Will it?

This is what I keep seeing lately in media and opinions of all sorts of people. While it is true that the market seems detached from reality, the problem is elsewhere. One day, we may see another leg down (or maybe not) but those who bet for it to happen soon may become broke long before it actually happens… if it happens.

Here are the reasons why I disagree with all the gloom and doom predictors:
 

1) Faith
Today, most of the market trades on faith. Like it or not but it is a reality. It is the same as with dollar. Since I have ever been aware of a currency named “the US dollar” for the first time in my life, I kept people predicting its demise, collapse, and being substituted by other, more reliable currency, such as Russian ruble, German Deutche mark (when it existed), Euro, or Chinese yuan… Fast forward some 50 years, and we still have the US dollar around and it still is a world reserve currency no matter what the US government does and have been doing to it for years, and no matter how irrational you may think FED and Treasury is. People still believe in dollar despite gloom and doom predictors foreseeing its inevitable bankruptcy… The stock market is same. As long as people/investors believe what FED and other players do in this market/economy, it will not crash just because you think it is irrational.
 

2) FED
And yes, FED plays a very significant role in all this. Powell has been signalling all day long that they will do anything and everything needed to keep the music playing. They are literally converting the stock market into the US T-bills… No matter what you and other players do in the market and to the economy, you are guaranteed a bailout. The FED will not let your investment go under. Yes, some individual stocks may go down, but the overall market will be let floating with as much hot air as possible. You do not like it? Well, me neither. I think it distorts the very prime function of the market but, hey, if it makes me money with less risk, I will go for it with absolutely no objections. And if FED makes me believe they will protect my investment, great. I will deploy money fullhandedly… And millions of other investors, traders, hedge funds, and big houses believe it too. We are back to the “faith” thing.
 

3) Comparing today’s market with today’s economy
It is a known phenomenon about the market that it is “predicting the future of economy” up to 6 months ahead. It is not a true prediction of the economy as no one, even the market itself, can predict the future. This means that in fact, the market is looking at the future economic expectation of where the economy might be 6 months from now. Investors, mainly those predicting the next crash seem to be forgetting this. If you think that the market is irrational because the “economy is in a very bad shape, we are in recession, we are going to crash, we will have a huge unemployment…” and who knows what else and so the market is manipulated and will crash soon, then you too fell to this same trap of comparing two incomparable time frames. Today’s market no longer cares. All this doom and gloom you are seeing coming – 25% unemployment, 34% GDP loss, crashing EPS… all that was already priced in the market back in March when we lost almost 40% of the market value. The market no longer cares about this. What it cares about is what the future might look like. We are reopening our economies – great, great news!! Companies will be hiring again, consumers will be spending again, recovery will be faster than we expected… All the gloomy economy suddenly is not that gloomy. Then add to it, that the unemployment is not 25% but only about 14% and some… Another great news! Recent earnings were not down more than 25% as expected and GDP didn’t drop by 35% as predicted. Another awesome news! Is it bad? Yes, it is, but not as bad as we thought. Add vaccine on top of it and music will go on.
 

Will we crash again?
Maybe. But not before the optimism of better bad than worst future fades away and market realizes (again), that all the great and bright future economic expectations were too optimistic. Then we will correct that optimism again. Remember, the market doesn’t know where the economy will be. It only expect it to be at some point in the future. If that expectation was wrong (too optimistic) we will correct. If it was still too conservative we will, shoot even higher. It is all perception. And fighting that perception can be costly. So far, optimism rages the Wall Street and it may take years before it goes away.
 

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.