Trading the Bounce

[ducati916]

I am still cautious on this V shaped US market recovery. The reason is simply this:

"" Looking at the stock markets, it seems that the US has recovered the most and the rest of the world markets are lagging behind in the recovery or languishing near the bottoms.

But I fear that the US might be the Achilles Heel in the Global market recovery thanks to mismanagement of the situation (the virus), although they are leading with their FED backed stock market bounce at the moment... ""

Quoted written by myself on another thread. I thought to just past it here.

Could be.

Trying to apply too much logic to these types of events, usually results in nothing much more than a headache. Sometimes you just hold your nose and jump in and hang on as best you can. If you wait for the all clear, markets are long gone and trying for a good entry is just a waste of time. The time to jump in is often when all looks lost. Easier said than done.

jog on
duc

 

[aus_trader]

Could be.

Trying to apply too much logic to these types of events, usually results in nothing much more than a headache. Sometimes you just hold your nose and jump in and hang on as best you can. If you wait for the all clear, markets are long gone and trying for a good entry is just a waste of time. The time to jump in is often when all looks lost. Easier said than done.

jog on
duc

US has probably see the best of it's gains for now. ASX has catching up to do but trend still up and I think will pick up momentum in weeks ahead.

Thanks guys, action trumps inaction (not referring to Donald Trump).

Yes things are not what they seem to be but I agree and I wrote a post with similar theme in another thread and why I am still taking small action steps at least on the ASX:

""
I just don't know. If everything is done to prop up the stock market in terms of FED actions and the leadership actions, well it is working at least for the time being. We can look at the US markets in disbelief, but human toll is not a factor that drives stock markets. It's the amount of money printing by the FED that can be used to buy the market either directly or indirectly via investment banks.

Anyway it is what it is, so I won't argue. As a well respected ASF member said either in this thread or another thread: it might take the loss of a high profile figure or their immediate family in the billionaire club for the funds and efforts to be directed to where it's actually needed in the real economy at ground level.

Good to hear that you are also re-entering stocks. I have also only just started buying ASX stocks, very cautiously and selectively. I have added another stock today that may be less affected economically in these times because they are an essential service provider. Will update my 'spec portfolio' in the evening with this purchase. For members interested, ASF thread for that portfolio is Speculative Stock Portfolio.

""

 

[ducati916]

Some more market history: short version 60% of bear markets result in new lows.

jog on
duc

 

[ducati916]

Thanks guys, action trumps inaction (not referring to Donald Trump).

Yes things are not what they seem to be but I agree and I wrote a post with similar theme in another thread and why I am still taking small action steps at least on the ASX:

""
1. I just don't know. If everything is done to prop up the stock market in terms of FED actions and the leadership actions, well it is working at least for the time being. We can look at the US markets in disbelief, but human toll is not a factor that drives stock markets. It's the amount of money printing by the FED that can be used to buy the market either directly or indirectly via investment banks.

2. Anyway it is what it is, so I won't argue. As a well respected ASF member said either in this thread or another thread: it might take the loss of a high profile figure or their immediate family in the billionaire club for the funds and efforts to be directed to where it's actually needed in the real economy at ground level.

Good to hear that you are also re-entering stocks. I have also only just started buying ASX stocks, very cautiously and selectively. I have added another stock today that may be less affected economically in these times because they are an essential service provider. Will update my 'spec portfolio' in the evening with this purchase. For members interested, ASF thread for that portfolio is Speculative Stock Portfolio.

""

1. So if we create an equation that more or less states your position in [1].

Corporate profits (Stock Market) = investment + dividends/buybacks - household saving - government saving - rest of world saving.

So: (-30%) + (-20%) - 20% - (-$3.7T)

In 2019, net investment, dividends/buybacks, household savings and rest-of-world-savings added up to $4.7 trillion. In 2020, the government is going to generate 78% of that in total.

So the point is, it’s not remotely surprising that the stock market has recovered, simply because it’s now trying to guess when those other variables will recover. And if they do recover, then there’s a very real chance you’re going to see record profits in 2021 and 2022.

