Investors seeking immediate returns are providing a high level of liquidity but the negative news flow is not likely to relent.
As we move deeper into earnings season the issue of uncertainty will become more pronounced. Many market players have felt comforted by the big bounce off the March 23 lows. There is a feeling that the worst has already been fully discounted and now there will be a sustained recovery as things slowly return to normal.
Big bounces of these sorts always occur in major market collapses and they typically do not lead to V-shaped recoveries. During the last market pullback of some size in December 2018, there was a classic V-shaped move but the big difference was that the crisis at that time was not economically driven. It was primarily driven by the blow-up of the 'short volatility' trade and was accelerated because the Fed was not very dovish at the time. As soon as the Fed changed its view the market rebounded and went straight up.
The current crisis is quite a different animal. There is a significant human and economic toll and there still is no great certainty as to its depth or duration. This morning we will see another round of unemployment claims. It is expected that there will be 4 to 5 million in claims which will bring the recent total to more than 25 million.
Despite these glaringly bad numbers, the market has not had much of a reaction. The argument is that it is already anticipated and priced into the market. In addition, the massive stimulus provides some justification for ignoring the economic consequences.
The big question at this point is whether the market has overshot in predicting that the worse is over. While the market is acting like it is confident that is the case, the news flow suggests that there continue to be some substantial obstacles. The possibility of the resurgence of Coovid-19 in the fall hardly seems to be of any concern of the market at this point and the difficulty of reopening the economy appears to be ignored as well.
Why are those obvious issues being ignored? Most likely because there is a supply of idle capital looking for a place to go. This money isn't driven by fundamental concerns. It is driven by the desire for immediate returns. It will abandon ship quickly as soon as price action weakens but it provides an aura of confidence and optimism in the short term.
At this point, the charts simply do not suggest strong odds of sustained upside. The risk is to the downside but the bulls are gaining confidence the longer the market holds near recent highs.
My game plan is to continue to hold very high levels of cash, look for shorter-term plays, and not be in any rush to build long term positions. I simply do not have much confidence that the market can continue to trend higher from here without some consideration of the substantial economic uncertainty that lies ahead.