Thursday, May 7, 2020

Morning Note

Analyst Jim Bianco tweeted a link to an article this morning on the rush among pharma to produce a COVID vaccine. He suggested that hope for a vaccine is what’s driving this morning’s rally, then concluded with “I guess hope’s a strategy”.

Well, I can sympathize, not necessarily with his reasoning for this morning’s rally (there’s news that U.S. and China trade officials will be chatting next week, which I suspect is contributing markedly), but with his notion that hope is a strategy.

Of course, as I continue to report, and will persist till it subsides, there's presently huge short interest in futures contracts on the S&P 500 Index. On days like today those short-sellers have to cover to keep from getting potentially killed, and, make no mistake, that adds bigly to the upside!

As simplistic as that (hope as a strategy) sounds, I indeed suspect that it accurately captures the present mood of the market. After all, in many circles, the first retracement rally in a bear market (if indeed that’s what we’re experiencing) is called “the hope phase”.

Clearly, when we consider the fact that, per this morning’s jobless claims release -- over 3 million Americans filed for unemployment over the past week -- and that the previous week’s number was revised upward, and that 22.6 million Americans show up in the “continuing jobless claims” data, and that the last recession (worst since the Great Depression) saw a total of 8.6 million job losses, and that companies are dropping like flies into bankruptcy (Neiman Marcus this morning), and that, amazingly, the S&P 500 Stock Index is trading at 19 times last year’s earnings, and just off it’s all-time high price-to-sales ratio, well, certainly, folks piling into stocks right here are hoping for a lot.

Let’s hope they’re right… Time will tell…

US and European equities are nicely in rally mode this morning, Asia was mostly lower overnight. Commodities (ex-ag), save for nat gas are trading higher across the board. The dollar’s up against the Yen and the Euro, but down across the board against commodity (driven) currencies -- as the commodity price action would imply. Treasuries are rallying nicely this morning (yields lower).

I could say this morning’s open is totally “risk-on” as they say; my only hesitation is that bonds and gold (i.e., defensive plays) are having a nice morning as well.

The other point worth noting, that’s presently positive for stocks, is the plunge in volatility. The VIX (tracks the price of S&P 500 options implied volatility), as I type “trades” at 30.90, down from 40+ on Monday. That’s a big 3-day drop, and is certainly doing a number on the value of our hedges this week. However, historically-speaking, a 30 VIX denotes a very dangerous market to play in…

The VIX (white) pretty much lived in the 20 to 30 range throughout the initial 25% S&P (yellow) decline during the last bear market:  click each insert below to enlarge...

And for the majority of the time during the previous one:

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