2. The British Prime Minister almost died. I doubt you even blinked.

I think this market will fall into the 40% bracket (from above chart).

jog on
duc

 

[aus_trader]

Some more market history: short version 60% of bear markets result in new lows.

View attachment 103220

jog on
duc

Amazing stats duc. This is why I love hanging around these forums. You get to learn from other members and have a broader perspective rather than hiding in a hole and being scared.

I am more prepared this time. If the markets need to re-test or go below the lows, I would have most likely liquidated the positions that I am putting on now, unless a particular stock decides to go against the grain and rally hard.

My extreme cautious view to buy very cautiously and very selectively comes from living through the GFC and coming out the other side on life support. I thought I was a genius when the market tanked during the GFC and bought up everything under the sun including mining juniors and mining services companies going all in. Didn't have an exit plan and sold out of a lot of those companies either when most were trading for pennies with almost no value left in them or still held on stubbornly till the companies were wound up and given to either receivers or administrators to clean up and to this day I didn't get a cent back.

 

[aus_trader]

I think this market will fall into the 40% bracket (from above chart).

I hope so, fingers crossed !

 

[waterbottle]

Could be.

Trying to apply too much logic to these types of events, usually results in nothing much more than a headache. Sometimes you just hold your nose and jump in and hang on as best you can. If you wait for the all clear, markets are long gone and trying for a good entry is just a waste of time. The time to jump in is often when all looks lost. Easier said than done.

jog on
duc

I agree wholeheartedly with you on this.

There is a risk no matter what option you take: either in the form of lost opportunity or lost capital.
The decision between one or the other is up to the individual, although risk management & luck each have a role to play.

Risk management
Risk management
Risk management please!

 

[ducati916]

Amazing stats duc. This is why I love hanging around these forums. You get to learn from other members and have a broader perspective rather than hiding in a hole and being scared.

I am more prepared this time. If the markets need to re-test or go below the lows, I would have most likely liquidated the positions that I am putting on now, unless a particular stock decides to go against the grain and rally hard.

My extreme cautious view to buy very cautiously and very selectively comes from living through the GFC and coming out the other side on life support. I thought I was a genius when the market tanked during the GFC and bought up everything under the sun including mining juniors and mining services companies going all in. Didn't have an exit plan and sold out of a lot of those companies either when most were trading for pennies with almost no value left in them or still held on stubbornly till the companies were wound up and given to either receivers or administrators to clean up and to this day I didn't get a cent back.

Which is why I only really trade ETFs directionally. If I trade individual stocks it has to be a market neutral position so that if they go to zero, I still get paid.

jog on
duc

 

[ducati916]

Buffett speaks:

A firsthand explanation of why Berkshire continues to sit on top of some $137 billion in cash and Treasury bills following the steepest market sell-off since the 2008-09 financial crisis, rather than snapping up beaten down stocks or entire companies. The Oracle of Omaha told a spookily empty auditorium for the first time how credit markets had virtually seized up in March, as the Covid-19 pandemic and related economic shut down punished stocks — and sent companies scrambling to tap their credit lines, bringing markets to the financial edge.

“We came very close to having a total freeze of credit to the largest companies in the world who were dependent on it,” Buffett said. Chief financial officers were petrified. “Fear is the most contagious disease you can imagine,” he said.

The precarious state of the U.S. banking system was not widely known. “I had no idea how much we were up against it in terms of facing a banking crisis,” said Thomas Russo, managing member of Gardner Russo and Gardner, a money management firm in Lancaster, Pennsylvania, which has owned Berkshire shares since 1990. “We were near a precipice.”

He pointed out how the 2008-09 financial crisis unfolded in stages. “You didn’t see all the problems the first day,” Buffett said. “There are things that trip other things and we take a very much worst-case scenario into mind.”

jog on
duc

 

[$20shoes]

FRED developed a new chart painting a not so pretty picture.

The WEI is an index of real economic activity using timely and relevant high-frequency data. It represents the common component of ten different daily and weekly series covering consumer behavior, the labor market, and production. The WEI is scaled to the four-quarter GDP growth rate; for example, if the WEI reads -2 percent and the current level of the WEI persists for an entire quarter, one would expect, on average, GDP that quarter to be 2 percent lower than a year previously.

