- 04/30/2020 at 12:51 am #78457
I have been sitting in disbelief over the recent market rally over the past month. There is absolutely logical explanation that explain how stocks are rallying when most companies are virtually shut down. Airline, Cruise, Casino and Theme Park stocks zoom 10, 20 or 30% higher while closed down. Other companies that are open and profiting are falling during those rallies.
For the life of me, I really can’t believe the market has bounced back so quickly from the March 23 low.
The economy will not be resuming back to normal in the foreseeable future and even when it does, it won’t be the same as before, yet the market continues to rise.
Call me crazy, but I just don’t see how it can keep moving higher.
Luckily, even with the lower allocation to stocks this month, the 3x leverage strategy I follow has made a very good return.
My hope is that the defensive nature can continue to produce a big result in the event people realize that this current market rally isn’t really sustainable.
If it is, what am I missing?04/30/2020 at 9:55 am #78465Alexander HornKeymaster
The name of the game currently is “expectations vs reality”.
Current estimates of loss of GDP for 2020 in the developed world are somewhere between 5-8% of GDP, varying by country. That’s based on the assumption that the worst is over after Q2 2020, there will be a “stabilization” in Q3-Q4 2020, and then a modest re-bounce in 2021. That’s the “hole” created by the shutdowns in the economy – and P&Ls.
At the same time central banks and governments are to spend also between 5-8% of GDP, either as direct subsidies, or providing liquidity. That’s the “grease”.
If you add this up, surprise, then the “grease” might cover that “hole”.
Well, provided the underlying assumptions hold:
– duration of shutdowns
– no 2nd, 3rd, Nth waves
– no other “fundamental” issues in the market
– no ping-pong effects in the global supply chains
… and probably another 20 or so..
From a valuation perspective the S&P currently is at least at the pre-crisis P/E levels. Prices are not yet recovered, but I assume it’s safe to say that the “E” for 2020 will be hit strongly, and for 2021 is guesswork. So today’s valuation historically is quite/very expensive.
At Logical Invest we’re price-action driven – meaning we trust that main wisdom is always priced in, so our algo’s can do their job.
I trust the algos (the math part), but yeah – it’s currently hard to find the wisdom in the market, and whether it has correctly priced in reality, or making reasonable assumptions about the future. Helping that argument is that volumes are low – so probably a lot of “dumb” money driving the market, while the “smart” money is still on the sidelines.
Still, it’s important to stick to the plan – which according to most models still is: “shelter in place”, to “flatten the (equity) curve” (double pun intended).04/30/2020 at 12:05 pm #78471PatrickKeymaster
Two popular axioms come to mind…
“Don’t fight the Fed”
The Fed and Congress have and will do everything in their power to prop up the markets. Even before current stimulus measures, years of easy money and deficit spending have not caused price or wage inflation, but instead have fueled asset inflation. They can continue to pump more money into the system, but they cannot force consumers or companies to spend it. So where does it go?
“The markets can stay irrational longer than you can stay solvent” — John Maynard Keynes
That applies in both directions. Everyone “knows” when markets are over or under priced, but we seldom know when markets will realize or care that the emperor is wearing no clothes.
While interesting, these axioms don’t really tell us how to invest, which is why Logical Invest uses systems based on actual market behavior rather than what they “should” be doing, and of course uses hedges because we know markets can change their mind fairly quickly.05/04/2020 at 2:37 pm #78599Alexander HornKeymaster05/04/2020 at 7:19 pm #78600
It basically all boils down to this, the market can only crash if the FED doesn’t intervene. Since they have always intervened, they can never undo what they have already done because doing so would cause the market to collapse.
So, if they undo anything they’ve done before, the market will collapse. Since they don’t want that to happen, the market won’t collapse.
The stock market, in my opinion, is now rigged and manipulated by the FED in a way that it will never crash again for a long downward duration.
All previous economic rules we’ve grown to understood over the past decades are no longer in effect. The rules have changed and will always change to ensure a market collapse will never occur.
Everybody wins.05/04/2020 at 10:37 pm #78601Mark VincentParticipant
The question is when don’t they win. Just like every market timer your right once every 20 years but you missed the bull. Right now volatility is over 30 I have missed out on a 5% uptick since I liquidated March 10, 2020. Except for 20% gold. Right now with volatility so high I am happy to sit it out. Interested to see others opinions on trading when vix is over 30?
The models are holding up but is there a next leg down? Is there a scenario where you make 15% next year and volatility is over 30? Without 20% drawdown? If I knew I would do it but I don’t.
Cheers and stay safe.
MV05/06/2020 at 2:21 am #78612
I dont believe there will ever be a next leg down. The market is rigged to only go higher. I suspect Trump called Powell and told him to do whatever it takes to make sure the market doesn’t fall while he’s president, especially since there is an election on the horizon.
If an event like this can’t bring the market down, what can?
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