May 11, 2020
Posted 9:30 AM ET - Last week the S&P 500 rallied 130 points off of its low and it finished the week within eight points of a new closing high since the crash. Asset Managers are erroring on the side of being long since fixed income yields are generating negative real returns. Central banks are printing money as fast as possible and that is providing a safety net. The next few weeks will be critical as economies start to reopen. Buyers will be evaluating consumption and that will determine where we go next. I believe that resistance is building and that the market will establish a relative high in the next few weeks. We can't short until technical support has been breached. Countries are reopening their economies even though the Coronavirus spread is still a concern. The risk of an economic collapse is greater than the risk of a viral relapse. As companies reopen, policies will enforce social distancing and workers will wear masks. Prime Minister Boris Johnson wants anyone who can't work remotely to go back to work even though the UK has one of the largest death tolls (32,000). South Korea and China have a resurgence in new cases. The Coronavirus is very resilient. Germany is questioning the ECB's bond buying program and there is tension between the countries. The central bank is accepting junk bonds (BBB-) from European banks as collateral for loans. This is an act of desperation to pump liquidity into the system. The United States is going through similar turmoil. The Fed is printing money as fast as it can and $6 trillion in stimulus has been pledged. Money will go to workers and small businesses, but not to states and municipalities. President Trump does not want the country to bailout states that have been fiscally irresponsible for decades (blue states). Tesla could move out of California. Elon Musk is very frustrated with the state and he wants to reopen his car manufacturing plant in Fremont which reduced 500,000 cars last year. Every country has to weigh the cost of life against the cost of an economic collapse. The fiscal stimulus will run out quickly and workers will be monitoring new orders to see if their jobs are secure. Until things return to normal, they will keep their purchases to a minimum. I believe that the recovery will take much longer than expected. There are signs of life. Last week Disney Shanghai reopened and they instantly sold out. The theme park has to stay at 30% of capacity initially. This morning Carnival Cruise Lines said that they have incredible demand for future cruises and that bookings are up 200% year-over-year. Simon Property Group (SPG) will report earnings today. They are the largest mall operator in the country and many of their tenants are struggling. JC Penney, Neiman Marcus and J Crew are just a few of the brick-and-mortar retail casualties - there will be many more. Last week's employment numbers were dire, but according to Treasury Secretary Mnuchin they will get worse before they get better. ADP reported that 20.2 million jobs were lost in the private sector during the month of April. Most analysts believe that the unemployment rate is close to 25%. Swing traders are largely on the sidelines. The upside reward is smaller than the downside risk and last week we bought back our short position for a tiny loss. We currently have a few bullish put spreads and a few bearish put spreads in our portfolio. As a trader there are times when you need to keep your risk low - this is one of those times. In the next six weeks we will be able to gauge the strength of the recovery as nations reopen. Corporations don't know what to expect and the vast majority have pulled guidance. We need to wait for clarity and that will take time. Until then, we will identify opportunities on a stock-by-stock basis and we will focus on premium selling strategies (bullish and bearish). Day traders need to let the early action play out. The SPY is going to challenge a key technical level at $288 today. That area has been a magnet and if support is established, we will have a buying opportunity. Gaps down have been very profitable for us. Relative strength is easier to spot and we can start scaling into long positions once support is established. After the first market bounce, take profits and go to the sidelines. I've seen strong buying pressure and strong selling pressure in the last few weeks. The market has not moved much in the last month and buyers and sellers are battling it out. In the chat room I am providing play-by-play commentary and it will take me an hour or so to figure out how the rest of the day will play out. At this stage, I believe we will have a nice buying opportunity this morning and we will see what happens after that. I believe that Asset Managers are going to error on the long side and that the bid will remain strong for a few more weeks. If the recovery is struggling and consumers are cautious, we will see a market pullback this summer. Stay liquid and wait for clarity. . .
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