The WEI is a composite of 10 weekly economic indicators: Redbook same-store sales, Rasmussen Consumer Index, new claims for unemployment insurance, continued claims for unemployment insurance, adjusted income/employment tax withholdings (from Booth Financial Consulting), railroad traffic originated (from the Association of American Railroads), the American Staffing Association Staffing Index, steel production, wholesale sales of gasoline, diesel, and jet fuel, and weekly average US electricity load (with remaining data supplied by Haver Analytics). All series are represented as year-over-year percentage changes. These series are combined into a single index of weekly economic activity.

Although you could assess the damage as being front loaded as Duc mentioned (and it may be), the probability of this leg up being a relief rally are higher than it being the continuation of the bull market.

However, the exuberance of the move does not appear to have yet ceased. With Wave A complete, we should expect a small pullback for Wave B (we are currently in Wave B) and then highs above 3000 before Wave C terminates this leg up. That should set up a broader move down well below the MArch lows.

 

[qldfrog]

N

FRED developed a new chart painting a not so pretty picture.

The WEI is an index of real economic activity using timely and relevant high-frequency data. It represents the common component of ten different daily and weekly series covering consumer behavior, the labor market, and production. The WEI is scaled to the four-quarter GDP growth rate; for example, if the WEI reads -2 percent and the current level of the WEI persists for an entire quarter, one would expect, on average, GDP that quarter to be 2 percent lower than a year previously.

The WEI is a composite of 10 weekly economic indicators: Redbook same-store sales, Rasmussen Consumer Index, new claims for unemployment insurance, continued claims for unemployment insurance, adjusted income/employment tax withholdings (from Booth Financial Consulting), railroad traffic originated (from the Association of American Railroads), the American Staffing Association Staffing Index, steel production, wholesale sales of gasoline, diesel, and jet fuel, and weekly average US electricity load (with remaining data supplied by Haver Analytics). All series are represented as year-over-year percentage changes. These series are combined into a single index of weekly economic activity.

View attachment 103227

Although you could assess the damage as being front loaded as Duc mentioned (and it may be), the probability of this leg up being a relief rally are higher than it being the continuation of the bull market.

However, the exuberance of the move does not appear to have yet ceased. With Wave A complete, we should expect a small pullback for Wave B (we are currently in Wave B) and then highs above 3000 before Wave C terminates this leg up. That should set up a broader move down well below the MArch lows.

Not an Elliot fan, but that scenario seems quite reasonable vs figures and psyche.good find!

 

[ducati916]

The 2020 crash had many of the hallmarks of the 1987 crash.

I was 25 years old and had been on John Meriwether’s Arb Desk for just over a year, following two years working in Salomon’s Bond Portfolio Analysis Group. My memories from the day the US stock market dropped 22% didn’t seem very noteworthy when my friend Rich Dewey asked to interview me for an article, Black Monday Revisited, he was writing for Bloomberg to mark its 30th anniversary. After all, compared to the other people Rich was interviewing—Paul Tudor Jones, Howard Marks, Stanley Druckenmiller, Ed Thorp and my former Salomon colleagues Eric Rosenfeld and Michael Lewis— what could I add?

We borrowed money to finance our long positions in bonds primarily through the repo market, but we also had to borrow securities to support our short positions. When we shorted a bond, such as the 9.25% of 2/15/2016 that we were running a big position in at the time, we needed to borrow that specific bond from someone who held it in order to make good on the sale. We could borrow money from anyone– a client, a bank or as a last resort even the Fed. But the only party who could lend you a security was someone who owned it free and clear, and hadn’t lent it already. And the lending market was mostly overnight, so we had to roll every day.1

First takeaway: Bond traders finance their positions by selling 'X' and buying 'Y' (bonds). This has to be rolled over in the Repo Market. There were issues in the Repo Market in September 2019. The result being that Relative Value Arbitrage positions had created significant negative convexity positions, which, with an increase in volatility, leads to an endogenous feedback loop and margin calls. The Fed had stepped into the Repo market, but, with the massive increase in volatility, the forced selling overwhelmed (again) the Repo Market, resulting in significant selloffs in Treasuries, driving the sell what you can in equity markets.

