So strong. Friday's afternoon rally was just so strong. For that matter, unlike the several trading sessions prior to Friday, sellers simply walked away later on in the day, allowing equities to enter a mini "risk on" type frenzy just ahead of and into the closing bell. Trading volume actually ended the day for NYSE listed names, juts a bit below Thursday's levels. For shares listed at the Nasdaq Market Site, volume moved more or less..... sideways.
The rally, and it has now been well more than a month since we wrote that we saw what could be seen as a buy-type signal for both the S&P 500 as well as the Nasdaq Composite, has grown to levels that have become difficult to trust. Still, we do not see the kind of action that would provoke, at least for me, any kind of broad profit taking across a diversified portfolio.
The macro, no secret there, has been awful. Earnings? Just as poor. According to FactSet, with 86% of the S&P 500 already having reported first-quarter results, the blended (results reported mixed with results still expected), earnings have/are contracted/contracting a whopping 13.6% from Q1 2019. This is more or less in line with last week's update.
What's different now is that second-quarter earnings are now expected to print at -40.6% on revenue of -10.9% itself, with full year (2020) earnings now at -19.7%. As forward-looking earnings projections have contracted, equity markets have continued with their incredible rebound. The already mentioned S&P 500 has not only moved back within striking distance of the highs of late April, but the shares in aggregate, now trade at 20.4x forward (12 months) looking earnings.
I have pointed this out before, but I think that after Friday's action, pointing this out again may be important. After seeing how this index found stiff resistance close to Fibonacci's 61.8% retracement level on April 29, and after Friday's rally fell short of that mark, the success (or lack thereof) of the index on a third attempt to take that line cannot be overstated. Traders will note that the Nasdaq Composite, which is now actually up year to date, struggled precisely around that level of retracement as well, prior to breaking out once again.
In addition, the composite make-up of the Nasdaq Composite across industries, simply appears better suited to perform in either a "reopened economy" or one that is "locked down". The S&P 500 is far more exposed to financials, discretionary types and industrial type names, and remains riskier than an index more reliant upon technology. Just my opinion.
So, the question that screams out at investors is simple. Why? An economy intentionally shelved, reopens. Okay, we get that. The velocity of money, which I think we all can acknowledge is level one for any broad recovery by definition, will improve as general volume of aggregate transaction moves from nothing to something.
Makes sense. I don't think anyone in my line of work expects this reopening to go off all at once, or without the least bit of a negative hitch. Most expect the speed of this already mentioned mass transaction to level off somewhere in between what is essential, and what is truly discretionary until there is either a trusted vaccine for the coronavirus or a therapeutic remedy that renders this virus far less dangerous.
The majority of our most closely watched domestic macroeconomic data points, as reported monthly, have become far too "out of date" to be taken as truly representative of ground-level conditions to impact markets. We all know folks who have lost their jobs since mid-April, and we all know folks who have already been called back to work, depending on just what they do occupationally. We all know still others who might work for an hourly wage, but have seen hours reduced. In all likelihood, and Treasury Secretary Steven Mnuchin has acknowledged this, the unemployment rate is already considerably uglier than what was presented by the BLS as the April data. Look to May? That data will be stale by early June, as well.
As my esteemed colleague and Real Money contributor Peter Tchir of Academy Securities has pointed out, the real measure of success as regional economies reopen, will probably not be captured accurately in the economic numbers, nor in confirmed cases of the coronavirus as testing remains behind, and many folks walk around unknowingly without symptoms causing huge gaps in what is confirmed and what is actual. Peter writes that what will be pertinent will be hospitalization rates, and unfortunately, the numbers of Covid-19 related deaths.
What I Am Telling You
Have I seen a sell signal? No. Technically, the indices remain in good shape. Would I welcome a little more sideways type action? Yes, I would. Even though I will perform better in a rising market, I would prefer to see a bit more base-building across equity markets prior to resuming the northerly march.
We, as investors, at this point have to consider that we currently stare into a black cave of risk, and not just risk directly related to the health crisis itself -- even if all factors are now caused by, or exacerbated by, the virus as an underlying force. Obviously, the risk increases from here as tensions mount between not just the U.S. and China. This tension can really go either way, as might the public health risk.
Forget the trade deal, as there will certainly be plenty of talk, perhaps a lot more talk than action, especially as political pressure mounts to repatriate, or at a minimum, diversify supply chains. More domestically, as this is an election year where a pandemic has caused an economic crisis, the actions taken, not taken, or when taken, and the size of programs implemented through deficit spending will certainly become campaign issues on both sides of the aisle in Washington.
Equity prices will certainly react with increased volatility as the next round of fiscal support moves into negotiation. We all know that support is needed across many states and localities. We all know that to get there from here, there will have to be enough give and take to make both sides quite uncomfortable with anything falling within the range of variable outcomes. Traders will note that, as we take a look at the CBOE Options Equity Put/Call Ratio, the level of concern for individual equity positions has returned to the lowest levels since prior to the pandemic.
Yet, for options pertaining solely to equity indices, the exact opposite is true.
Apparently, even amid a very handsome-looking rally going into a weekend, traders took this version of the Put/Call ration back up above it's own 50-day and 200 day simple moving averages. Very interesting.
So... What I Am I Really Telling You?
I am telling you that I trust nothing at this point. Oh, I still trust my Mom. Sure, would have liked to have seen Mom, this Mothers' Day, more than perhaps any other Mothers' Day of my lifetime. Don't get me wrong. The markets, however, I still approach in real-time as a trader. More than an investor.
As we have mentioned here in this column, when uncertainty reigns, I think it prudent to pull in time timelines. Put simply, this means trading short term right now is just an easier way to make a buck than investing long term. Does that require a more hands-on approach? Of course. Individual flexibility is and will remain key. Traders must remain highly cognizant of all twists and turns, and must be able to turn on a dime themselves.
Remember this. Equity prices at least in the context of history, are reliant upon the flow of capital. That, of course, is still true. But the flow of capital itself has over time relied upon earnings growth that stood upon the foundation of economic growth.
Think of capital flows as the head, and economic growth as the torso. The torso stands on two legs. One leg would be policy driven, both monetary and fiscal. The other leg would be comprised of such former niceties as "ease of commerce", sentiment and valuation. The velocity of money would the the two feet that everything is built upon. Now, about those two legs. One is now very powerful, but perhaps fatigued through sheer dependency. The other has withered and become atrophied. How does this skew the traditional concept of price discovery? You don't know. Neither do I.
This is why we now pursue agility in the marketplace. For in the age of uncertainty across almost all fronts, the goal will always be the ability to identify, in close to real-time, both threats and opportunity, while maintaining a financial ability to adapt to either. You CAN do this. You WILL do this.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
12:30 - Speaker: Chicago Fed Pres. Charles Evans.