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June 3, 2020

The Most Confusing Time for Traders

Frank Cabibi

Featured Photo From: https://assets.cmcmarkets.com/images/sg_uncertainty_170517_large.jpg

This might be one of the most confusing and nonsensical times in the stock market. Global currencies are extremely volatile and no one seems to know what is going to happen next. Setting aside logic, US indices seem to keep climbing in one of the fastest recoveries in stock market history. And this is based off what exactly?

My concern is that there are no bullish cases that outweigh the enormous amount of debt carried by the US for printing trillions of dollars, unemployment at record highs, GDP projected to be record drop of 50% in Q2 (which is a ridiculous number), and private sector job losses projected to be 9 million.

Here is the Congressional Budget Office's projections for the rest of the year:

Source: https://www.cbo.gov/publication/56335#:~:text=After%20a%20sharp%20contraction%20in,half%20of%20calendar%20year%202020.&text=In%202021%2C%20real%20GDP%20is,to%2Dfourth%2Dquarter%20basis.

Uncertainty

In the same way investors panicked and sold millions of shares in early April, the V-shaped recovery we're seeing is the produced by panic buying. There is still confusion around everything and now FOMO has taken over logic. When investors see the fed-fueled Dow Jones climb 200 points a day, they can't help but to join in to keep from missing out on these big moves. At the same time, confidence is very mixed and uncertainty is rising. The recent sentiment has been to rely on the fed for every little bump in the road and ride on the coattails to profits. The fed was designed strictly for monetary policy; it was never intended to be able to buy stocks on a seemingly unlimited balance sheet, but that is what it's come to after the 2008 financial crisis. Now we have traders and investors alike pooling their money into an endless ocean of artificial wealth called the stock market. That might sound nice, but there are some serious problems that come with that. One, inflation rates will rise due to the overprinting of currency. And two, debt levels will increase as well. Our economy is in a hot mess right now, but the market doesn't reflect that.

Source: https://www.longtermtrends.net/price-earnings-ratio/

Price to earnings ratios are grossly high as companies who generated no profit for over a month are priced around when they did make profit. According to the chart, we have not been overvalued, but in a bubble for years now. We're too high, and performance can't back it up.

What Now?

Because shorting is so hard to time, it makes it hard to wait with your money on the sidelines. Buying might seem attractive considering that the market has done nothing but move up since the pandemic crash. But the right move may not be to buy now. If you are seeing some big gains in your portfolio, you may be wondering why. And trust me, so is everyone else.

US30 Technicals

The rally doesn't seem to end with US equities, as fears, bankruptcies, riots, unemployment, and GDP continue to get worse. US30 is now about to face a big test against its 200 DMA as RSI climbs close to 70. In further news, according to Yahoo Finance, economists expect private sector job losses to be 9 million this month. Looking technical, if US30 touches the 200 DMA, we could be looking at some serious short interest on the index and all major US indices.

Other Technicals

XAU/USD did end up coming off highs and pulling back to the downside as global stimulus measures are being discussed. As a result, investors look to gold and USD as safe havens for the economic recovery phase. However, gold prices dropped due to the concern of the federal stimulus package wrapping up. Gold currently touching support at $1701, RSI down to 45.

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Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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