MorningWord 4/30/20: The Financial-Industrial Complex Keeps Moving the Goalposts

by Dan April 30, 2020 9:15 am • MorningWord

Just as its imperative in trading to review both winners and losers, it is also so in punditry. In January and early February I was wrong on the direction of the stock market for the right reasons, in late February and March I was right on the stock market for the right reasons, and for the better part of April, I have been wrong on the direction of stocks, for reasons I expected, just not to this magnitude. But as I review my musings as the pandemic response wrecked our economy and our financial markets, I have tried to highlight one simple fact, the Financial-Industrial Complex (you know who they are) wants to keep you in the markets and generally optimistic…their strategists and economists keep moving the goalposts, and they know that in desperate times they can rely on the Fed to take desperate measures.

For the last few weeks, I have been fairly steadfast that there appears to be a massive disconnect between what’s going on in the economy and the stock market. Prior to the market’s sell-off in February, I was cautious about the stock market for three main reasons (and also the uncertainty of coronavirus quarantines on global supply chains)l. I did not think the daily new highs for months was reflective of our near-term economic outlook, unusually positive sentiment towards a small group of stocks that are making up a larger part of the weight of the broad indices and valuations were expanding one again due in part to newfound easy money policies instituted by the Fed and central banks globally, from Feb 19th ( Pride Goeth Before the Fall ):

If you look at the Twitter feed of the POTUS he appears to display a great deal of pride about many bad things… It reminds me a bit of what I deem to be some downright nasty things going on in risk assets and the pride that our politicians, central bankers, and market cheerleaders revel in as a result. If you subscribe to the really old saying Pride Goeth Before the Fall, then you might want to consider portfolio protection in the SPY.

The decline in the SPX from the Feb highs to the March 23rd lows was the fastest decline in of its magnitude in 100 years. Near the lows, after a 35% peak to trough decline, I was fairly adamant that vicious rallies, where features, not bugs of bear markets, and we should expect one very soon, from March 26:

On Monday’s Fast Money on CNBC, I was asked about capitation and near term bottoms, I had the following to say: “We are one fiscal stimulus headline away from a massive short-squeeze…. banks, homebuilders being sold indiscriminately,… make no mistake a vicious, vicious short-squeeze is coming soon… I suspect you see a very violent short-covering rally in the next week or so”:

Click to watch: FAST MONEY MONDAY 3:25:20

And on RiskReversal, CNBC and Twitter, I have been clear that there was a simple fix to stopping the indiscriminate selling of stocks in March:

And on April 3rd, after we got that vicious rally I laid out my view of the range, up and down for the market, until we get more clarity on the health crisis:

Just as the stock market sniffed out the severity of the growing pandemic in February prior to many of our elected leaders, it is also likely to mark the turn in our health and economic battle prior to the data topping out in health terms and bottoming out in economic terms. But I will stick to my guns and suggest from a purely anecdotal viewpoint that coming out of this health crisis in both economic and market terms will take longer than most think, because the Fed, the Treasury, and Congress have all front-loaded their response, which means that there will be more to come, but all likely to have a lessening impact as the economy deteriorates so quickly.

To my eye, the SPX has near term resistance between 2800 & 3000 and longterm support between 2200 & 2000:

What strikes me about these ranges is 3000 on the upside was the level that the SPX broke out from in late Oct on a Fed liquidity induced rally that seemed flat out unwarranted, I would be shocked if the SPX trades above 3000 for the balance of 2020 or above 3400 in 2021. On the downside, the intraday low on March 23rd got very near the late 2016 breakout following the presidential election. What is significant about that is 2016 was a rocky year for the global economy, starting with a continued growth scare in China and rocky geopolitical events with Brexit in June and populism and nationalistic leaders and policies being voted in/enacted across the globe.

My view has also been consistent on CNBC and on RIsk Reversal to raise cash near or in the red zone and start to dollar cost average in the green zone. In Top Gun parlance, we are approaching the hard-deck and engagement should be limited, not yet in the danger zone of investing mistakes if you stay disciplined and stick to your wingman (risk management).

In mid-April, my very clear view is that investors should start to think about taking more defensive posturing and use the recent rally as an opportunity to lower exposure to stocks as we are likely to be in for a long economic slog, longer than most think (Re-Balancing…Act Now?), from April 9th:

If you are worried that current health and economic crisis lingers for next year, then stock market will make new lows from last month and the recent bounce of 25% off of the lows is presenting an opportunity to get more defensive. Capital preservation should be top of mind in this environment.

Since mid-April I have echoed this sentiment routinely, It’s Time to Prepare for the Worst and Hope for the Best, from April 17th:

the stock market has been the wrong lens to view the health crisis brought on by the virus. It also seems incomprehensible that the virus mitigation efforts of the last two months does not morph into one of the worst economic shocks we have seen in decades, likely to result in the deepest and longest recession since the Great Depression. I know, I know, just like the unprecedented nature of the crises, the monetary and fiscal stimulus that has been thrown at it, and will continue to be is also unprecedented. But this is the third bailout of capitalism in 20-year by the Fed and our Treasury, and I worry it is straining the very fiber of our financial and societal institutions and having a decreasing impact for the overwhelming majority of our citizenry. And again the propped and inflated stock market is NOT the economy, despite the Fed, and the President often confusing the importance of not letting the stock market reset.

Yesterday’s 2.66% rally in the SPX is bringing it very near a level I was fairly confident a few weeks ago that it would be unlikely for the index to be above this year. My friend Sven Henrich aka @NorthmanTrader post a simple chart that sums up my view why this previously seemed incomprehensible:

So yeah I am fighting the tape aka as Fighting the Fed…

Yesterday messaging with a friend who is a very successful investor… who asked me after a brief back and forth of the Fed presser yesterday “did you even watch, did you hear what Powell said??” His answer was that whatever you think they have done so far just to get us back to where we are, they’re just getting started:

haven’t event activated the primary and secondary corp credit facility yet
the main street lending facility has also not started
those are levered up. 4T. its 10x the size of PPP
that’s 20pct of GDP
they haven’t even started yet!

So the hedge fund community is all-in… tons of cash on the sidelinesretail investors are ALL-IN high on free-trading, the Fed put is squarely in place and they think the assault on their civil liberties is about to be lifted and the good news on the therapeutics, resting and vaccine front of late outweighs the risk of further spread. The stock market V’d, now the economy will V. Just to be clear, that is NOT what I heard from the Fed on the economy, but I guess we won’t know for at least a few months.

I’ll stick to my guns for now, unless the SPX can breach and convincingly hold 3000 with healthy breadth I am not likely to change my tune at this juncture. I am not hoping for a deeper and longer recession, I am just hard-pressed to see, especially given investor sentiment that it does not surprise to the downside.

As for you who think I cherry-picked my commentary, it’s all there, on the pages of RiskReversal, find it, hit me directly contact@riskreversal.com and I am happy to answer any questions. I have detailed bullish and bearish trade ideas throughout the volatility this year, I don’t think I have been “perma” anything, but I can assure you that I have been wrong-footed as any honest investor, trader or pundit will be. I am not one of those guys you see on TV who are always talking out of both sides of my mouth, you know the ones that know better than being on the wrong side of a market move so they can take credit no matter what happens. That’s not me.