Phasers on Stun

Last week's market bottom has left many among us wondering just what happened. Is the 'V' shaped rally a sign of the all-clear? Have I missed the lows? Or the question that I got most often - "is this a good time to invest?"

I don't know the answer, but there is still work ahead of us. I still believe at some point I will be getting calls to "never buy a stock again!".

Although Martians seemingly landed on March 23 and fired their ray guns, they had set their phasers to stun. We survived, but we have all been left stunned.

I said last week that markets had gone down too far after the most compressed bear market I have ever seen. In the crash of 1987 it took 3 months to do what we just saw in three weeks. Now, I am compelled to say the opposite after the best weekly performance in years. A combination of bottom fishing, short covering and quarter-end rebalancing have markets quickly getting ahead of themselves. Too much, too soon. Take chill pill guys.

Now that the initial financial fever of the Corona Virus has been broken, mostly due to prompt work by the world's central bankers, we are left sifting through the ashes of a devastated economy. The projections for unemployment, GDP and debt accretion are unprecedented. Only during world wars have we seen such economic dislocation.

And yet we are left to try and carry on investing as if nothing has happened. The rapid return of equity market confidence has more to do with the TINA/FOMO thinking that has dominated investor psychology since 2009 than it does with any prescient view of a future economic outcome.

When I said that stock prices are a monetary phenomenon, I meant it.The Fed 'put' is back with a vengeance. The risk free rate drop since last January says it all. No wonder we bounced.

Fed Funds Rate and Balance Sheet

But is the U.S. market cheap? It depends. If normalized ROE for the S&P 500 is 15% on a current book value of $950, EPS will be $140. With multiples in the 20X region, the projected fair value is 2800. With a trading range of +/- 15% the market is a buy at 2400 and a sell at 3200.

Lots of assumptions there, Deck.

But what else can anyone do with 2020 earnings trashed and any economic projection a guess? But long term thinking, while comforting, is rarely helpful at navigating volatile market gyrations. By the way - that's why we have traders.

Now that the risk free rate has collapsed, stocks are dutifully bouncing higher. Growing evidence of a nascent 'restart' in Chinese business has given investors hope. Drug trials have been launched. The war on Covid 19 is suddenly viewed as 'winnable'. There is now a floor under risk assets.

Sounds about right, but there are too many assumptions embedded in this simplistic analysis - especially when using Chinese data. A 'W' shaped recovery in the number of new cases is still highly plausible. Looking over the economic valley of such unprecedented depth and unknown width is 'FWR' - fraught with risk. (my son loves that expression)

Although the publicly listed credit markets have recovered, I believe this is a head fake. By buying assets, the FED has stabilized liquidity - an important element for a recovery. But it has stopped short of guaranteeing longer term solvency and profitability. For that, a full economic reboot is needed.

We need to take the patient off its induced coma and allow it to breath on its own. Cash flow needs to be restarted for investors to be comfortable taking risks again. Given that Covid 19 cases are still expanding, we are a long way away from that, despite the protestations of Pres Cheeto .

That's the dichotomy of the 'V' market bounce juxtaposed with what looks to be an 'L' recovery, especially for the cyclical sectors.

By out-bidding real market participants, and obviating their role in normal price discovery, the FED has put a N-95 mask on the credit markets. They have temporarily stopped the spread of the disease.

But that is far from discovering a cure.

This is the basis for my call for a retest similar to what we saw in the 1987 and 2009 bottoming process. We aren't out of the woods just yet. Some stocks have seen their lows but many haven't. The beauty of dollar cost averaging is on my mind. We can buy this market, but slowly and methodically is the best way to do it.

But after the past month, you can excuse me for being just a bit more stunned than normal.

Risk Model: 1/5 - Risk Off

The XIU is currently 17% below the 200 dma - Risk Off.

The XIU RSI is currently 47, - Risk On.

The VXV is 51 - Risk Off.

The AAII Sentiment is .63 - Risk Off.

The Copper/Gold ratio is .0013 - Risk Off.

The RSI is still rising and is now above the signal line of 45. The 1/3 recovery scenario is playing out. When we get there - then what? Not much left on the table from here.

I just hate having my risk appetite force "Fed". That's what got us into trouble the last time.