Trading the Indices on Fundamentals

[FXtrader8911]

Doug Ramsey, Chief Investment Officer at Leuthold, said that based on Bloomberg analysts' forecasts available on their terminal, even if markets were to go to March lows, they would still be overvalued. He also said that if printing money was the way to boost economies, then Argentina and Brazil would be in a good place but they are not. His advice to investors is to plan on the likelihood of a 37% correction from current prices.

Friday was again a volatile day with the bulls and bears taking turn to dominate giving the DOW yet another 700pts swing.. good for day traders but such daily swings should be making investors nervous.

 

[Relentless]

... His advice to investors is to plan on the likelihood of a 37% correction from current prices...

Barring a full blown 2nd wave Corona meltdown he is dreaming.

We'll be lucky to get back into the 2500's on the S&P.

He's going to cost any investors that take his advice a lot of money. If they sit in cash waiting for 37%'ish downside they'll be there for an eternity.

 

[FXtrader8911]

He's going to cost any investors that take his advice a lot of money. If they sit in cash waiting for 37%'ish downside they'll be there for an eternity.

I am very tempted to think like you and in fact, many pure technicians do, but the 23% unemployment now, compared to the 14% at the peak of the great depression of the '30s, should make anyone wary of just looking at the technicals. Mind you, the 23% unemployment does not count the employed by Zomby companies existing on life support. Unless the Fed continues printing money beyond Sept (the current target date to stop) the day of reckoning will come. A further consideration is that in the '30s, the US was a manufacturing & exporting nation, not 70% reliant on the domestic consumer that needs to be employed to spend. The proposed $t infrastructure proposal might help in absorbing the unemployed but this has been just talk with no action for 3 years. When bankrupt companies and broken companies are being bid-up together, and as much as, companies benefiting from the virus, one must conclude that much of the money going into the markets is really dumb money just there for the taking.

 

[FXtrader8911]

It is a given that all major economies are in a recession, unlike previous recessions, which focused on tax cuts and infrastructure spending, today's recession is relying on fiscal spending to smooth the impact, this type of action can be implemented quickly for immediate results, however, the outcome of all this aggressive spending, without adding to GDP (helicopter money), is bigger government deficits without counteraction i.e it is creating an economic imbalance. There are expectations of the deficit has reached 20% in the US, which is raising questions about how the deficit will be addressed and what indirect damage is the imbalance causing.

The reality of the virus itself is that the only thing that has changed since the 23rd March panic, is better health services management and more public complacency... there is still no cure nor vaccine.

In Feb, while I was making the call for a sizable correction, the technicals were pointing to a 30k DOW in the face of the pandemic, the projection was unjustified then and market price action is unjustified now, my call for a correction now is being repeated.

 

[FXtrader8911]

Wed saw another 1,000pt swing on the DOW, ending the day at -2.6%, the seemingly unbreakable NDAQ also fell 2%. Europe was very much tied at the hip with US markets to continue the irrational behaviour of markets in general... why should an isolated event in one country move another county's market by the same amount?

Trump did his bit on Wed to influence markets downward, he chose the peak of a pandemic to unstabilized the health system by pushing for the abolishment of Obamacare, chose to threaten new tariffs on EU goods and China during a time the consumer is least receptive to price increases and chose to go Germany bashing at this time of crisis.

Simon Doyle at Schroders has warned that the bull case for equities is “brave”, and rests with the US Federal Reserve successfully controlling the yields on governments bonds. He said “The market’s scenario gear shift from economic Armageddon to a “V-shaped” recovery seems highly optimistic. From a valuation perspective, the US market is now trading on multiples much above pre-crisis levels. On this basis, we’d be loath to chase the market up.”

 

[FXtrader8911]

An acceleration in Covid-19 infection rates in the US, Brazil & India deflated positive sentiment last week, the US counts for one-third of world reported infections (However, 3rd world counts are probably higher than reported by the the quite useless WHO). The global number of virus infections now tops 10 million, with 500,000 reported fatalities. Texas, Florida and Arizona have reversed lockdown easing, This provided Friday's trigger for a 2.5% sell-off.

Tomorrow ends Q2, earnings reports for Q2 will determine whether the bulls were justified in pushing markets to current levels. My view remains that they were not, I remained positioned for more selling.

 

[Petechiapeter]

If you are into trading indices, it is important to make sure to choose an index in which you can be comfortable trading. Further choosing the right trade is important and you have to decide if you are going to spread bet or trade CFDs. Make a plan according to that so that every act of your could protect you from volatility.

 

[FXtrader8911]

Last quarter few companies gave investors earnings guidance and most of the ones that had given guidance before the March sell-off, withdrew the forecast.

Now that Q2 has ended, companies are about to give results of their worst quarter since the Great Financial Crisis, it is widely anticipated that Q2 will show to be the worst earnings season in 12 years with average earnings expected to fall 44%. Lindsey Bell, chief investment strategist at Ally said "Increasing coronavirus cases, management outlooks and price-performance could all have an outsized impact, and that could lead to outsized market moves.”

Above is the reality, but long-forewarned investors might just shake off the bad news. In some cases, earnings might be absolutely horrible, but not quite as horrible as expected - which could drive stocks higher. Peter Boockvar, chief investment strategist at Bleakley said "Since March lows People don’t seem to care about the numbers" This might well be but my view is that people will react to what the companies have to say. I remain positioned for a sell-off.

 

[FXtrader8911]

Retail trading has jumped from under 10% to over 20% during the stay at home orders, according to Robinhood, more than half of the traders are 1st-time entrants into equities. Where is the money coming from? The government.... unemployment pay has jumped from the $400pw average to over $1,000pw, further, government directives to financial institution and landlords require mortgage and loan payments as well as rentals to be deferred. Multiply this windfall of around $3,500 per month per person by the 13m unemployed and one can see just how much new money has gone into the markets.

The caveat is that the vast majority of this huge sum that went into markets and in purchasers was put in the hands of people normally not good at managing money, when the bonuses stop and the banks & landlords want the deferments paid, sparks will fly, the day of reckoning will arrive and the only place these people can get money to pay will be from the markets. Full circle and no surprise if a substantial sell-off by Sep happens.

 

[FXtrader8911]

For the last 2 months, big tech has driven markets upwards but the tech-focused index is about to be tested. Next week we'll get a look at whether the Big Tech stocks are really worth what investors have paid for them. IBM, Intel, Microsoft, Tesla, and Twitter will be reporting. Tesla, in particular, is estimated to be trading at 300 times earnings, hard to see a fund manager buying at these levels, if other techs show similar PE ratios, we are likely to see a correction in the Nasdaq and, how tech goes, may well go the market.