Continuing:

Another thing that I don’t remember happening was an economic depression following the stock market crash. Well, I guess that’s because it didn’t! It was supposed to though, just as the Great Depression followed the Black Tuesday of October 1929. In fact, in December 1987, 33 prominent economists (5 with Nobel prizes) issued a statement predicting that “the next few years could be the most troubled since the 1930s.”2 The fact that we moved forward with barely a blip to the real economy makes us feel that October’s stock market crash was bogus, a market move that had nothing to do with fundamentals. But it didn’t have to turn out that way. It’s important to remember what didn’t happen: an alternative future in which the Fed didn’t act as it did (would Volcker have reacted as Greenspan did?), the stock markets fell even further, financial firms started failing, and we got a long and deep recession.3

Obviously there are differences then to now: what is common however is the speed of the intervention from the Federal Reserve.

The recovery:

Some blips lower, but essentially, a 'V' recovery. Of course there was no aftermath recession.

So some examples of earnings based recessions:

The drawdown in earnings is YoY. The worst being 2007 with 35% drawdown. The market fell 57%. We have had earnings Q1 already. Pretty grim for the Banks, but they already had issues that as usual, they were hiding. However the issue will be going forward (for most listed companies mid-caps+) will be with so much stimulus already provided and no hint that more, if necessary, could not be made available, it is quite possible that there is no second shoe to drop as earnings + stimulus will keep earnings higher than anticipated.

The fall in March was a Bond market margin call that as usual migrated into stocks. The COVID-19 lockdown that has subsequently been enforced, is (has) creating the losses going forward. The fallout is (will) mostly fall on small (non-listed firms) that have difficulty accessing capital. The larger firms will weather the storm via bailouts etc and emerge into a lower competition market, which, paradoxically, could enhance earnings going into 2021.

At the moment (but that could change) I do not see anything that will break the current secular (bull) market. This remains primarily a margin call that has crushed (mostly) small businesses through a lockdown. There will be exceptions (examples in the oil patch) but by-and-large, as we start to exit, I don't see a second leg down.

jog on
duc

 

[aus_trader]

Reading all of the above I come to the conclusion that 1987 comparison to current market and Buffet's actions contradictory .

 

[Smurf1976]

The WEI is a composite of 10 weekly economic indicators: Redbook same-store sales, Rasmussen Consumer Index, new claims for unemployment insurance, continued claims for unemployment insurance, adjusted income/employment tax withholdings (from Booth Financial Consulting), railroad traffic originated (from the Association of American Railroads), the American Staffing Association Staffing Index, steel production, wholesale sales of gasoline, diesel, and jet fuel, and weekly average US electricity load (with remaining data supplied by Haver Analytics).

I like that they're measuring very real things in the economy not conjured up numbers produced by some model subject to hedonic adjustment and based on dubious assumptions.

Retail sales, unemployment, income tax, petroleum consumption and the activities of freight trains, steelworks and power stations are absolutely very real things with broad economic implications that are difficult, in some cases outright impossible, to fudge by any means short of outright lies. Either workers are employed, the train's hauling freight and the blast furnace is running or it's not, that sort of thing is very real.

It's not like some model where you can say it's hot despite the fact it's snowing outside if you just refine the definition of "hot" until it gives the answer you want and nobody can really prove it's wrong or right. Jet fuel loaded onto aircraft and gigawatt hours sent out to the grid are far more real, definite things.

 

[Smurf1976]

An interesting mix of views here on all this, ranging from "new all time highs are just around the corner" through to "end of the world is nigh" sort of stuff.

Personally, I'm somewhat biased to the upside but far from convinced. There's all that money printing going on and there's a lot of bearishness from the public and both of those point toward markets more likely to go up than down. On the other hand, the rally does seem rather like the battery's just about stuffed, it's struggling along at best.

Main thought though is a comment I saw on a YouTube video regarding the S&P500: "Stop focusing on the detail and indicators, stand back and look at the chart. Now tell me this isn't a huge bear flag".

Thoughts?

