What Do You Call a Bear in the Middle of the Road?

You could say right now that I'm in a middle of the road kind of mood. I remain bearish, continue to target 2,800 for the S&P 500, and, while last week Nasdaq performed slightly better than the S&P, I expect it will slip into the quarter's end. Credit spreads are also likely to widen moderately. I do, however, think that the Credit Default Swap Index at 80 is a better risk vs. reward from a long risk perspective than bonds, as the Bloomberg Corporate Option-Adjusted Spread is at 1.53. Then there's the Fed's Secondary Market Corporate Credit Facility, which is buying bonds for the first time. But despite that, credit can be under some pressure, precisely because so many have bought corporate bonds and exchange-traded funds ahead of the Fed's credit facility action. As for Treasuries, it's difficult to like them, with the 10-year yield at 0.65%, so I would not express my bearish outlook by pounding the table to buy them right now, especially on the short end. I could see owning some long bonds, but only for a trade, because despite being in risk-off mode, I have difficulty seeing treasuries gain much ground here -- even further flattening of the curve seems difficult from these levels. Mr. Middle of the Road Let's take a quick recap of the themes that have kept me bearish. I feel the need to reiterate that the most difficult thing about remaining bearish is that I am effectively betting against what I want to happen. First, we have the Covid-19 crisis. We see a surge in new cases vs. far fewer hospitalizations and fatalities. But what I'm struggling with is whether we finally have enough safety protocols in place that the virus is mainly hitting those unlikely to experience severe problems, or is there a lag effect between hospitalizations and fatalities that is likely to spike in the coming weeks? The disease can take weeks to progress, so time will tell. I don't think, however, we will see that spike, but I cannot completely dismiss it. We must remember that time it takes between getting sick and needing more serious care, especially since testing has become more readily available. Second, we also have so much uncertainty around patients having severe and possibly permanent problems from having had Covid-19. It's also not clear if there will be any level of immunity for those who have recovered. We just so many unanswered questions, more than six months into this outbreak. Again, I am not alarmed, but I am also not at ease. Third, Washington is another story. The market is pricing in more stimulus. I have two issues here. The path to the next round of stimulus will face many obstacles. Everything I'm seeing and hearing is that the small divides that were overlooked when it came to passing the Cares Act are increasingly becoming stumbling blocks or at least negotiating points. That is a risk, especially when the economy and the country desperately need the ongoing support while jobs are not returning at the pace necessary. Any slowdown in reopening, which seems likely, will make additional stimulus more of an urgent requirement. We will get another round of stimulus, but it won't come without some moments that should spook the market. The other issue is if it's not the right kind of stimulus. We need stimulus that creates jobs, ideally permanent jobs. Bringing manufacturing back to the U.S. does that. Building out our infrastructure doesn't quite accomplish that, but it's a step in the right direction. Providing more money to help overcome temporary setbacks is less likely to do the trick as it is a slippery slope from temporary to seemingly permanent. Job creation needs to be the focus and seeing evidence of that would be the thing that turns me from bear to bull faster than anything else. Mr. Middle of the Road on the S&P For now, I'm continuing to use 3,200 as a sell and 2,800 as a buy. We are bouncing here at 3,000, but that could be as simple as Wall Street ramping up ahead of all the weekly call buys that seem to come in on Monday, or the pension fund rotation trades are over -- I don't think they are -- or more short covering, but I don't think so as short positions seem to have declined over the course of last week. Liquidity in terms of real depth of markets remains horrible in both directions at any given time, so we have to be cautious to read too much into any move, including Friday's reasonably large downside move Be Safe! Be Cautious!

What Do You Call a Bear in the Middle of the Road?

That's me, right now, and here's how I'm positioning myself amid a host of uncertainties.

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