Tuesday, July 7, 2020

Morning Note: Back In The Twilight Zone

Asian equities traded mixed overnight, with 10 of the 16 markets we track closing in the red. Chinese stocks -- aided by the state -- continue to rally. The last time we saw such blatant state-influenced pricing of China's markets ended very badly.

Like I said in yesterday's morning note, reality can be very painful.

That, by the way, was a bear market that occurred outside of recession.

European equities are down virtually across the board this morning, while the U.S. is mixed; Dow down 130 points, the S&P 500's up .1%, the Russell 2000's down .31% and the Nasdaq is up a sold .8% as I type.

The VIX (S&P 500 volatility) while dangerously elevated (27.30), and the day's still young, is signaling calm this morning; down 1.29%. On the other hand, and again (like yesterday), bucking the rally in the Nasdaq, VXN (Nasdaq volatility) is trading up 2.3% (interesting!).

As for commodities, oil's up, gold's up, silver's up, copper's up and ag is mixed this morning. The dollar's flat...

I listened to an excellent interview last evening with analyst Barton Wang (very sharp guy!). The question of who is buying stocks amid the worst recession in modern history was posed. Wang's not all in on the popular notion that folks living these days in their jammies who've dumped their stimulus checks and their extra $600/week unemployment benefits into their online trading accounts are measurably moving markets. He's guessing that the buyers are split roughly down the middle between your traditional retail and institutional investors. 

Thinking later about the importance of that question, it occurred to me that while (contrary to Wang's opinion) I do see an element in equity market action that is reminiscent of the '90s dotcom craze, rather than who's buying, the why is likely more important. Why would folks be so willing to buy stocks (un-hedged) under such obviously risky circumstances? 

Answer the why and you can develop a thesis/opinion as to whether you should...

Well, people are people, and after living through the longest bull market in history, where you buy every dip and never buck the printing press, it makes sense that there are a good number of folks who believe that stocks can indeed circumvent fundamental reality. There are also a good number of professionals, beholden to market performance mandates, who continue to play the game (nervously I suspect [as VIX levels strongly suggest]) even though they don't believe in it.

Note stage 6 in the boom/bust process:

1. In the initial phase the trend is not yet recognized.

2. A period of acceleration, when the trend is recognized and reinforced by the prevailing bias; that is when the process approaches far from equilibrium territory.

3. A period of testing when prices suffer a setback.

4. If the bias and trend survive the testing both emerge stronger than ever and far from equilibrium conditions in which the normal rules no longer apply become firmly established. If the bias and trend fail to survive the testing no bubble ensues.

5. The moment of truth when reality can no longer sustain the exaggerated expectations.

6. A twilight period when people continue to play the game, although they no longer believe in it.

7. A crossover or tipping point when the trend turns down and the bias is reversed.

8. A catastrophic downward acceleration; commonly known as the crash.

The process tends to start slowly, accelerate gradually, and then fall steeper than it has risen.

Yes, the February/March plunge sure appeared to be your step 8, by definition. However, thanks to the herculean efforts of the Fed the market recaptured its upward bias and now finds itself, in my view, perched back at stage 6. If indeed that turns out to be the case, I suspect, when it's all said and done, I'll be referring to the Feb/March experience as that stage-5 "moment of truth"...

Time will tell...

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