 

[ducati916]

Obviously the COVID-19 is having an impact. But by comparison to the 1917-1919 variety which killed 50M-100M, it's nothing really by comparison.

This is the 1917 market. The first wave of flu. The dips were deeper, but still nowhere near the lows. The second wave, which was actually the most significant wave in 1918, the market came back to the lows in 1917. The third wave in 1919, market was long gone. COVID-19 wave 1 will be (in my opinion) the worst wave. Once we get through this, any subsequent waves will be lesser, although some industries may be hit harder than others. So one takeaway is choose the industry carefully.

The key going forward for the market is forward guidance.

Clearly there is anticipation and profit warnings going forward. But nothing compared to the 2008 situation:

The key difference is time: COVID-19 has a finite shelf life, either through herd infection or some sort of vaccine. Therefore currently I don't see significant declines back to the lowpoint in the market currently. If the situation changes, well, then I might change my position.

Industries to date:

And just a little history of volatility.

jog on
duc

 

[ducati916]

And:

This morning the Treasury Department announced the resumption of 20-year bonds for the first time since 1986, with the first $20 billion auction set for two weeks from today. That announced sale is well above the $10 billion to $13 billion size range suggested by a Wall Street advisory committee and complements an upsized reopening schedule across existing maturities. Next week, Treasury will sell a record $96 billion in so-called refunding debt across three-, 10- and 30-year auctions, up from an $84 billion quarterly refunding schedule which had been in force since fall 2018.

With a frozen economy and cascading job losses necessitating colossal fiscal stimulus, Uncle Sam is obliged to fill in the gap. On Monday, the Treasury announced it will borrow a record $2.999 trillion during the second quarter, more than six times that of the prior three-month period.

The figures are mind boggling. According to projections from the Congressional Budget Office, the fiscal deficit this year will equal 18% of GDP, the highest since World War II and double that seen at the height of the Great Recession in 2009. Since March 1, the national debt has grown by $1.5 trillion to $24.9 trillion, an increase of 6.4%. Even before the bug began wreaking havoc, the budget deficit during the first three months of the fiscal year came to $389 billion, up 25% from a year ago

Yet the dramatic escalation of supply has made no dent in the multi-generation bull market in Treasurys. Even following some selling pressure today, the 10-year yield of 0.70% is down from 2.03% as recently as late July, and 0.78% when Federal Reserve announced on March 23 that it will buy Treasurys “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”

This afternoon, the New York Fed announced it is “prepared to include the 20-year bond in System Open Market Account (SOMA) operations and treat it in a similar manner to other nominal coupon Treasury securities, effective immediately.”

There’s more where that came from.

jog on
duc

 

[Garpal Gumnut]

Be very, very, very careful about trading a bounce.

I was listening in to a podcast from Blackrock to high net worth individuals last night and the predictions for the NASDAQ are dire.

Ergo, the ASX will further tank.

I can say no more.

Be brave to keep the liquidity going but not to make a profit.

gg

 

[mangojoe]

Be very, very, very careful about trading a bounce.
I was listening in to a podcast from Blackrock to high net worth individuals last night and the predictions for the NASDAQ are dire.

Could you link said podcast here? Thanks

 

[Smurf1976]

Be very, very, very careful about trading a bounce

One thing when trading a bounce is to make sure that what you're trading does in fact bounce.

Thus far the Nasdaq has bounced like one of those you beaut super bouncy balls that would be considered cheating if used in any proper sport.

The S&P 500 has bounced like a regular ball that would be legit for use in sports.

The ASX has bounced like, well, rather a lot of stocks have bounced much like a bag of cement really. The index looks somewhat miserable compared to the US but dig beneath the surface and there's rather a lot of stocks which have gone pretty much nowhere but of course there are others which have indeed performed well.

If there's one lesson from the past few weeks it's that correlations can and do fail. Trading OOO is not actually trading crude oil as many have found out. Trading randomly chosen shares, or even an ASX200 index ETF, is not a proxy for the Nasdaq, S&P500, FTSE or whatever else you did your analysis based on.

Or in other words, whatever you're trading, and whatever you're analysing, need to be the same thing. Correlations work until suddenly they don't - I expect many have discovered this in various ways in recent times.