Will Bill Miller be right this time too?

Lock down weekends give you more time to read and think as you are not that much pressurized with your other core activities for weekends before the lock down. The weekdays help you to take the pressure away from your normal weekend responsibilities.

Probably we all are suffering from the biggest cognitive dissonance of our lifetime. Will the stock markets continue to rise, or will it top out soon? Are we seeing a tipping point in the health crisis? I am skeptical about both and I will explain why.

Firstly, on the health situation: politicians and administrators are under tremendous pressure to reopen the economy. While it is important to find a balanced approach, the decisions you make now are very critical.

The improvements in medical treatments are clearly being downplayed by the authorities to not raise expectations of the public and for people not to violate the lock down guidelines.

Reports coming now from Japan and Singapore who we thought had everything under control are showing signs of further escalation. South Korea who were one of the first to take a very disciplined and intelligent approach in containing the pandemic are now reporting people who recovered from the symptoms are testing positive again. So, it looks like the problem will stay with us for a long time until a clear vaccine is found.

The markets closed higher on Friday with news that Gilead technologies experimental treatment for COVID is working. The media was all over it.

The S&P 500 has bounced an amazing 32% from its lows just four weeks ago. The market is closing in on a much-watched retracement level of 61.8% of the major down move. The 200-day moving average which is like a yearly trend line comes in just above 3000 in the S&P 500. The charts are showing a clear rising wedge.

The Fed, Treasury and Congress have thrown in a quarters worth of GDP to keep the markets functioning, but nothing can be done to the damage that has already happened.

The market has been struck by lightning and many businesses are closed for ever and many are on life support. Many will have second thoughts about taking more debt if the economy cannot return to normalcy. We will move to a new normal and the old rules will not apply.

In the midst of this, many past successful money managers are thinking these are great opportunities to be long in the market. Bill Miller who has a terrific record on the markets is saying this is one of the top five buying opportunities of his lifetime. The past ones were 1974, 1982, 1987, 2009 and now.

Bill Miller may be a great stock picker, but I don’t think he has any much insights on the epidemic more than you and me. Since the epidemic has put us in this situation, only a solution to that can give a better direction to the markets. With that let us look at the markets in more detail.

EQUITIES

As this report is getting too long, I will discuss only on the S&P 500. Last week the S&P 500 pushed to 2885 meeting the top trendline of the structure. The sub waves since then are not conclusive but a move below 2745 should indicate the upward pressure is over. Should it move above last week’s highs the significant level surrounds 2935 which will also fill a gap from Mar 10 and a.618 retracement from the Feb 19 top. A move below 2761 would indicate a trend reversal.

A bear market rally can be very emotionally challenging. The goal of the rally is to recreate the bullish spirits of the prior peak. It is one of the most difficult times to be on the right side of the market.

BONDS

Bonds spiked to 182 and then reversed. If the down move that we are expecting is happening, it is important that bonds don’t rise above 182^31 the high of Apr 03.

EURO

Still waiting for a clearer picture in Euro. One thing to note is large speculators have increased their net long positions in Euro through futures and options. This big jump is normally a bearish sign for the Euro.

GOLD

As suspected the high at 1748 is significant. A move below 1670 should help us to eliminate any alternate upside pressure. In either case, it is near or close to the end of this bear market rally.

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.