Are we in a Kangaroo market?
Abraham George Macro View
We all know what bull and bear markets are. But what is a kangaroo market? Jonathan Stubbs of Berenberg Capital Markets referred to the current market situation as a “Kangaroo market” in an interview with CNBC last Friday. I think it is a good metaphor.
Kangaroos make moves with unpredictable trajectory in their actions. Their powers are centred in their hind legs and tail. They can hop in small steps or just take off creating a lot of confusion for the onlookers. Current volatility in the markets create that sort of confusion and unpredictability for us.
In April alone, the personal income in US has gone up by 10.5% which is about two trillion dollars through the Fed and government policies. More than half of the 20 million who applied for unemployment benefits in April got more money than they were getting when they were employed. When you are bored of Netflix binge-watching and unable to watch any live sports, what can people do with their extra money? They think of ideas to make some quick money and have some thrill.
How can you explain the price surge of a bankrupt company like Hertz by 900%? Nikola (NKLA), an EV company who claim they will be making trucks has a market cap of 30 billion. The market cap is bigger than that of Ford motor company which is over 116 years old. The company does not make any profits, but not only that, the company has stated they will not be making any revenue in the coming year.
Speculators especially the millennials have caught on to such stocks thinking that they are the next Tesla. Since they lost out on Tesla, they want to catch on to something that sounds like Tesla and has EV attached to it. It is like Pet.com during the dot com bubble. Anything with dot com attached to a company name was a hit.
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Robinhood, the hip e-broker has opened more than 3 million accounts in April alone sending their valuations above 8 billion. When the shoeshine boy, Uber driver and the construction worker get involved in the stock market, it is highly unlikely to be the start of a bull market.
Markets fell sharply yesterday but rebounded strongly when the Fed announced that it is updating its Secondary Market Corporate Credit Facility to include the purchase of individual corporate bonds that satisfy the facility’s minimum rating, maximum maturity, and other criteria. Fed Chairman Powell will be testifying again today, and markets will look for anything new from his statements last week.
EQUITIES
The major indices moved down in a perfect impulse wave pattern. We are again in a second wave corrective pattern which should top out soon. On the S&P 500, we believe that is likely within the 3105 - 3135 area. The next move down could be deeper and sharper.
BONDS
As expected, the bonds topped out on the 178 handle and has made a sharp down move. Even if it goes back to test higher levels, the top at 183 on Apr 22 should remain capped.
EURO
The rally from 1.1213 on June 12 should be almost complete today. A move to mid-1.1000 area is our preferred scenario.
GOLD
Gold has really not made much progress in either direction since mid-April but has created a lot of volatility within a 70-point range. We will stick with our past comments.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.