Economy Analysis
$DIA $SPY $QQQ $UVXY $STUDY
We’re witnessing an extraordinary period of time in World History. We recently had the biggest Market loss ever, and the largest market recovery rally as well. We came from a pandemic that paralyzed the world. Weak businesses have gone bankrupt, but the strong ones still have to struggle with the low demand of products and services. The question now is what's next?
COVID-19
The Coronavirus pandemic put the economy at a halt, to this day there is no cure and there is no vaccine, there are procedures to mitigate the propagation of the virus and there are medical procedures to try to recover the patients, the tHreat is out there and we will have to deal with it in the future, so things will move slowly for a while until a vaccine and an effective treatment are found. This will be a heavy factor that will weigh in the economy in the months and years to come.
The US is officially in an economic recession.
Needless to say that COVID-19 was the triggering element that tumbled the domino chips of the economy, the so needed stay at home order reduced the demand for services, the first ones affected were the hospitality services, restaurants, tourism, hotels, airlines, etc, it made another chip fall, as soon as the businesses closed it triggered a massive unemployment rate, people need money and a lot of people were living on a check by check basis, the lack of this income drastically reduced the demand of non essential goods and services. The effect extended to the different sectors of the economy fabric and the descending spiral is growing.
The NBER based Recession Indicators for the United States declared the US in a recession. This was last declared based on this metric in 2008.
Re-opening the economy.
The economy is at a halt, and the only way to turn the switch on is by lifting the stay at home order and just like that go back to work. Reopening the economy doesn't mean we're out of the woods, it doesn't mean the virus has gone away, it doesn't mean that the COVID-19 cases curve has flattened, it only means that people have to abide by the health guidelines, social distancing, wearing mask and gloves, hygiene, etc.
For the sake of the economy we can't stay at home, and the governments know it. I assume by now they must have assessed the risks and the human vs the economic and political costs it will imply.
Although the world is trying as much as possible to go back to the point where we were before the economic slowdown and the pandemic, the so called "new normal" won't be enough to push the economy back at the levels where it was before.
The number of affected businesses and the ripple effects are yet to be seen.
New ATH in the Stock Market.
After the big crash the market had, it bounced as soon as it hit technical levels that made it "cheap" and the old mantra "buy low - sell high" applied, there were juicy profits and those who opened positions early this year are breaking even by now. We witnessed one of the biggest short squeezes in the history of the stock market. Not surprising it went beyond the expected retracement level. NASDAQ made a fresh all time high which was not followed by the other indexes. The question here is will it continue to go higher,? will the market take profits and retrace? or are the bears done closing their shorts and it will fall to the levels it had at its recent bottom?.
Economic Indicators
SP500
It reached a technical level that allowed people who were caught at the top to recoup their losses if they bought when the buy signal was triggered at the bottom of the downtrend, plus an additional profit; worst case scenario they just broke even and had enough. This is discouraging to continue the trend and it can head to a double top with strong resistance and a negative momentum divergence. If the word recession doesn't kick in the market's mind then it could define a trading range here, otherwise, this will nosedive aggressively.
Unemployment
When we think about employment we picture an image of a 40 hours full time job, but that is far from the truth. The unemployment numbers are tricky, and those have to be taken with a grain of salt. The government uses the U3 as the unemployment metric, which is very rosy, the U6 metric is a more realistic metric, you can take a look at the reference for further details on the different ways to define unemployment.
On the other hand, there was a non accurate classification, the BLS counted unemployed people as temporarily absent for "other reasons". Also the government encouraged the business to keep people employed so instead of asking for the unemployment benefit, the money was funneled through the business and this counted as one more employee after the payroll protection incentive, instead of one more unemployment application.
The analysts came up with a 20% unemployment estimation for the month of may, if you look at the initial claims, we're in the millions, and even though it has decelerated, the number is very high. The "official" 13.3% unemployment is absolutely questionable and should be re-evaluated.
