The current situation on the SP500 is at least, confusing, how is it possible that the SP500 has bounced nearly 30% from March 2020 lows given the current situation (pandemic, terrible macro data, fear and pessimism, etc). In this post I'll share my views about what this "non-sense" might be telling us...
As you see in the chart, technically speaking, the current set up is very similar to that in 2001. We have huge bearish divergences between Price action and RSI oscillator. Keep in mind, that this is just technically speaking, as current macro situation is completely different.
So first thing you may notice is that these huge bearish divergences lasted almost five years (1996-2001) in the previous crisis, and the bear market only began once Price tested 12 month moving average and could not break higher (red circle), but previous drops did not signal the start of a bear market as Price moved higher tan the MA.
Currently we have a similar set-up in April 2020, huge divergences between Price and RSI, and Price approaching MA. Should Price go higher than the MA, bull market could continue at least until November 2020 (US presidential elections). If Price cannot break above the MA, then bear market is definitely confirmed.
Target Price for bull market would be (approx) 3600 (Nov 2020).
Target Price for bear market would be (approx) 1500 (Nov 2020).
So now the question is, which one is more probable? Well, you have to keep in mind that currently there are two forces fighting:
FED + Us Gov: printing like there is no tomorrow + bailout everybody (inflationary)
Who will win this fight reminds me the part of Avengers movie, when Loki says "I have an army" and Tony Stark says "I have a Hulk". Well in this case reality would say "I have a pandemic" and Fed would say "I have a printer". I favor therefore the bullish scenario because FED will do anything necessary to pump the markets higher. They will buy stocks if necessary and destroy the purchasing power of the dollar without hesitation.
This does not mean that we will not have volatility (retesting MA several times), I think we will see a lot. I would not position myself heavily anyway for any of this scenarios until we see a test of MA. Of course, that test should happen in the next two weeks, otherwise, the thesis should be reassessed.
So even if market sentiment seems negative (most articles in Tradingview are bearish), this does not mean that market can stay irrational longer than you think (look at 1996-2001), as Kostolany said: "If weak hands hold stocks, any positive news has little effect on prices, but any negative news will make them go down deeply. If strong hands hold stocks, any positive news will make stocks go higher, and any negative news will have little effect on prices." This is what is happening right now, so ask yourself who is buying stocks (short squeezes apart).
To conclude, I think one should stay as agnostic as possible, leaving feelings and what we want, or what "should" happen aside. Logic and macro tells us we are in bear market, but technicals do not confirm this yet.
Feedback more than welcome.
Comment
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Sp testing 200 SMA, we’ll see in the next few days wether the bull market is confirmed, or if this is just a bear market rally. This week sentiment will remain positive on earnings and news about countries re-opening, later in mid may, a correction is quite probable as oil prices should collapse again.
You are a really good writer. I especially enjoyed the quote from the Avengers - it felt good to laugh while reading a market analysis. The Kostolany quote was insightful as well.
Your advice of keeping our emotions and desires off the decision making table is spot on. Thank you for that reminder.
Very nice analysis in simple words. I completely agree with you. I like the Kostolany quote. In this current market, it is wise to not anticipate too much.
rosscepp
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this is good
ForexSignalsDaily
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We know who's buying but we also see decline in volumes...
WKMAnalytics
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@ForexSignalsDaily, true, there are some bearish signals (divergences, decreasing volumes) in short term horizons (1 to 4 hours) which may lead to a short term correction.
Crypto1337Dk
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It sounds about right.
But what I read is "short the dollar", the problem is just in respect to what?
* Stocks, hmm, might work. But really, depresion is not unlikely. We might not get there, but then again we might. P/E are not impressive, more or less everything seems to indicate a higher risk than normal.
* Gold, hmm, it has it's own problems. It's a all time high and those who claims to know about this is bearish.
* Bonds, well, funny right. Now go away.
* Real estate, well no. The depression scenario will be even harder here. It might not happend! But the chance is enough for me not to be interested!
So what should I buy.
That's TINA right. There Is No Alternative. Just buy the f.ck.ng stocks!
I don't want to hold anything really. But out of the possibilities CASH is probably the worst and stocks the least bad.
Of course you could try Bitcoin, fine art or other creative ideas. That might work, but I guess you really need to know about those things. Most people don't. And even then, probably the prices are already inflated by the "free dollars".
WKMAnalytics
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@Crypto1337Dk, I agree with you on the TINA idea. I favour stocks and gold for medium, long term investing.
In fact most people say "stocks are expensive", but you have to put this in context with FED monetary stimulus. FED's balance sheet increase from 4 trillon to almost 7. A 30% increase, which is roughly the same % of increase in stock prices, so maybe stocks are accounting for this monetary inflation in their prices. Should stocks drop, FED will provide more stimulus (they are already funding short term markets with 15 billion a day).
About gold, it should be a good hedge about increasing inflation (I'll write another post of that).
Bonds make no sense, they'll be destroyed by inflation.
Real estate may have sense as a hedge to inflation. Some REITs have already been beaten to the ground so there may be some interesting opportunities.
Don't like bitcoin, as it can be heavily manipulated and destroyed by governments quite quickly.
Many thanks,
Boolish
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@WKMAnalytics, the helicopter Fed money going straight into stock market is the fundamental problem why fiscal policy will fail. The money was meant to create jobs, help distressed companies, not enrich stockholders and CEOs. The millions who lost their jobs are not going to be rehired anytime soon if what the corporations do is take those interest-free money and pile them back on to the stock market to enrich themself.
Re inflation, this is less likely to happen despite ultra low interest rates because unemployment will be so high that people can't even afford to buy food, let alone spend more to create inflation.
I agree with you that the market is stuck between the bull and the bear situation and if it the bull dominates this quarter due to QE, it will eventually run out of steam suffer more spectacular downfall when economic reality hits home.
WKMAnalytics
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@Boolish, many thanks for your feedback. Couldn't agree more with some points you mention, specially after oil collapsed yesterday. However, just consider several things:
- In order to rise inflation FED does not necessarily need to rise production (employment). Although rising employment would be the desirable effect of the monetary policy, FED can produce inflation by sending checks to everybody. Insted of sending 1200$ checks, send 1 million $, and then tell me if that would not cause inflation (note this is an extreme absurd example, but just to illustrate the point, as reality has become quite absurd lately...).
- FED can pump the market using the backdoor, just funding banks that can fund hedge funds that can buy US stocks.
Your advice of keeping our emotions and desires off the decision making table is spot on. Thank you for that reminder.