Suspended Animation

It appears the 'suspended animation' market is upon us.

Tentative first steps towards restarting the global economy unveiled this week have been met with mostly scepticism. Naysayers, arguing for caution, are plentiful. Politicization of the issues is not creating much confidence. Elon Musk has gone rogue.

Nonetheless, the most hated bull market in history continues to roll on, blithely ignoring the naysayers. The Fed's explicit backstop of the credit markets, in full swing this week with their buying of the HYG, has continued to support the uneven advance of this trifurcated market. (read: last week's "LUV It")

This, despite the daily revelation of dismal economic and corporate news that is nothing short of shocking. But not to worry, the $3TN of Fed stimulus has your back! And just like my wife, the Fed is fixing to bake another batch of monetary cookies should the economy eat through this first jar too quickly.

I didn't think the '19" in 'Covid19' referred to weight gain! I shouldn't have married such a good cook.

Yesterday, the markets shook off an initial pull-back opening that head-faked the bears once again. Led by MAGA (Microsoft, Amazon, Google & Apple) and their acolytes, the broad averages are now pushing up against new recovery highs.

The massive monetary and fiscal response to the Covid crisis has effectively given the stock market what humankind has yet to enjoy - immunity. Enticed by this, the emboldened growth-loving investors have been first to awaken from their cryogenic pods. As the outright beneficiaries of the creative destruction wrought by the sudden economic stop, these chosen few are benefitting by default. And their sheer size in the broad averages has effectively masked the underlying carnage being experienced by the cyclical segments of the index.

The look of the 'market map' on any given day lately has been similar to yesterday, shown below. The size of the square and it's colour depict the effect on the S&P of any one issue.

You can plainly see what is driving this market daily. Tech, Communication Services, Healthcare and Consumer Cyclicals -mostly Amazon - are dominating. Notably, the Financials, Industrials and Energy stocks are still asleep in their red-hued pods. This has created a dangerously extended trend of performance between growth and value styles. (below)

Growth ETF / Value ETF

This week marks the beginning of the Fed's program of outright purchases of high yield publicly traded debt. Now that the Fed has gone from 'the lender of last resort' to the 'buyer of last resort' the normal intermarket allocation of capital has been disrupted. So the TINA/FOMO buying continues unabated.

During the 2008 crisis, the SEC banned short selling. This time, the Fed seems to have effectively banned any selling.

Of the stocks still left in a deep slumber in their cryo-pods, the most interesting are the financials. As I said last week, they are hybrids: part cyclical and part defensive. Certainly not growth, though! They are historically cheap. The question is, as always, are the negatives "priced in"? And secondarily, when will we know?

Generally, bank investors have been a cautious lot. These stocks are perfect for the patient conservative crowd, the kind prone to AAII (American Association of Individual Investors) membership. That's why the sentiment survey of the AAII is so instructive of market behaviour.

Currently, in AAII land, there is outright fear. The 'bearish' reading soared to a four year high last week. (below) The huge ETF inflows being experienced in high yield, gold and money market segments speaks volumes about this.

AAII "BEARISH"

This doesn't mean that the banks, retail investor favourites, are a contrarian "buy" however. We need to see more data on the real economy and how it is recovering. A secondary spike in infections is also a real fear that remains to be faced. But by that point it won't matter how bad the numbers are - I think they will be 'priced in'. Once most of the uncertainty is removed, I believe we should see a catch-up rally by the segments of the market that have been left behind - led primarily by the banks. And with dividend yields many times that of ten year bonds, at least we are getting paid to wait.

A massive rotation trade is shaping up at some point this year. The crowded growth trade is a bubble that will burst on a perceived 'successful' restart to the economy and/or an actual major medical breakthrough which I hope comes out of China, just to piss-off Trump. But for now, we still have a 'growth' trade that seems unstoppable. Perversely, the time to sell this market may be when things actually get better and interest rates start rising.

But before that point is reached, the last of the space travellers should emerge from their current state of suspended animation.

"L. U. V." Market - Charts

Financial ETF - "L"

Homebuilder ETF - "U"

Technology ETF - "V"

Risk Model: 1/5 - Risk Off

The XIU is now slightly overbought thanks to Shopify (Canada's only MAGA stock) and the energy bounce (which I'm not playing). The RSI has moved above 60, a level that generates a cautionary signal. Today may see the first positive signal from my preferred volatility indicator - the VXV - on a close below 30. That would still leave the model in a 2/5 sell mode. There is no help from the Copper/Gold ratio this week as recent Chinese restocking of copper has run out of steam and gold funds are still capturing huge inflows. And as noted above, the AAII Bull/Bear ratio made new lows.

This model was designed in normal economic times and has not been able to differentiate the nuances of the 'LUV" market we are facing. But it will likely help to identify a signal for the 'rotation trade' that is pending. As I said above, AAAII is a cautious group - they love dividends! Also, a successful restart to the economy should help Copper/Gold turn around. There isn't a lot of sub $2.30 copper left to be mined. No sign of the rotation rally this week however - its too soon to tell.