They are like two heavyweight champions, in a corner, the champion, with five knockouts against the bond market, a loyalist who won many more fights than he lost, but was eliminated by the meat grinder repeatedly.
Who are these boxers? In one corner is a viciously oversold position where stocks have been dropping steadily to historic and hysterical proportions due to the coronavirus and the ancestry of Bernie Sanders.
In the other corner is the bond market, more precisely the Treasury bills, which, each time they go up in price and fall in yield, constitute a vicious combination which stirs up the stocks as surely as Muhammad Ali sent so much of challengers on the web. And that explains the bizarre action which gives rise to a gigantic and unbalanced battle with the techniques which prevail beyond all reason.
Let me explain. First the challenger: We know there is a huge fear in this market, both economic fear and fear of personal security. When there is a huge fear like the one we have, we get what is called a theft to safety, a stupid term which means that people just want to hide in something and are not really asking to be rewarded. I know this sounds ridiculous to humans, but many wealthy people and institutions are willing to make almost nothing, even if there is a risk of losing money for it. That is why we continue to see interest rates fall. Buyers really want these bonds for their protection and sellers don’t want to get rid of them.
If I ran the treasury, which I certainly don’t, I would take advantage of this foolish purchase and offer billions of dollars in 10, 20 and 30-year bonds to have enough money to make American infrastructure again great. It won’t happen – I tried this at the start of the Trump administration and it didn’t fly.
With no new supply, these links are bound to go higher every time we are afraid of the coronavirus, which, judging by the global nature of the scourge and the extremely erratic and secretive way in which the Chinese accumulate all the data, is a little almost every day of the week.
The lack of economic activity in terms of travel, leisure, catering and entertainment further lowers rates. If you stop operating normally and everyone works from home, you’re going to slow the economy down something fierce, which is why the Fed wrongly gave us a 50 basis point cut in short rates. If I were the head of the Fed, which I certainly am not, I would never have done it because we always think the Fed knows something and you cut rates so high only because you know that something really bad is happening.
Like many others, I know it is a biological crisis, not a financial crisis. It’s great to have lower rates if there is demand, but if there is no demand for money because you are too scared to go out, lower rates will not work help you. In fact, it has gotten so bad that I speak to many, especially the elderly, who also seem concerned that they will not be able to get any fixed income because the rates are too low because they concern the possibility of contracting the coronavirus.
Thus, a combination of a lack of demand, a vicious fear factor punctuated by a “first interminable case found in (fill the city or the country)” or “closed schools”, or “x number of deaths” , and the Fed helplessness – would it really kill them to contact me first so I can tell them what’s going to happen? – gave us a stock market that didn’t seem to know the bottom.
Now let’s bring in the champeen, the heavyweight on whom I have bet all my career and who failed only once and for a very good reason. I’m talking about the MarketEdge oscillator, something I pay for and get every day after the market closes. This damn reliable thing is so reliable that even a bearish crisis in biological bonds is not up to par with what the oscillator can do for bonds.
What does an oscillator do? It measures the buying or selling pressure, especially when there is an inordinate amount of sales which may be disproportionate to the event press. When you get caught up in events, of course, you may not know that things have gotten out of hand. This is why you may need something like this MarketEdge product to remind you of what happens when there is also lots of sales.
It is a fairly simple tool. When the oscillator goes below zero, you are in the neutral zone. When it exceeds five, there is too much euphoria and when it is below five, there is too much gloom. Levels above or below these levels generally support taking on the other side of the trade.
And when it drops below 12, it’s almost always a good time to buy. We saw it after September 11, when it turned out to be a terrible, tragic – but one-time event. We saw this on August 11, 2011, when the federal debt crisis caused S&P to downgrade US bonds. We saw it again when the Chinese stock market collapsed at the same time that the Fed governors seemed determined to raise rates. We saw it again when the Fed raised rates and talked about further rate cuts in late 2018, just when it should have been talking about rate cuts.
Each time, it was a wonderful time to buy stocks. Each time, the stocks reacted excessively to some news which turned out to be less serious than the market thought. Sure, things were bad, but they weren’t that bad and they were resolved in a shorter time than anyone thought possible, otherwise we wouldn’t have been so low at the start.
The fifth and last time? The only outlier, the Great Recession. You smoked if you bought minus 12 the first time, because the problem involved the most important thing when it came to stocks and bonds: a real financial crisis when almost all of the biggest banks were under pressure or went under. The government, in particular the Fed, did not understand how uncontrollable things were – hence my rant “they know nothing” – and they tried to stem their own stupid and misguided regulation with rate cuts not knowing that they needed a much more powerful tonic. In the end, it was too late and the stock market was cut in half before it hit bottom.
Now let’s talk about the commonalities. In all four cases, where we rebounded strong after minus 12, there were no real financial consequences. There was no confidence in the credit. There have been no major failures.
In the one we failed to rebound, we had it all. The reason it was so wrong for the Fed to cut Tuesday was that it had made old hands like me believe there was to be some kind of impending credit crunch, that one or more institutions were on the point of failing. I mean, what a terrible signal.
As I have said over and over again, however, this is a biological crisis that could hurt hiring and cause layoffs and if the federal government were to help catch up with the short-term unemployed, we could be OK, even with the expected epidemics that will close businesses all over the country. We will experience a mild recession based on a lack of travel and entertainment – so-called gatherings – but the oscillator says the odds are good for buying short-term and long-term, for that matter.
You could say that this rally reflects other things: more stimulus, a remedy that we do not know. I say it’s a traditional snapback and even if you don’t believe it, you can liquidate anything you want at better prices than a week ago. Me? My confidence stands up, alleviating a bit of all the money we put to work during the recession, because the members of the Cramer club, Action Alerts PLUS, which follows confidence, know this only too well.
I think the champion put the links in the meat grinder, turbo charged by the turn against socialism in the elections on Tuesday evening. Did you miss the fight? Don’t worry, there will be a new one soon enough.
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