The market is not a dog. You can't tell it to stay. You can't tell it to roll over. You can't get it to fetch. People, though, people keep thinking that there is discipline to the process. When you get a spike in infections then the market should be clobbered.
That's what happened Friday.
Don't expect it to happen again Monday. This is a new day and the bulls, who think that you can still get sick but that death is pretty much off the table, want to take advantage of a decline like we had Friday, and do some buying.
Remember, it doesn't mean you buy the same stocks as you may have before. The stay at home stocks, the so-called Cramer Covid Index, had a bad day for a simple reason: if you think that the spike in infections is no longer an issue than you are a buyer.
How is this possible?
Let's go over the confluence that allowed us to advance after a brief dip down in the morning.
First, we have a reason that can be time-stamped. The market was, indeed, taking a header when we got a truly incredible Pending Home Sales Index, which surged 44.3% in the month of May. That's just outstanding. As the National Association of Realtors put it: "With May's result, pending home sales are down 5.1% year-over-year, also greatly exceeding expectations for a 22% decline." It was broad based with a 44% increase in Northeast, 37.2% in the Midwest, 43.3% in the South, and an astounding 56% in the West. That's pent up demand and a level of resilience that is totally unexpected.
Second, the incredible bounce back of stocks. Friday saw a trashing of Nike (NKE) after a so-so quarter with the company stuck with a lot of inventory and weak gross margins. I thought there would be a second day given the disappointment. Nope people can't resist. They smell a bargain in a blue chip -- $101 down to $93% and they take it. Same goes for Facebook (FB) . It gets pancaked Friday after a bunch of high profile advertisers say goodbye because of the controversies on the site make them uncomfortable. The big blue chip pull-outs include Verizon (VZ) , Unilever (UL) , and Starbucks (SBUX) . The stock gets smashed at the opening and then percolated higher as people digested that the company has 8 million advertisers and this won't even ding numbers, at least according to JP Morgan. The turnaround was stunning. It was as if nothing ever happened. So much better than when it was hit with the Cambridge Analytica controversy. Maybe, for once, people don't think of Mark Zuckerberg as a bad an actor as these consumer package goods companies would indicate. He's a lightning rod.
Then there's Goldman's (GS) double upgrade of Southwest Air (LUV) . Why? It will be the first one to launch a major comeback. The enthusiasm of retail investors for the airlines took that call and ran with it. Next thing you know all the airlines are running and so are the cruise ships!
Third, it looks like Boeing's 737 might get out of the FAA doghouse. The FAA will be testing the plane for its safety. Boeing's hugely important to this economy, and it's possible that it might be flying by year end, just when you should get a rebound in traffic. It will be the most tested plane in the universe so I don't think there will be many objections taking it.
Fourth, remember there is a rotation going on. The market didn't rally to the Cramer Covid Index because the problems in Texas, Arizona and Florida, haven't led to a lot of death, nowhere near New York and New Jersey. So it actually helped spur buying in a host of industries that had been given the back of this market's hand: Defense, I like L3Harris Technologies (LHX) , up 5, autos, I like AutoNation (AN) , up 5, and Tesla (TSLA) , priced up $29 to $989, healthcare, I like Centene (CNC) , up $2, retail, my favorites are Costco (COST) and TJX (TJX) , but the buying was indiscriminate. Of the winners I prefer Dollar Tree (DLTR) , up about $1.76
Fifth, the banks were able to bounce back despite the Fed's heavy hand from last Thursday evening. That's pretty incredible. I explained earlier the importance of that move.
Sixth, the market didn't give a darn about Chesapeake's (CHK) filing for bankruptcy. It was expected and because oil, which had been down early in the morning, reversed and finished strong. The oil stocks with the good balance sheets, namely ConocoPhillips (COP) and Chevron (CVX) rallied easily.
Finally, there's the seasonal trade. Remember we charted out the thoughts of Larry Williams, the legendary technician, and he said that if you bought stocks today, four days before July 4th, you made money 80% of the time in the last 21 years. The next days' even better, up 85%, and the day before the holiday? How about 95% of the time. That's pretty astounding.
Now how about the decline in the stay at home stocks, and the stocks that help companies digitize? Is this the end of that move? Can we really trust them still given that Goldman Sachs raised its price targets on a slew of the digitizers and they got hammered? Remember, there's not a lot of new money coming into the market. That means you have to sell something to buy something. These stocks had huge runs. It is reasonable to take something off the table.
What hasn't been cooled is the ardor for "story" stocks, the companies too small to mention that have been trafficked in endlessly, particularly, I am told by young people who can't resist penny stocks. Here's what I have to say to you: Think about it. Does any company set out to be a penny stock. Never. Does any company ever amount to anything that is a penny stock? I studied this over a 15 year period and there was only one stock I could find, and it has since been taken over. Similarly, no company files for Chapter 11 bankruptcy hoping that shareholders maintain an interest in the new company that comes out of bankruptcy. But it very rarely happens. Maybe you will be the lucky one if you are buying Hertz (HTZ) or Chesapeake or the stocks of any other companies that filed for bankruptcy. It is likely you will be wiped out, unless your plan is to buy high and sell higher.
Honestly, I wish there weren't such rampant speculation in this market. But a lot of younger investors have apparently taken some of their $1200 and gambled with it not at the tables -- because the casinos has been closed -- but in the casino that it is the stock market. It's all about one thing: day trading. You pick the right stock, you get someone to take you out, you are a hero.
I do not think we have a good feeling about this much speculation. These buyers have to abandon things that don't work, and companies that barely exist, and move on to companies that can grow into something big. Just because you are looking for the next Tesla, you don't buy a stock that has his first name in it. You don't buy the stock of something you don't know. Ask yourself this before you buy, can you come to me and tell me three things I don't know that make it a reason to buy?
Yeah, I thought so.