Markets are rallying in spite of horrible economic momentum and progressive earnings downgrades. Based on what seems to be the range of 2020 top-down S&P500 EPS estimates by top Wall Street shops ($110/$130), forward PE is now at levels last seen in the dot-com era (21.5 to 25.5). FED can pull off miracles, and this is one of them. in the face of unprecedented economic distress for Main Street, the war chest deployed by the central bank is enough to create false sense of security, and I am pretty sure many investors are banking on what could be the FED's next nuclear move, i.e. buying equities like the BoJ does. Because, why not?........ This being said, policy support almost always fades over a matter of weeks. Look at the ECB's launch of the public sector (April 2015) and corporate sector (March 2016) purchase plans: they boosted markets in the short term, but they were faded just in a matter of weeks (just look at the Stoxx50 performance). I strongly expect this to be the case this time around as well. To me it is pretty simple. A crisis of this magnitude (we are not talking of a mild manufacturing recession like in 2016, but of a potential depression the likes of which nobody over 4 generations has ever seen) does not end with valuations at multi-cycle highs, does not end with markets trading flat YoY, and does end with most strategist expecting the S&P500 to close around 3000 for the year and with sentiment rebounding into net bullish territory in record time. Markets are relying too much on policy support, and isn't this natural after buying the dip was the name of the game for the past 10 years thanks to central bank support?? Too bad that sooner or later the fundamental narrative will start dominating again and FOMO-driven investors (especially trend-following retail ones) will be dumped by strong institutional selling (with big asset managers only waiting to be around flat for the year before booking the profits and closing the 2020 balance...).
From a technical standpoint, I don't like analog charts. Each cycle is different and it is just a waste of time to compare day over day. What matters to me is the big-picture market behavior, and one thing stands out: how both in 2001 and 2008, after the first leg down, markets rebounded off the 55-month moving average and retraced around 50% of the downturn. In both cases, that ended up being only the first move and the real bottom was touched in proximity with the 200-month moving average. I don't see why it should be different this time: the S&P500 rebounded off the same MA and is now trading around the 50% retracement level. It is always like this: first, markets puke; second, investors start talking about "writing off and looking through" the year because "hey, we will rebound at some point"; third, the extent of the economic damage becomes fully clear and investors turn hopeless. Only then, when nobody wants to buy and valuations have really adjusted to the doom and gloom, markets start a new cycle. We will get there; this is a multi-month process, not a 30-day crash. This is 1929 or 2008, not 1987. As we trade close to many strong resistances (50% retracement, 55d MA), this is the right time to book any profit and position for what will be a grind lower. I would start buying anywhere between 1700 and 1900. Buying now is like buying toilet paper for $10 per roll: just panic buying for something you don't need to hoard now. Be patient.
From a technical standpoint, I don't like analog charts. Each cycle is different and it is just a waste of time to compare day over day. What matters to me is the big-picture market behavior, and one thing stands out: how both in 2001 and 2008, after the first leg down, markets rebounded off the 55-month moving average and retraced around 50% of the downturn. In both cases, that ended up being only the first move and the real bottom was touched in proximity with the 200-month moving average. I don't see why it should be different this time: the S&P500 rebounded off the same MA and is now trading around the 50% retracement level. It is always like this: first, markets puke; second, investors start talking about "writing off and looking through" the year because "hey, we will rebound at some point"; third, the extent of the economic damage becomes fully clear and investors turn hopeless. Only then, when nobody wants to buy and valuations have really adjusted to the doom and gloom, markets start a new cycle. We will get there; this is a multi-month process, not a 30-day crash. This is 1929 or 2008, not 1987. As we trade close to many strong resistances (50% retracement, 55d MA), this is the right time to book any profit and position for what will be a grind lower. I would start buying anywhere between 1700 and 1900. Buying now is like buying toilet paper for $10 per roll: just panic buying for something you don't need to hoard now. Be patient.