Chill Pill

The Covid-19 virus crisis is mutating again. What first started as just a health issue, quickly became more about the economy. It is now a political issue as we think about the return to normality. The battle has begun for the hearts and minds of the voting public.

The market 's focus has shifted rapidly over the past three weeks. After the March 23rd forced liquidation bottom, bullish investors have been grasping at different straws to give them courage to write their blue tickets. First it was the 'flatten the curve' measures that have prevented the medical disaster of an overwhelmed health system. Then it morphed into a 'look over the valley' mentality as rapid deployment of fiscal and monetary backstops were deemed sufficient to stave off economic ruin. The latest straw to be grasped this week is - the 'restart'.

Who says hope is not a strategy? It seems now, after one of the best market recoveries in 50 years, it is.

Fans of a retest for the March low, myself included, are now seriously wavering. The most popular playbook for the bears has been a repeat of the March 2009 secondary low sequence. I even showed such a chart in last week's missive (the VIX chart). But I also showed a chart of the 1942 market low. It was never tested. The war wasn't over for three more years.

So we now must consider that the retest isn't coming. At least any time soon. Having again proven that we really don't know anything, it remains an open question - what next?

The anticipations of others - optimistic or pessimistic - seem likely to remain in this disquieting limbo for some time to come as this most uncertain of futures unfolds.

The bullish narrative focuses on how economic policy is erring on the side of largess. The FED's surprise backstopping of the riskiest segments of the credit market last week took an economic depression off the table. Markets dutifully soared higher.

This ensures that the bad earnings to be revealed over the next few weeks will be dismissed as temporary and unimportant. The FED's decisive action to 'paper over' the mother of all financial cracks has given investors a set of powerful binoculars to look over the looming financial valley.

What struck me from my reading of sentiment last week was how polarized investor attitudes have become. Although a few bears decamped to the bullish side, it was not enough to sway the Risk Model (see below). What was notable is how few respondents were 'Neutral'.

Maybe that is the clue we need. Since 'the market does the thing that makes the most people wrong' - it stands to reason that the true contrarian should opt for a flat market view after the initial recovery phase peters out.

AAII Sentiment

I blame myself.

Didn't I give a S&P 500 2800 estimate of fair value two weeks ago? I also argued for a 'Midway' technical ceiling of that same level in last week's issue of Tues@11. We just got there so quickly, I'm having trouble believing it.

This market seems scarily complacent as we continue to place a 'V' shape bet on what will inevitably be an 'L' shaped economic recovery. Now that we have done so, my view is - 'don't just do something, stand there'.

Anything materially above these levels will be too risky for my liking. The battle of the restart will be messy - just like the economic and earnings data.

I'm not shorting this market just yet. But a monster 'sell on news' event looms large if we start celebrating the reopening of the economy too soon.

Hey bulls, take a chill pill.

Risk Model: 2/5 - Risk Off

I'm afraid our slow-footed risk model will take some time before it becomes more useful. The sheer violence of the market's recent trip to hell and back is just too much for it to handle. It works best in trending markets - hardly what we have now.

Although based on last Thursday's release the AAII sentiment indicator is in risk off mode, I get the sense that it will soon be fully recovered by this week, thus generating a highly lagged 'buy' signal for the overall model. This will be most likely should the 'bears' go into the neutral camp as I discussed above.

The pattern above shows how relatively complacent investor sentiment was at the recent lows - despite the scary virus headlines and forced liquidation. The recent low in this ratio was actually higher than the 2018 FED induced panic. And it is unlike 2008, when the FED was a perceived to be behind the curve. I can distinctly remember Cramer's rant "they know nothing!".

With that playbook in hand, it's FED to the rescue - and promptly too!

I think we're gonna pay for this - higher taxes for sure. But that's a topic for another day.

GOLD vs OIL

You can now buy more than 75 barrels of oil for one ounce of gold. In 2008 it was less than 7.5! Why is the TSX Energy sector still 3X the weight of Mining? Got gold yet?