They are like two heavyweight champs duking it out, in one corner, the champion, with five knock outs under his belt vs. the bond market, a stalwart that's won far more bouts than it has lost, but has been out through the meat grinder on many occasions.
Who are these boxers? In the one corner is a viciously oversold position where stocks have gone down to relentlessly that they have been knocked back to historical and hysterical proportions because of the coronavirus and the ascendance of Bernie Sanders.
In the other corner is the bond market, more specifically Treasuries, which, every time they go up in price and down in yield, serve to be a vicious combination that decks stocks as surely as Muhammad Ali sent so many challengers to the canvas. And that explains the bizarre action that's yielding such a gigantic, lopsided battle with the technicals prevailing beyond all reason.
Let me explain. First the challenger: We know that there's tremendous fear in this market, both economic fear and fear for personal safety. When there is a tremendous fright like we are having, we get what's known as a flight to safety, a silly term that means people just want to hide in something and aren't really asking to get any reward for it. I know it seems ridiculous for man, but lots of wealthy people and institutions are willing to earn next to nothing, even if there is risk that they could lose money for doing so. That's why we keep seeing interest rates go lower. Buyers want these bonds badly for protection and sellers don't want to get rid of them.
If I ran the treasury, which I most certainly don't, I would be taking advantage of this insane buying and offering billions of dollars in bonds in 10, 20 and 30-year increments to have enough money to make American infrastructure great again. Not going to happen -- I tried this early in the Trump administration and it didn't fly.
Without new supply, these bonds are doomed to go higher every time we get scared by the coronavirus, which, judging by the worldwide nature of the scourge and the tremendously erratic and secretive way the Chinese are hoarding all data, is pretty much every day of the week.
The lack of economic activity in terms of travel, leisure, dining and entertainment is further driving rates down. If you cease operating in a normal fashion and have everyone work from home, you are going to slowdown the economy something fierce, hence why the Fed wrongheadedly gave us a 50-basis point cut in short rates. If I were the Fed chief, which I am most certainly not, I would have never done that because we always figure the Fed knows something and you slash rates that big only because you know something really bad is doing to happen.
I, like many others, know this is a biological crisis, not a financial crisis. It's great to have lower rates if there's demand, but if there is no demand for money because you are too afraid to go outside, lower rates aren't going to help. In fact, it's gotten so bad that I speak to many, especially older people, who seem as worried that they can't get any income from fixed income, because the rates are too low, as they are about the possibility of getting the coronavirus.
So, a combination of a lack of demand, a vicious fear factor punctuated by endless "first case found in (fill in the state city or country)" or "schools closed in," or "x number of fatalities," and the Fed's cluelessness -- would it really kill them to check in with me first so I can tell them what will happen? -- gave us a stock market that seemed to no know bottom.
Now, let's bring in the champeen, the heavyweight I have bet on all my career and has only failed once and for a very good reason. I am talking about the MarketEdge Oscillator, something I pay for and get every day after the market closes. This darned thing is so reliable that even a bearish biological bond crisis is no match for what the oscillator can do for bonds.
What does an oscillator do? It measures buying or selling pressure, specifically when there is an inordinate amount of selling that can be disproportionate to the press of events. When you are caught up in the events, of course, you may not know that things have gotten out of control. That's why you might need something like this MarketEdge product to remind you of what happens when there is too much selling.
It's a pretty simple tool. When the oscillator goes below zero, you are in the neutral zone. When it goes above five, there is too much euphoria and when it is below five there is too much gloom. The higher or lower from those levels usually support taking the other side of the trade.
And when it goes below 12, it's almost always been a great time to buy. We saw it after 9/11, when it turned out to be a terrible, tragic -- but one-off -- event. We saw it on Aug. 11, 2011 when the federal debt crisis caused the S&P downgrade U.S. bonds. We saw it again when the Chinese stock market collapsed at the same time as the Fed governors seemed hellbent to raise rates. We saw it one more time when the Fed raised rates and talked about further rate cuts at the end of 2018, just when it should have been talking about cutting rates.
Each time was a marvelous moment to buy stocks. Each time stocks were overreacting to some news that turned out to be not as serious as the market thought. Sure, things were bad, but they weren't that bad and they were solved in shorter order than anyone thought possible or we wouldn't have gotten so low to begin with.
The fifth and final time? The one outlier, the Great Recession. You got smoked if you bought when it first hit minus 12, because the issue involved the most important thing when it comes to both stocks and bonds: A true financial crisis when almost all of the biggest banks were under pressure or went under. The government, particularly the Fed, didn't understand how out of control things were -- hence my "they know nothing" rant -- and they tried to stem their own foolish and wrong-headed regulation with rate cuts not knowing that they needed a much more powerful tonic. In the end, it was too late and the stock market got cut in half before it bottomed.
Now let's talk about commonality. In the four instances, where we bounced hard after minus 12, there were no real financial consequences. There was no confidence of credit. There were no big failures.
In the one that we failed to bounce, we had all of those. The reason why it was so wrong for the Fed to cut Tuesday was it made old hands like me feel that there must be some sort of looming credit crisis, that some institution or institutions were about to fail. I mean, what a terrible signal.
As I have said over and over again, though, this is a biological crisis that could hurt hiring and cause firings and if the federal government were to help tie over the short-term unemployed, we could be OK, even with the expected outbreaks that close businesses all over the country. We will be getting a mild recession based on a lack of travel and entertainment -- so called gatherings -- but the oscillator is saying the odds favor buying short term and long term for that matter.
You could say that this rally reflects other things: more stimulus, some cure we don't know about. I say it's a traditional snapback and even if you don't believe in it, you can liquidate all you want at better prices than a week ago. Me? My trust is standing pat, lightening up a tad on all the money we put to work in the downturn as members of the Cramer club, Action Alerts PLUS, which follows the trust, know all too well.
I think the champ put the bonds through the meat grinder, turbo charged by the turn against socialism in Tuesday night's election. Miss the bout? Don't worry, there will be a new one soon enough.