Crude Oil
The Light Crude Oil futures price is set in the upper 30's, doing a bit of a retracement from the 40 milestone. The OPEC tries to keep its members in sync; however, this is more than restricting the supply, in a recession the oil price tumbles due to lack of demand. This problem didn't start with the virus, the price started a downtrend since 2014 when it reached levels above $100. It tried a rebound between 2016 and mid 2018, but it was when things simply didn't recover. This economy peaked in 2014 and the signs of recession became noticeable in 2018, from that point on it was just a matter of finding a triggering element to slow down the economy and send us into a recession, the triggering element was COVID-19.
The oil prices won't go higher unless we'll go through the expansion economy cycle, which is going to take a while. In the meantime, the oil prices are going to be depressed.
Gold
Gold is making a rally that started back in 2016, with ups and downs, mini-rallies and corrections until 2019 when the market was committed to it. The price of gold is making a double top with the prices from 2012, when gold rallies it means the market is looking for a hedge against inflation.
Bonds
The 5y bond yield dived down since 2019, it has bottomed, and there are no signs of reversal. The market looked for protection, and bonds are a safe haven in case of market crashes. This market saw it coming and rotated capital from stock into bonds.
VIX
The VIX, A.K.A. The "Fear Index" spiked to 64 recently and even though there was a recovery rally in the market after the short squeeze plus a bit more, the VIX didn't completely retrace to the levels it had before the COVID-19 reality check kicked in. It was bouncing above 24, and after the last unemployment claims number the market is trying to make sense of the real economy we're living in. The VIX was not dead, it made a consolidation and it was dormant. We could see the gains from this recovery rally evaporate soon and the market is looking for a hedge.
Dollar Index
It spiked and reached the level above 12750, at this time it is back to the levels it had in 2019. A strong dollar is good for importing, but not good for exporting. The policies related to how the US has to look at the world are not exactly friendly, and this is going to create hurdles when trying to export to the world and bring tourism once the virus is tamed.
COVID-19 in the USA
This is a very sad story. The USA became the epicenter of the pandemic. I won't go into politics, but when you look at how other countries have flattened the case curve, as in the case of Germany, you can see there is something that we are not doing right. The cases in the USA passed the 2 million milestone, and the curve is peaking and upticking after the reopening of the economy. People are being deceived about what reopening means, it doesn't mean the virus has gone away, it doesn't mean the cases curve has flattened, it only means that the economy of the most powerful country in the world has collapsed and the only way to put it to work is by reopening it.
This reopening without a vaccine and with overwhelmed medical services plus a population that doesn't have scientific based guidelines from the administrative level will only lead to a second wave of COVID-19 and a potential second lock down. The world keeps on turning and so must the economy regardless of the collateral damage it implies.
Interest Rates
The FED has kept the interest rates close to zero and with no intent to change that until 2021, so free money for the market. However this free money will make another rally in the stock market? I don't expect it. We went back to levels where the market is expensive from the point of view of yield. If we take into account the recession, the virus and the "new normal" it will mean the companies will start to report not very shiny ER's. It can be expected that there will be companies that will cut dividends, which would make the stock price even more expensive. The market will have to find a new bottom where the PE ratios are more reasonable.
Election Year
The election year complicates things. It is a common thing that during the election year the volatility visits the market. We have a picture of the real economy, and how the politicians try to deny, deceive, divert, and picture a sunny day. The numbers don't lie, we're in a recession and the markets need certainty. The smart money can't ever be fooled and the market is acknowledging the reality check sooner or later.
References
NBER Based recession Indicators. Federal Reserve Bank of St. Louis
COVID-19 Analysis I
COVID-19 Analysis II
Over 40 million Americans have filed for unemployment during the pandemic—real jobless rate over 23.9%
Real Unemployment rate with calculations
Don’t Be Fooled By Official Unemployment Rate Of 14.7%; The Real Figure Is Even Scarier
The Difference Between U3/U5/U6 Unemployment Rates
It's official: The recession began in February
$DIA $SPY $QQQ $UVXY $STUDY
We’re witnessing an extraordinary period of time in World History. We recently had the biggest Market loss ever, and the largest market recovery rally as well. We came from a pandemic that paralyzed the world. Weak businesses have gone bankrupt, but the strong ones still have to struggle with the low demand of products and services. The question now is what's next?
