Stopped Out

The catalyst for a correction remains elusive as ever. Putting on market protection strategies since early April has been a futile effort, despite the disappointing news from the Covid pandemic battlefront. With the threat of initial enormous fiscal stimulus set to run out shortly, the muddle-through fiscal sausage making continues in Washington. My fears of a Pelosi-McConnell hissy-fit have been somewhat neutered by the recent signs of progress.

Add to that, the teflon coated testimony from Jerome Powell last week in which he was given essentially a free pass from the politicians on his handling of the crisis. His promise (threat?) of further accommodation, whatever that means, seems to be enough for now to placate the market's fears.

All this is to say that I did not made a great call last week by warning of an imminent correction. I have been 'stopped out' of my short position yet again.

This, despite the fact that the negatives on which market watchers are focussed have not changed for weeks:

'The narrowness of the advance'

'The speculative participation of new younger investors'

'The weakness in the Financials'

All valid points in an otherwise normal market environment. By normal, I mean one that is guided by Adam Smith's "Invisible Hand" not one guided by an "Invisible Virus". We can throw out the playbook for what is normal given the unique drivers of policy action. By now, policy easing would be slowly reversed, mirroring the improved economic data. Not so this time, in an environment of worsening Covid case loads and the tepid response to the once highly touted 'reopening' of the economy.

Partial school openings, recalcitrant restaurant patrons and, importantly, a phobia surrounding air travel continue to be sufficient economic barriers to ensure the perpetuation of a sub-par economic recovery.

And a credible MLB season looks like a pipe dream. Try getting getting guys who spit for a living to wear masks.

Hence the persistence in the bid for yield instruments. Bonds of all issuers, credit-worthy or not, have maintained their bid. The largest ETF inflow reported last week was in the 'SDY' - the dividend biased stock fund. All this, despite the elevated inflation expectations and huge issuance calendar in the Treasury market.

Yesterday's market action was more of the same. Covid beneficiaries outperformed an otherwise sleepy summer tape. Microsoft rose over 5% on the TikTok news. I guess helping appease Donald Trump has its benefits, but a one-day $80 Billion increase in market cap seems a bit extreme even for the MAGA cheerleaders behind this move.

So we continue to be faced with a market where bad news is good news. There continues to be lots of free money to keep the equity pot bubbling. You can check your brain at the door - but only after wiping it down with Lysol first.

I can't wait for the arrival of a real economy, instead of one driven by government handouts. That can only come from good news on the creation of a credible vaccine that changes the narrative. A post-Covid 'Thelma and Louise cliff' is looming for those whose virus-beneficiary status will suddenly change.

Zoom calls, Pelotons and DoorDash will seem soooo 2020 next year.

But for now, given how badly the U.S is screwing up the pandemic response, the party continues like it's 1999. I'm stopped out.

Risk Model: 3/5 - Risk On

Despite the worsening in investor risk appetite, as evidenced by the collapse in the AAII Bulls to 10 year lows, equities drifted higher last week. A benign $VXV, and a neutral RSI was enough of a support to fully offset the vicious pull-back in the Copper/Gold ratio. But take away AAPL and MSFT and the market was flat. The Cu/Au is now accurately reflecting the economic pessimism stemming from both negative Covid news and escalating U.S. - China tensions. The U.S 10 yr bonds agree.

The Model has it right for now. It is saying to buy non-economically sensitive equities, gold and bonds until the narrative changes. I'll watch for now, given the binary nature of the scenario. The current consensus embedded in this bet is sure to change at some point - I just can't seem to find it yet.