[Chart courtesy of MarketWatch.com]

1. Moving the markets

Hope of a reopening of the economy kept the bullish theme alive with the computer algos feasting on the latest news that the worst human toll of the coronavirus may have passed.

ZeroHedge summed it up like this:

In case stocks needed another reason to soar higher with 20% unemployment, 30% mortgage defaults, GDP about to print at -40%, cratering corporate profits, JPMorgan profit crashing 69% with Jamie Dimon warning of a “severe recession”, Boeing delivered moments ago when the company reported that customers cancelled a record number of orders for the 737 Max lead balloon last month, deepening the crisis the company faces between the coronavirus pandemic which has virtually frozen all commercial air flight and the continued grounding of its best-selling plane after two fatal crashes.

We’re staring the most likely worst ever earnings season in the face, and the markets rally, because fundamentals no longer matter, as I have repeatedly noted. Analyst Bill Blain sees it like this:

Massive monetary stimulus through QE Infinity, and unlimited fiscal support via the promise of sector and company bailouts and nationalizing payrolls, have fueled the market’s expectations rally. NOT BECAUSE OF A STRONGER ECONOMIC OUTLOOK OR RISING COMPANY RESULTS. Distortion and disconnect is not sustainable long-term (although it’s pretty much fueled markets since 2009).

The expectation is Central Banks can’t allow a market meltdown. Follow the Fed… you won’t lose.

Right now, the focus remains on the reopening of the economy with some erroneously expecting this to be like flipping a switch and voila… there is a V-shaped recovery, while the second half of the year already has some sort of normalcy priced in.

I think it will be a slow process, much slower than expected, of getting back to normal. I simply do not believe that people will rush out to restaurants or get involved in large gatherings the moment the shutdown is lifted.

Even Neel Kashkari, the head of the Federal Reserve Bank on Minneapolis, painted a gloomy, or let’s call it more realistic, picture via these comments:

“America should be ready for 18 months of shutdowns in ‘long, hard road’ ahead.”

“This could be a long, hard road that we have ahead of us until we get to either an effective therapy or a vaccine. It’s hard for me to see a V-shaped recovery under that scenario.”

Be that as it may, with the Fed being in full support mode of the markets, we could very well see the return to a bullish cycle, or, we could witness a total breakdown with the a visit of the March lows being a real possibility.

That’s why we must make sure that we don’t succumb to the desire of bottom fishing but be patient and wait, until the odds have improved and our Trend Tracking Indexes (section 3) are signaling the green light again.  

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

In case you missed it or got confused by last week’s efforts by the Fed to rescue the markets via an alphabet soup of emergency measures, analyst and author Graham Summers put together an easy to understand summary:

On Thursday the Fed announced a $2.3 trillion (with a “T”) monetary program.

In its simplest rendering, the Fed announced it would expand its current Quantitative Easing (QE) programs for municipal bonds, asset backed securities, and investment grade corporate debt. The Fed also announced it would begin buying junk bonds for the first time in history.

Thus, the Fed is now intervening directly in:

1)    The Treasury markets.

2)    The municipal bond markets.

3)    The corporate bond markets (both investment grade and junk).

4)    The commercial paper markets (short-term corporate debt market).

5)    The asset backed security market (everything from student loans to Certificates of Deposit and more).

At this point the only asset classes the Fed isn’t buying outright via a QE program are stocks and commodities. It is, however, worth noting that the Fed is buying bond Exchange Traded Funds or ETFs which trade on the stock market just like regular stocks.

Again, the Fed has effectively nationalized the U.S. debt markets. All in the span of just six weeks.

It is almost impossible to express the insanity of this. Perhaps the easiest way would be to say the Fed just printed the GDP of Brazil in last six weeks and is planning on printing the GDP of France in the next six weeks.

The multitrillion dollar question now is if this will stop the meltdown triggered by the economic shutdown in the U.S.

Of course, it is possible that these monetary efforts will stoke the market fire for a while, but the durations of it is questionable. As trend followers, we are less concerned with the “why’s” of a rally but more so that it penetrates our dividing line between bullish and bearish territory not only to the upside but also by a clear margin.

That would signal a new “Buy” for domestic equity ETFs, however, the duration of which is always an unknown. Right now, we have a way to go before such a signal will materialize, as you can see in section 3 below.

My point simply is that the newly created trillions of dollars could certainly drive equities against all fundamental valuations to a point of creating a new bullish theme for us. The recent stimulus has helped the markets bounce off their recent lows by an amazing 25%, despite some of the worst economic settings. This TV screenshot makes this abundantly clear.

Tumbling into another week best describes today’s action with the question in my mind being this one: Can the Fed and its continued stimulus efforts offset what is sure to be a miserable upcoming earnings season?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

Here’s an analysis of the market idiocy we saw over the past couple of trading days. A tip of the hat goes to ZeroHedge for this explanation:

In a mirror image of yesterday’s last 10 minutes action, when the S&P dumped by 40 points in seconds, when a $2.4BN “market on close” (MOC) sale imbalance was announced at 3:50 pm ET…moments ago, at exactly 3:50 pm again when the market on close imbalance was unveiled, and revealed that there was $2 billion left to buy, the Emini future (i.e., the S&P 500) spiked higher by 20 points, from 2,732 to 2,752, which was also the session high as algos scrambled to front run the residual buy orders in the last minutes of trading.

And then the conclusion:

As a reminder, this is at least the 4th time in the past two weeks – it started on March 26 – that the MOC imbalance announcement has led to a stunning move in the market, a striking phenomenon which is attributable to one simple thing: there is absolutely no liquidity in the market, and as a result the headline MOC announcement is sufficient to send the entire market surging or tumbling…

Despite yesterday having been the deadliest virus day in the world, optimistic comments by Dr. Fauci about a turning point with lower total deaths than expected, was enough to shift the headline scanning computer algos into overdrive. The day was saved with the Dow adding almost 800 points with the usual assist of another epic short-squeeze for the third day in a row.

Again, the rally of the past two days occurred despite neither economic nor earnings data having divulged the viciousness of the economic crisis that not only the U.S. but also the world has plunged into.

Analyst Bill Blain offered these succinct and true words:

“The greatest idiot is a man who thinks strong stock markets are an indication of economic health.”

As I mentioned before, this kind of volatility is typical in bear markets, and we may see more of that tomorrow, when the jobless claims numbers are sure to extract their pound of flesh from the markets.

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