Morning Note: Oil, Stocks, and what they're reflecting...

US equities opened lower this morning and have been volatile (VIX back above 40) within a -1.5% to -.5% range for SPX. Bonds are up (yields down), gold’s up, silver’s up, the dollar’s up and oil is getting utterly hammered. Europe opened lower but most countries have now moved into positive territory. China traded higher overnight, while Japan traded off 1% and Australia tanked 2.5%.

Oil volatility (OVX) is through the roof, up 35% this morning, it’s also notably elevated across the equity space, while gold and silver vol is lower, by .22% and 3.8% respectively.

Thoughts:

Despite attempts to intervene on the part of OPEC, etc., oil is plunging -- as demand has of course fallen off a cliff. And, of course, this is precisely how markets are supposed to work.

Large cap US stock indexes, on the other hand, are not nearly reflecting the plunging decline in demand for virtually everything, save for basic goods (and their delivery) and in-home entertainment.

Now, while oil has seen a cut in production, there’s still production occurring that exceeds demand, thus exacerbating the price plunge. In the case of other goods, the supply destruction is likely greater (as far fewer folks are at their factory jobs). So there’s a different supply dynamic at play for sure. Although there ultimately is a different demand dynamic as well -- the first thing folks will restart using upon reopening is fuel.

In a nutshell, with the economy thrust into the deepest recession on modern record, the fact that stocks are trading at current levels is not about the data subtly improving and beginning to discount the recession bottoming; we’ll see that occurring as it develops. It’s about the exact same emotions that have driven the initial retracement rallies of past bear markets; i.e., hope that the data is about to subtly improve, denial of the data and the embedded buy-the-dip mentality, desperation to recover from the initial liquidity crisis-induced selloff, the belief that government actors will save the day, and the fear of missing out by the rest of those who misinterpret what’s driving the rally.

The past two bear markets saw 50+% initial retracements that each took 8 weeks to play out. We’re 4 weeks into this one; assuming this will indeed be deemed a bear market rally in retrospect...

Keeping in mind that before anything happens in the market, any position one takes is based entirely on assumption. And the market is most adept at making asses out of assumers.

So, yes, the data scream epoch bear market ahead, and, yes, the data can improve in a hurry -- thus we stay on our toes. But it’s not just the economic data: It’s the corporate credit crisis that the Fed is grappling with, with all its got (and some), it’s the fact that share buybacks supplied the main fuel for the previous bull market, and those have gone to the wayside in a huge way, and it’s the fact that geopoliticking had already done a number on supply chains coming into this mess and the stress on trade relationships has been notably exacerbated since; the barbs being thrown back and forth today would’ve -- a year ago -- roiled equity markets to an even greater extent than the current crisis has thus far. But nobody seems to have made that connection just yet...

Again, anything is possible when it comes to markets, which is why we never wed ourselves to a bullish or a bearish thesis; we absolutely have to stay open to all possibilities, and stay exceedingly diligent as we dig for those clues that lie deep below the surface-stuff that dominates mainstream market-think…

Yesterday I addressed what happens at the other end if indeed the rally turns out to be for real; which means record stimulus succeeded in keeping the stock market from discounting economic reality:

“ ...the Fed says they’ll withdraw once the economy is back on course. Well, literally, after 9 years of expansion -- in an economy that was billed the best ever -- Powell tried to tighten just a bit and the market vomited all over him (of course there was the trade war too) in late 2018…

So, yeah, the notion of withdrawing stimulus from a market buoyed only by stimulus -- regardless of general conditions at the time -- well, like I said, we can only imagine…”