Hitting the Fan

Now that the equity shit has finally hit the liqudity fan, I get the feeling that we can hit the pause button on this rally. No big pullback, just a breather. Tuesday at 11 syle.

Seemingly spurred by the participation of Robinhood traders, (you know, those savvy grizzled investment veterans, the millennials), bankrupt Hertz stock has soared from its penny-stock lows in a frenzy of speculation. The 'free pass' of low rates issued by the Fed has turned investing into a video game style passtime for novice market players who equate the price of a stock with its attractiveness. Despite all fundamental evidence to the contrary, the urge for them to buy a $.75 stock was unstoppable.

Hertz - $HTZ

If you price something at zero, the demand for that good is almost infinite. When the free trading app, Robinhood, was launched, most competing online brokerage accounts had restrictions on minimum account size and trade costs of $9.99. Not so, Robinhood, whose mission is to 'democratize investing for all', offering free trades, fractional shares, and crypto trading. It's no wonder this thing has taken off.

Stock Positions - Robinhood

I'm not sure we can blame these 'new' investors completely for this rally in the junky, low-price segment of the market. Mohamed El-Erian has coined a new term 'FOMU - Fear of Major Underperformance' as a driver of the market surge. I'm sure there are many professional money managers now staring at their performance benchmarks with envy as they prudently hold cash, vainly waiting for a pull-back. Could they be buying a few bombed-out 'value' candidates as a catch-up trade?

Huge amounts of short-covering have also propelled the advance of junky stocks like J.C. Penny and Chesapeake. The pain trade is higher for the last remaining bears, who feel betrayed by their faith in fundamentals. In this sea of indiscriminate, liquidity-fuelled buying, woe be the prudent.

The improvement in data that we are beginning to see is a bit of a head-fake for the 'V' shaped recovery fans. Since the collapse in the aggregate economic numbers was viciously fast, statistics (like last week's employment stats) are bouncing back just as fast. The pent-up demand factor is at work now. I know I haven't had a real haircut since December, but let's not confuse that demand with sustainable economic growth. I actually like my new hair style. If this Covid shutdown has taught us anything, it's that we can all get along with less.

Economic 'reopening' numbers will all be statistically inflated. Yet that won't stop the headline writers from gushing about them, thus tricking investors into a bullish mood. You can fool some of the people some of the time.

Those calling this rally a 'bubble' are the ones probably hoping for a prequarter-end pullback. The theory that markets will have a meaningful check-back is now guesswork. The data and the Fed are key determinants. It makes sense that markets have headed higher on pure sentiment since the second derivative of the data has gone positive. But how much further it can go is determined by the Fed response to the actual recovery.

In their critical meeting this week, it's likely they will continue to provide assurances of support for the liquidity necessary to support the economy. It is too soon to talk of any reduction in stimulus, last week's employment data notwithstanding.

But they must feel a measure of discomfort with the rapid rise in stock speculation that we are now seeing.

But they should only blame themselves, having provided the mother of all fans for risky (shitty) stocks to hit.

Risk Model: 3/5 - Risk On

Since turning positive a couple of weeks ago, the model has stayed with this rally. Although slightly over bought on a RSI basis, there is no evidence of major deterioration. But let's not forget the model's flaws - it moves a bit slowly and can be late to the party when things quickly change.

The AAII component (ratio of Bulls to Bears) shown below is behind the curve. I have circled the two most recent examples of a reversal in Fed policy to easing. Thay have had two very different outcomes in terms of changing investor sentiment. This is understandable, given the unprecedented impact of the Coronavirus lockdown on stock fundamentals. Any turn to a positive reading - it might come as early as this week - will be woefully late to the party. It could be a sign that the last few bears have thrown in the towel, thus setting up a more meaningful correction in the market. They fought the Fed and the Fed won.

AAII Bull/Bear Ratio

My old fav, copper, has ripped higher. I actually got confirmation a few weeks ago from the 'cab driver' effect. A buddy at my club praised me for my bullish stance on gold. He looked confused when I told him it's time for copper to bust a move. I hope he listened. Unfortunately it's already time to take profits if you did, my friend.

Copper/Gold Ratio