Over the past month, the market has not been able to hold onto positive gains for two days in a row. From the lows of 2180 reached on 23rd March, just two weeks ago which seems like a decade already, the S&P 500 has rallied 26%. The key level market participants and technical pundits were targeting was 2650; the 200-week moving average support level which we lost for the first time this month since 2008. This was the first level that needed to be captured by the Bulls to see if a positive trend could be in place. Monday was the second back to back day of positive returns, although being up 7% in one day does not make a healthy market. Yesterday was the 6th 7% move over the past month, during the entire GFC crisis we saw 7, but this was done in only 22 trading sessions! The market rallied to 2745 which is the 50% Fibonacci retracement of the entire decline from February highs. Low and behold we touched it and turned back down later this morning. So what is going on?
On Sunday, President Trump tweeted that the rate of change of new Covid-19 cases was leveling off in hot spots that suggested that the US was past its peak. The statistic being focused on is the rate of new cases and deaths as opposed to the nominal numbers which are still quite shocking. There had been an anomaly in the weekend New York data that showed a decline on the past weekend but then a higher rate on Monday, which seemed to be the case this time as well. The market rejoicing was at odds with Singapore announcing that they had re-entered a month of lockdown after a new cluster of cases was discovered, and more imported cases in China as well. If every country and city follows these strict measures, one can argue that we can see the peak of global cases sometime over the next two weeks. But how soon does demand return and some form of normalcy is another matter altogether as nations want to avoid a second wave. It almost feels like the Titanic where countries need to be careful not focusing on just the business aspect superseding all rational sense; we all know how that ended.
Most bear markets (1987, 2001, and 2008) saw sharp vicious rallies all the way to their respective 50% Fibonacci retracement only to then make new lows or at least retest an older low. The average basing period for a bear market has lasted 9 months and the average length of a bear market is 2 years. Very rarely have we ever seen straight line events, but the bottoming process takes on average 3 months before volatility subsides, investors feel confident to step back in and then when VAR (value at risk) is actually increased. We are far from there today. It is still too early to say whether there will be a retest of lows or a newer low, only time shall tell. It all depends on how much longer the lockdown measures are in place and when global travel and business can seriously resume normally. One thing is certain this rally was on relatively light thin volume. Yesterday we averaged about 12.77 bln which is -17% vs. the 20-day average. It was a classic short squeeze as the short basket outperformed by 20 bps.
March 23rd was the day the Fed went all-in and announced unlimited QE and buying of Investment Grade Bonds. Given the Fed and now ECB's aggressive intervention which is unprecedented, stocks and markets have broken away from fundamental reality. This entire rally has been technically driven. And following various key technical levels and moving averages only make us aware where the next levels of support and resistance can be. Economically and financially we are nowhere clear. We have not even started Q1'20 earnings reporting season and company outlooks will be far from good. Sell side analysts have not taken numbers down for the year, judging by US Q2 GDP being down 35%.
According to Nomura, CTA speculative positions have been massively short this market but they are now 20% less short than April 3rd levels, which contributed to the aggressive rally yesterday and this morning, as their target level to unwind entire short was 2700. Sods law, where did we get to? 2745! Retracing from here down to the lower level of 2600 is possible then to 2400 if conditions are bearish still. It is important to take each day at a time, but balance the risk and reward and with stocks up 80% in some cases, it seems out of sync.
Buying the market here is about pricing the economic recovery and end of financial damage being priced into these stocks. Even during the GFC 08 it took a few months before we started seeing actual bankruptcies and closures. Given the carnage in the Commercial Market, Mortgage market, and businesses unable to actually get the funding in time, it seems this crisis is far from over, no matter what the Fed prints.
President Trump has managed to engineer a deal to get OPEC and Russia to cut about 10 mbpd between them. Even if a deal is announced, the starting level is in disagreement whether the clock should start prior to Saudi's gush of 3 mbpd of Oil or after it. Clearly Russia will not be the only one cutting 3 mbpd. Needless to say, to assume President Putin would cut here allowing prices to rally only to salvage US Shale seems at odds. It will be a fake deal, and implementing it will be even more uncertain. Even with 10 mbpd of Oil out of the market, with demand loss of 25-30 mbpd, we have an excess of 15 mbpd at the least for the next two months! The only way to solve this crisis is to let true pricing dynamics take over and let weak players get flushed out. As once they do and we see proper well shut-ins, can the price rally sustainably. If only Saudi Arabia wait it out, they could finally get their dream of once again being the swing producer and maximize on Oil price upside later on.
As the old adage goes, we need to see more dead bodies before we can firmly say a true bottom is in for the markets.