Who's Next?

Pete Townshend, the mercurial driving force behind The Who, was my favourite rock stars. He said what was on his mind, never caring for the manicured publicity that his record labels desperately tried to get him to promote. The songs he crafted, often referencing drug use, were existential cries for help during the crazy classic rock era of the 70's.

After yesterday, you might be forgiven for thinking the market was on drugs - literally. A rally, seemingly out of the blue, righted the market from a week-long slide.

Investors are being whipsawed in and out of their comfort zone like drug addled rock stars, lurching from bender to rehab and back. They are hanging on every news item, one minute processing the economic devastation, then grasping at good news in blind optimism the next.

The last 24 hour media cycle reads like the script of the movie "Network". And the bears were mad as hell and they won't be able to take it anymore. Last week saw a 'sell on news' market after fears of a secondary viral surge offset the budding optimism generated by the tentative government 'restart' announcements. The market naysayers started licking their chops, sensing the end of the bear market rally was imminent.

But yesterday stocks abruptly reversed higher following comforting the words from Fed Chairman Jerome Powell on 60 Minutes, a Mea culpa from XI Jinping and, most importantly, the release of "positive" vaccine trial data from a small start-up biotech firm. The controversial pharmaceutical Unicorn, Moderna, provided bullish hope to a world desperate for any good news on finding a way out of this mess, and the markets dutifully cheered.

And speaking of drug addicts, President Trump disclosed his questionable decision to take the malaria drug hydroxychloroquine to prevent acquiring the Coronavirus. I can't help but think it was on the advice of his personal medical advisor - Dr. Feelgood. Next, you might see him try to torch a 5-G cell tower in a desperate attempt to halt the spread of Covid-19. You can't make this shit up.

He is also focused on his preferred version of The WHO - the World Health Organisation. It's the newest pawn in the U.S./China geopolitical chess game, now that trade war issues have been shelved. He desperately needs a new shiny object to deflect voter attention away from the growing leadership failure-fest in Washington. China's perceived mishandling of Covid-19 is gleaming brightly in the alt-right's eyes as an easy target. Forget that virtually every jurisdiction in the World, including the now-lionized Governor Andrew Cuomo, initially tried to downplay the virus's threat. Politics as usual.

The dust is settling this morning as we await more clarity on the pace of the economic restart. That will probably take longer than the market likes, setting us up for more choppy action ahead. Phase one safety data on an novel vaccine is unlikely to hold the market up for long. We will need to continue to see an unlikely flow of positives in order to generate further upside as we approach new highs for the Nasdaq and the overhead resistance on the S&P 500.

Moderna's actions - they were quick to hit the bid by initiating a $1.3 Bn rights issue - tells me they see a tricky road ahead. The CEO, Stéphane Bancel, a divisive and hard driven visionary, is no stranger to controversy. His company's unproven 'messenger RNA' technology is prone to side effects, - the reason Big Pharma abandoned that approach early on. Betting on the results of one drug trial in the biotech sector is like betting on a single drill sample in mining. Remember Bre-x??

But whether on not you believe in the hope/hype is not important. The bullish backdrop of a cost-free risk environment, created by the Fed's massive monetary stimulus, continues to support stock prices, despite the sharp economic collapse. But hey, don't confuse a bull market with brains.

Notably, yesterday's tape saw actual signs the much hoped for growth/value rotation. Banks, pummeled in last week's risk-off drubbing, rallied hard - harder that the MAGA darlings. The bounce hardly shows up however on the "razor blade bannister" (think about it) relative-strength chart shown below. They have given back most of that ground this morning.

XLF/XLK

I like the banks for the next year but don't chase them here. The next opportunity to buy them should come from the earnings release season, set for this month in Canada and late June in the U.S. The forbearance and fiscal stop-gapping from government is just prolonging the agony of a negative credit cycle. Their guidance will be 'disconcerting' to say the least. A patient approach is advised during this volatile interregnum of post-panic and pre-restart.

We will need to see more concrete data on the effect of 'retsrt' on the level of new virus case acquisition, combined with further progress on the medical front before getting more aggressive on value and cyclicals.

The Who (the rock band, not the intergovernmental agency) said it best:

Behind blue eyes, my generation does things I can't explain.

On the magic bus to the new eminence front, I won't get fooled again.

Risk Model: 2/5 - Risk Off

The choppy sideways trading market that I have been looking for is unfolding as the offsetting positives of underinvested positioning/scepticism interact with the negatives of massive economic carnage and earnings distress. The most important component in the model is the Copper/Gold ratio that is butting up against the signal line. Strong gold ETF inflows have kept gold prices from flashing a definitive risk-on signal. Copper rallied yesterday on China's pledge to expand infrastructure (more ghost cities and highways to nowhere??) but the ratio has not yet moved above the signal line.

Copper/Gold poised for a breakout?

Copper/Gold Ratio

Volatility is also tantalisingly close to a buy signal on a drop below the 100 dma. The return of confidence from shell-shocked investors is waiting the verdict from this critical measure.

3Mo Volatility

My fear is we get a major disappointment once we start to see a rise in the 'post-restart' Covid case numbers. I can't believe that a relaxation of self-isolation won't bite us on the behind. Just think of the lack of self control evident in the St Patrick's day photo that I showed in March 17 blogpost "Fla-La Land". I won't be long til we see a bunch of Bubbas and Skeeters end up in the IUC after their packed Memorial Day keggers.

Another signal to watch is the steepness of the yield curve. The chart below shows clearly a transition to a steeper curve of the U.S. 10 yr versus the 2 Yr bond yield. The success of the stimulus efforts in generating a recovery in inflationary expectations will be reflected by a further steepening of this ratio. Unfortunately, it looks ahead of itself here.