COVID-19
The Coronavirus pandemic put the economy at a halt, to this day there is no cure and there is no vaccine, there are procedures to mitigate the propagation of the virus and there are medical procedures to try to recover the patients, the tHreat is out there and we will have to deal with it in the future, so things will move slowly for a while until a vaccine and an effective treatment are found. This will be a heavy factor that will weigh in the economy in the months and years to come.
The US is officially in an economic recession.
Needless to say that COVID-19 was the triggering element that tumbled the domino chips of the economy, the so needed stay at home order reduced the demand for services, the first ones affected were the hospitality services, restaurants, tourism, hotels, airlines, etc, it made another chip fall, as soon as the businesses closed it triggered a massive unemployment rate, people need money and a lot of people were living on a check by check basis, the lack of this income drastically reduced the demand of non essential goods and services. The effect extended to the different sectors of the economy fabric and the descending spiral is growing.
The NBER based Recession Indicators for the United States declared the US in a recession. This was last declared based on this metric in 2008.
Re-opening the economy.
The economy is at a halt, and the only way to turn the switch on is by lifting the stay at home order and just like that go back to work. Reopening the economy doesn't mean we're out of the woods, it doesn't mean the virus has gone away, it doesn't mean that the COVID-19 cases curve has flattened, it only means that people have to abide by the health guidelines, social distancing, wearing mask and gloves, hygiene, etc.
For the sake of the economy we can't stay at home, and the governments know it. I assume by now they must have assessed the risks and the human vs the economic and political costs it will imply.
Although the world is trying as much as possible to go back to the point where we were before the economic slowdown and the pandemic, the so called "new normal" won't be enough to push the economy back at the levels where it was before.
The number of affected businesses and the ripple effects are yet to be seen.
New ATH in the Stock Market.
After the big crash the market had, it bounced as soon as it hit technical levels that made it "cheap" and the old mantra "buy low - sell high" applied, there were juicy profits and those who opened positions early this year are breaking even by now. We witnessed one of the biggest short squeezes in the history of the stock market. Not surprising it went beyond the expected retracement level. NASDAQ made a fresh all time high which was not followed by the other indexes. The question here is will it continue to go higher,? will the market take profits and retrace? or are the bears done closing their shorts and it will fall to the levels it had at its recent bottom?.
Economic Indicators
SP500
It reached a technical level that allowed people who were caught at the top to recoup their losses if they bought when the buy signal was triggered at the bottom of the downtrend, plus an additional profit; worst case scenario they just broke even and had enough. This is discouraging to continue the trend and it can head to a double top with strong resistance and a negative momentum divergence. If the word recession doesn't kick in the market's mind then it could define a trading range here, otherwise, this will nosedive aggressively.
Unemployment
When we think about employment we picture an image of a 40 hours full time job, but that is far from the truth. The unemployment numbers are tricky, and those have to be taken with a grain of salt. The government uses the U3 as the unemployment metric, which is very rosy, the U6 metric is a more realistic metric, you can take a look at the reference for further details on the different ways to define unemployment.
On the other hand, there was a non accurate classification, the BLS counted unemployed people as temporarily absent for "other reasons". Also the government encouraged the business to keep people employed so instead of asking for the unemployment benefit, the money was funneled through the business and this counted as one more employee after the payroll protection incentive, instead of one more unemployment application.
The analysts came up with a 20% unemployment estimation for the month of may, if you look at the initial claims, we're in the millions, and even though it has decelerated, the number is very high. The "official" 13.3% unemployment is absolutely questionable and should be re-evaluated.
