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Stock market expectations (May 08, 2020)

The market completely invalidated all my expectations in the last week. We were range bound and we broke the range on April 29th just to give it all back the very next day. We returned back into the range. A false breakout? It seemed like one. Until this week.

Amid bad data people were expecting this market to fall badly. Pessimism out there is the highest since 2015. And today, we have received another batch of bad employment data. The market rallied up +1.68% and everybody is outraged and complaints about the market being overbought, manipulated, fake, and whatever else emerged again. But if you look at the underlying data, the picture shows that this market is not overbought at all, manipulated at all, and it still has a room to go higher.

I would also prefer some retreat and longer consolidation to give this market some more strength to run and align itself with the economy, but, today’s market is not about today’s economy! It is about future expectations.

For example, unemployment data. Everybody was expecting a carnage at labor market. Everybody was predicting 20% – 25% unemployment rate. I have seen people saying that the bad data are yet to come due to a reporting delay. And the data came. Data were bad, sure, but not as bad as expected. Instead of 20% unemployment, we only got 14%. Instead of expected 22 million job losses in April, we only saw 20.5 million lost jobs. Not good, but better than expected.

Add to the mixed bag of apocalypse that some companies are reporting rehiring employees at a faster and higher pace than expected as the economy starts slowly reopening. With these reports of slowing down unemployment claims, speeding up rehiring employees, FED stimulus, companies reporting better than worst earnings (yes, not all of them, but some are, and they are used as those first sparrows indicating spring coming) and the market suddenly appears as not high enough.

For example, after Shanghai Disneyland reopened this Friday, it got immediately sold out. This again indicates that people are willing to go back to pre-virus activities than expected. And the gloomy expectation was set by German experience earlier last month when people didn’t go shopping as expected and reopened businesses saw slow starts. It is all past and the future looks differently all of a sudden. And remember, the market looks at the future. It doesn’t predict it, it expects it. And it tries to price that expectation in.

The question would be, is it too optimistic? If so, it will correct itself again. If not, it will rally even more. And today’s momentum is “a bright future ahead of us.

I have a friend, who is in the same engineering field as I am. He works in a different company which stayed partially open, unlike mine. And whenever we talk, he says the same thing: “We will see a very sharp recovery. I have tons of new proposals coming in and clients bombarding me with new requests for proposals, they are all coming back and fast…” At first, I didn’t believe him. I though, when people start losing jobs, there will be no new demand for services, jobs, etc. But it is not happening.

Of course, this may all come to an end if those bright future expectations fail to materialise and and the future will not be as bright as expected. Or the future still be bright, but not as bright as the market is pricing in. Then we will see a decline. But as of today, do not blame the market for acting irrationally because of the data we see today. It is all about hope. It always has.

When looking at the market trend it is apparent that the sideways trend broke to the upside. It may return back inside next week, but the underlying data indicate rising strength behind this market which may push us higher.

People say the market is again overbought, but if you look at the weekly chart, it is not true. The RSI reading is slightly below 50 (a midpoint). The distribution is on a decline, accumulation is on the rise, this is also apparent on a daily chart, where accumulation is on a rising path again. Big players are buying shares. Nothing to throw a party about but it is happening. A weekly trend is still up although weakening, which doesn’t mean a trend reversal is in. And there is still a lot of room to go.

I expect the market to respect the new trend lines (either a major one or the secondary one and crawling slowly higher towards the 3020 resistance. Unless we fail again and go back into the previous range (see the two black lines indicating the sideways channel). The trend is still quite bullish.

 
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