Stocks rising. Earnings falling. Streets Burning.

Wall Street - Main Street chasm widens

Jun 04, 2020

The “reality” between Main Street and Wall Street has never been wider. There are more than 40 million people unemployed and American cities are literally burning with a lot of looting and anger being vented out on the streets.

So, why are the stock markets moving up relentlessly? Wish I had the answer. I can only draw reasonable guesstimates from my experiences, historical references, and market patterns.

As the saying goes “It is so bullish that it is bearish”. From yesterday’s price action in the major equity indices, it is clear that money has been flowing out of bonds and gold into stock indices. The S&P 500 pushed above the 3100 level for the first time in three months. But this is not something we did not expect. Please refer to my previous reports.

What many of the major managers and analysts have underestimated – the sea of liquidity that was hitting the markets from all corners. Globally, it is to the tune of 11 trillion dollars. A trillion was a lot of money before and still it is but governments have never shown the willingness and speed to pump the economy as they have now with trillions than ever before. Add to that the Fed removed the reserve requirement ratio for banks. It’s now zero! At zero reserve requirement ratio, the sky is the limit for money that can come into the markets. The stock of money could increase infinitely. The moral and practical implications of this is something we have to discuss another time.

Another explanation to the rally is that since the Mar 23 bottom the retail investors have been highly active. It is evident from the huge number of new E-trade accounts and the spike in trading on the Robinhood app. Where did they get the money? Uncle Sam gave it to them. Most of them are making more money than they were working.

Anyway, they didn’t work for it. When a better yield is unavailable from other sources, what better way to put it to use than play the markets with a bit of leverage? Anyway, you have a lot of time on your hand.

The other possible reason is that many of the active managers who have been waiting for a deeper correction and missed the move down to Mar 23 are piling in now and are forced to get in. They are going through FOMO (fear of missing out) as most of them are judged on the performances of the indices. So, this move is more like a stop-loss for them. That was the preamble now let us get into the details.

EQUITIES

The breadth indicators that we look at in terms of advance/ decline ratios and advancing/declining volumes were all clearly positive on the NYSE supporting the rally. However, in the closing hours of trading the CBOE put/call ratio was just a tick above the 0.55 level from Feb 19 when the S&P 500 topped out.

The markets have retraced 0.786% of the primary move down (the maximum fib ratio). On the way up, it has filled most of the gaps that existed. From a pattern perspective, it has met the objectives that we have been talking about. Can it still go up? Think it can. Who are we to say the markets cannot go up? But it doesn’t have to. The risk/reward of being long here is very much against you.

BONDS

Finally, bonds are coming into play. It has broken below our key support levels. We are looking for much lower levels and will develop on price targets in the coming days.

EURO

Euro has risen into our price target window. Ideally, it should top out here but if there is more strength left, it can rise another 100 points before it tops out.

GOLD

Gold clearly surprises us most days with its volatility. Yesterday, it moved down almost 50 points touching just below our critical support level at 1690 before it bounced up. There is more to Gold’s movement than what the retailers understand which we will cover in a future briefing. At the moment, the social mood is one of euphoria and panic.

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