Crude Oil
The Light Crude Oil futures price is set in the upper 30's, doing a bit of a retracement from the 40 milestone. The OPEC tries to keep its members in sync; however, this is more than restricting the supply, in a recession the oil price tumbles due to lack of demand. This problem didn't start with the virus, the price started a downtrend since 2014 when it reached levels above $100. It tried a rebound between 2016 and mid 2018, but it was when things simply didn't recover. This economy peaked in 2014 and the signs of recession became noticeable in 2018, from that point on it was just a matter of finding a triggering element to slow down the economy and send us into a recession, the triggering element was COVID-19.
The oil prices won't go higher unless we'll go through the expansion economy cycle, which is going to take a while. In the meantime, the oil prices are going to be depressed.
Gold
Gold is making a rally that started back in 2016, with ups and downs, mini-rallies and corrections until 2019 when the market was committed to it. The price of gold is making a double top with the prices from 2012, when gold rallies it means the market is looking for a hedge against inflation.
Bonds
The 5y bond yield dived down since 2019, it has bottomed, and there are no signs of reversal. The market looked for protection, and bonds are a safe haven in case of market crashes. This market saw it coming and rotated capital from stock into bonds.
VIX
The VIX, A.K.A. The "Fear Index" spiked to 64 recently and even though there was a recovery rally in the market after the short squeeze plus a bit more, the VIX didn't completely retrace to the levels it had before the COVID-19 reality check kicked in. It was bouncing above 24, and after the last unemployment claims number the market is trying to make sense of the real economy we're living in. The VIX was not dead, it made a consolidation and it was dormant. We could see the gains from this recovery rally evaporate soon and the market is looking for a hedge.
Dollar Index
It spiked and reached the level above 12750, at this time it is back to the levels it had in 2019. A strong dollar is good for importing, but not good for exporting. The policies related to how the US has to look at the world are not exactly friendly, and this is going to create hurdles when trying to export to the world and bring tourism once the virus is tamed.
COVID-19 in the USA
This is a very sad story. The USA became the epicenter of the pandemic. I won't go into politics, but when you look at how other countries have flattened the case curve, as in the case of Germany, you can see there is something that we are not doing right. The cases in the USA passed the 2 million milestone, and the curve is peaking and upticking after the reopening of the economy. People are being deceived about what reopening means, it doesn't mean the virus has gone away, it doesn't mean the cases curve has flattened, it only means that the economy of the most powerful country in the world has collapsed and the only way to put it to work is by reopening it.
This reopening without a vaccine and with overwhelmed medical services plus a population that doesn't have scientific based guidelines from the administrative level will only lead to a second wave of COVID-19 and a potential second lock down. The world keeps on turning and so must the economy regardless of the collateral damage it implies.
Interest Rates
The FED has kept the interest rates close to zero and with no intent to change that until 2021, so free money for the market. However this free money will make another rally in the stock market? I don't expect it. We went back to levels where the market is expensive from the point of view of yield. If we take into account the recession, the virus and the "new normal" it will mean the companies will start to report not very shiny ER's. It can be expected that there will be companies that will cut dividends, which would make the stock price even more expensive. The market will have to find a new bottom where the PE ratios are more reasonable.
Election Year
The election year complicates things. It is a common thing that during the election year the volatility visits the market. We have a picture of the real economy, and how the politicians try to deny, deceive, divert, and picture a sunny day. The numbers don't lie, we're in a recession and the markets need certainty. The smart money can't ever be fooled and the market is acknowledging the reality check sooner or later.
References
NBER Based recession Indicators. Federal Reserve Bank of St. Louis
COVID-19 Analysis I
COVID-19 Analysis II
Over 40 million Americans have filed for unemployment during the pandemic—real jobless rate over 23.9%
Real Unemployment rate with calculations
Don’t Be Fooled By Official Unemployment Rate Of 14.7%; The Real Figure Is Even Scarier
The Difference Between U3/U5/U6 Unemployment Rates
It's official: The recession began in February
