TSP Talk Blog

Stocks seem to be in that euphoric phase again, at least in this cycle of the bear market rally. The Dow rallied back again after the small losses on Tuesday, and it is making it tough for most investors to sit back and watch, so the fear of missing out rally continues during this historic bear market rally. We saw to 2% to 4% gains in most indices triggered by earnings, Gilead's positive data on its coronavirus drug, and they kept sailing after the Fed's accommodating press conference.

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Fed Chairman Powell said the coronavirus is causing "tremendous hardship." He said the measures to protect the public's health is causing sharp economic declines. They continue to pump the system with liquidity saying inflation should remain in check despite this because of weak demand and low oil prices. Sounds like a recipe for disaster, right?

No. Stocks soared. They were up coming into the day with the help of Google earnings and the Gilead news, but barely blinked after the Fed's press conference, and then after the bell, Microsoft, Facebook (both S&P stocks), and Tesla rallied sharply after earnings and that should send stocks higher at Thursday's opening bell. The question is, how are your local waitress, car dealer, theater, coffee shop, and hair salons holding up? They're likely joining the list on the double digit unemployment rate that the Fed talked about yesterday. Will it be another case of the Fed helping Wall Street and not Main St.? How will that go over? By the way, the April jobs report will come out next week.

I am a little mad about all this. For one thing, I didn't see a 35% rally off the lows coming so I'm missing most of it, but I know, from listening to some mom and pop types who are excited about the market recently, that this rally is going to fail at some point. The market apparently hasn't sucked enough people in yet, but now that the S&P 500 is playing with the 200-day EMA, it's just a matter of time that those holding out capitulate and join the bullish side. Will they be right in doing so? Maybe, but probably not. That's not how this normally works.

It just isn't normal to see a 35% crash followed by a 35% rally.




I go back to the 2008 bear market to illustrate a more typical bear market, as far as how they usually play out. You get declines, bear market rallies, resistance holds and we get another decline, more rally, but all the while the trend stays down until the bear is gone. This one took a couple of years. Look how formidable the 200-day EMA was during that period.




How about the dot com bubble bear market? Same thing. I won't mark it up in the same detail, but you can see that 50 and 200-day EMA were in play at every turn, so what is going on now is either a huge smoke screen and an attempt to pick retail investor's pockets, or free markets are gone and the Fed runs the economy now.




The coronavirus situation may be different as the economic decline was self-inflicted for health safety reasons, but stocks had been very overvalued before it started, and it looked like a good enough reason to weed out the overvaluations.

But just because stocks are off their highs, doesn't necessarily mean they are cheaper. When prices come down, valuations don't get better if earnings are also falling. Price to earnings ratios count on the denominator of that formula, in this case earnings, to be moving higher, not lower.

For example, if a stock's price is $20 per share and the company's earnings are $2.00 / share, then the P/E ratio is 10 (20/2). If the price of the stock moves down to $16 per share -- great, a 20% decline -- but earnings move to $1.00 per share, the P/E is now 16 to 1, making it a more expensive stock.

If this current situation does turn into the 2008 or 2000 bear market charts, then we haven't seen anything yet. It would just be getting started. Yes, things are looking better as far as seeing this virus getting more under control, but it was at the expense of the economy, which is and may be for a while, in trouble. This is not your February 2020 economy anymore.

Look for a rally to start the day with Microsoft and Facebook ripping overnight, but let's see if this frothy move triggers any late profit taking.

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The S&P 500 (C-fund) gained back all of the Tuesday's negative reversal, something we saw earlier in April as well, so once again the normal technical analysis / patterns, are not playing out as we had seen work for many years. Perhaps it was just the lure of that 200-day EMA which, as we saw in those bear market charts up above, tend to be tested toward the end of a rally, but again I don't know anymore if we can count on typical technical analysis working.




The DWCPF / S-fund closed at day #3 above its 50-day EMA, and this one actually has some room above before it hits the 200-day EMA. Perhaps the earnings pop will push it there today, but it is also testing the top of a channel now, which I had thought was a bear flag, but I'm not so sure anymore.




The Dow Transportation Index also broke above its 50-day EMA but it remains near the top of that rising channel.




The BND / F-fund continues to flirt with that all time high closing price near 87.70, which occurred in early March. It feels like this wants to breakout, but I would think that the stock market would have to reverse down to see that.




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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley



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