped on Friday as some of the beaten down airline stocks caught a bid. We've seen support break on this one and now it is moving back up and looking to test the bottom of that old support. The 50-day EMA is crossing a couple of other trend lines in the 8400 area, so that may be where the battle is won or lost for the bulls.
The EFA (I-fund) rallied on Friday and managed to pop back above its 50-day EMA. It is also coming up to test one of the old support lines, which it had broken below on May 1.
The Volatility Index has drifted lower ever since the sharp spike up on March 16. There is an open gap near 20, but it's the 200-day EMA that is being tested now that has my attention. That was resistance for a long time when we were in the bull market, so now it gets tested from the top side to see if it wants to act as support. It hasn't been below the 200-day EMA since mid-February.
The BND / F-fund has been chopping up and down within that flag formation for several weeks although it is descending. The 20-day EMA is being tested. With the 10-year yield still in the 0.6x% area, we have to wonder if they can go lower (bonds go up in value as yields fall)? I believe that the only way this chart breaks out of its bull flag (to the upside) is if the yield falls to 0.50% or below. It seems far-fetched but did anyone notice the unemployment rate? That's the kind of economic data that could do it.
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.
