We were well beyond due.
A pullback in the stock market was bound to pop up “out of no where.” Given that we saw the S&P 500 gain as much as 48% from its March 23 low, the Nasdaq100 gain as much as 50%, and the Russell 2000 gain as much as 59%.
For those “Technicians” and “Strategists” out there, typically a 50% bounce out of a bear selloff is met with selling pressure.
The basis for why the stock market is poised for a notable pullback at today's open is what is open for debate. A potpourri of potential catalysts from Covid to the Fed can be to “blame" for today’s selling.
To note them, the catalysts (excuses) for the weakness are:
Economic growth worries wrapped up in the Fed's projection that the fed funds rate will remain at the zero bound through 2022.
Concerns about a pickup in Covid cases and hospitalizations in states with early reopening efforts.
But like, why now?
The market is suddenly worried about the economic “recovery” not unfolding as quickly as expected is because what Fed said doesn't pass the sniff test. In simpler terms the market is telling you “Wait if things are rosy, why the fuck is the fed taking such aggressive actions?”
For weeks there have been daily warnngs by economists and other market bozos that a V-shaped economic recovery isn't going to happen. The stock market didn't care. It just kept trading up and up and up anyway on the heels of dudes like Dave Portnoy beating their chest in front of their RobinHODL:er fan base.
Why?
For starters the market is comprised of greedy participants. But also, partly because it felt the recovery would unfold better than expected, partly because there was a ton of fiscal and monetary stimulus thrown at the COVID-19 bridge, and partly because COVID-19 case counts were “fading” and there was a lot of hope around the news on COVID-19 treatment and vaccine work.
Yesterday, Eli Lilly (LLY) told Reuters it could have a COVID-19 treatment available as early as September if either of two antibody therapies it is testing goes well.
Today, Moderna (MRNA) confirmed it will begin the Phase 3 trial of its COVID-19 vaccine in July and Regeneron Pharmaceuticals (REGN) said it started its first clinical trials of a novel two-antibody cocktail for the prevention and treatment of COVID-19.
The futures for the major indices tanked anyway. A few weeks ago news like that on Covid would have ripped the market. Now that hopium is wearing thin.
There is now obviously more to the story behind the weakness in the futures market. This stock market was way overheated. Signs of froth were abundant. From RSI readings to all the new idiot money in the market. Yes, I’m talking about all the overnight geniuses in the RobinHood cult.
Fed Chair Powell didn't tell us anything we hadn’t already chosen to ignore for the last six weeks or which epidemiologists were cautioning about when it came to reopening activity.
Today is a day of sobriety. The bullshit of bidding up stock prices of bankrupt companies and penny stocks in exponential terms is being called to account. The rush to own cyclical and value stocks is being unwound. The safe-haven flight to the mega-cap stocks is being grounded. The unmitigated multiple expansion is hitting a wall. The articles about billionaire financiers being “dumber” than the market shmucks needed to come to an abrupt halt.
It was bound to happen. Just needed a match.
Initial jobless claims for the week ending June 6 decreased by 355,000 to a still-high 1.542 million (Briefing.com consensus 1.525 million) while continuing claims for the week ending May 30 decreased by 339,000 to a still stunningly high 20.929 million.
The takeaway from this report is that the hiring activity in May. It shows the labor market remains a long, long way from “being back” despite what the Orange Kremlin propagates publicly.
The Producer Price Index for final demand increased 0.4% m/m in May (consensus +0.1%). The index for final demand, excluding food and energy, declined 0.1% (Briefing.com consensus 0.0%). Those readings left the yr/yr rates at -0.8% and 0.3%, respectively.
The report shows why the Fed isn't thinking about raising rates anytime soon and why the Treasury market doesn't think it will either. The 10-yr note yield is down seven basis points to 0.68%, laving it down 23 basis points for the week.
Earlier in the week, the closing print for the CBOE Total Put/Call ratio brought the 10-day average of that data point down to 0.76, which was the lowest reading since January 2014.
That number is now 0.738, which puts it basically in line with the lowest reading in the past decade.
The above is just a fancy way of saying “investors” were lazy and needed to get washed. The simple fact is, this market badly needed a shakeout and all the retail participation provided it one.
The last thing to note is that the unprecedented move where we saw fiscal stimulus surpass monetary stimulus in total size and impact is a great setup for gold to get the benefit of the doubt, as it marches toward a possible fresh range breakout. This can also be true for Shitcoin if the HODL’ers weren’t so damn weak.
The last piece of anecdotal information I want to leave you with is the following; ask 10 different people where we are on the stages of the market and you will likely get seven different answers. No matter how you slice it, we are expensive historically. Even if you factor in the 0 rates, we are expensive. i mentioned this last week in a write up where I outlined that there was a capitulation event taking place in the Yen. That indicated that the leveraged risk (likely short) trade was looking capitulatory. The last week we’ve seen that play out with bankrupt companies abundant running.
Currently we’re trading at around 29x which are levels we saw in the .com bubble. So whether this is a reset or a retest we still need to sell. I leave you with the following image that will at least (hopefully) make you question.
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