Friday, June 19, 2020

What Might "Crack the Ice"

As I stated in his introduction letter, and, per the below, our new operations manager (Dan Lillibridge) has a thing for markets.

As you might imagine (particularly if you know Nick, Jeannette, and yours truly [not to mention Ryan, who's presently finding currencies fascinating], and now Dan) we often have quite the inner-office dialogue going on around markets and the economy. We have a group chat feed where any of us can log in, comment, ask questions, etc.. 

At times, I find it can be instructive enough to share a bit herein.


Dan: In your opinion, what’s it going to take for the market to correct itself and reflect the reality of where the research shows it should be? It seems like the current status is nothing more than a layer of thin ice waiting to crack.

Me: Good question! Often, believe it or not, you gotta struggle to find a catalyst... Nobody could really explain last Thursday's -1,900 point hit to the Dow (-6% for the S&P)... The thin ice analogy is a good one... essentially there's a lot of heat bearing down, slowly melting the setup, so to speak... You could argue that the market needs to burn through any residual bearishness (get more folks on the bull side of the boat), see futures traders give up their spx shorts (so those squeezes at every spike higher stop adding fuel to those rallies).. I.e., when the majority gets bullish -- especially at times like these -- it wouldn't take much to have them panic all at once... 

Advisers have definitely turned bullish, they're about back to where they were at the February top. Individual investors, however, are already turning bearish (big time week-over-week); that's actually a contrarian plus for the bullish narrative right here. And futures traders are still pretty net short on the S&P (not quite as much as two weeks ago, though). However, they're net long on the Russell and the Nasdaq. 

Back to catalysts... we've got kind of a fiscal cliff coming... 

The Republicans say the $600 extra per week for unemployed folks will not be extended past July... A client mentioned yesterday a friend who's an employee of a major airline who's been told he may lose his job after the date the company no longer has to maintain its ee numbers to not have to pay back their stimulus $... Another unusually savvy client earlier this week mentioned the airlines as well; he echoed the sentiment that the industry is likely to make some huge cuts once that green light's lit. 

Also, the Fed has to be catching huge flack for their bailing out private equity firms and hedge funds by buying junk... If they even hint of less support the market will likely freak out... The thing about the bond buying is that it won't stem the BKs and defaults.. I.e., the insolvency phase is still coming, and I don't think everyone in markets understands that... when they do, that by itself could serve as a catalyst... 

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