The Prevailing Bias

Today saw yet another of those recent “not-since-2008” trading sessions; this one being the worst of the current string.

As I type, the market’s attempting a comeback in the futures session; the S&P 500 contract is up roughly 2.5% — for the moment recouping a nice chunk of today’s 7.6% drubbing.

While today was no doubt nerve-rattling, when we consider the asymmetry of the stock market’s rally from last September (which coincidentally tracked the latest expansion of the Fed’s balance sheet [read money printing]) — and, among other things (like waning data in key areas), the stretched valuations we’ve illustrated herein multiple times of late, the market was primed to give some back, identifiable catalyst or not.

With regard to this evening’s rally in futures, here’s from our note yesterday morning:

“Wall Street believes big time in monetary and fiscal stimulus — despite all of the powers-that-be’s best efforts at the onset of the last two epoch bear markets. And, make no mistake, there are bazookas to be fired soon from both cannons.

On top of the virtual assurance that another .50% rate cut will come from the upcoming March Fed policy meeting, expect very soon to hear of fiscal stimulus plans that are likely to receive fast-track approval from Congress. The latter being of the size and scope that very well could inspire strong snap back rallies in global stock markets.”

And here’s the newsflash:

President Donald Trump said Monday he will seek a payroll tax cut and “very substantial relief” for industries that have been hit by the virus, reversing course on the need for economic stimulus hours after markets posted their worst losses in more than a decade. 

Trump, speaking at a White House news conference, said that he plans to announce “very dramatic” actions to support the economy at a press conference on Tuesday following discussions with lawmakers. “I will be here tomorrow afternoon to let you know about some of the economic steps, which will be major,” Trump said.

The promise in the newsflash is that a fiscal bazooka is about to be fired, which explains this evening’s rally.

While my quote from yesterday’s post smacks of skepticism — suggesting stimulus attempts failed as the past two recessions were getting underway — many believe that the powers-that-be waited too long to get going the last two go-rounds. If that’s indeed the case, then one might argue that this time around things will be different; that massive stimulus before the economy actually falls into recession may indeed keep things afloat.

Well, like I keep saying, I’m open to all possibilities, however, for the time being this is beginning to look too much like stage 7 of the boom/bust cycle for us to go chasing any snap-back rallies. 

Here’s the sequence:

1. In the initial phase the trend is not yet recognized.

2. A period of acceleration, when the trend is recognized and reinforced by the prevailing bias; that is when the process approaches far from equilibrium territory.

3. A period of testing when prices suffer a setback. Like the 2011, the 2015/2016 and the 2018 corrections…

4. If the bias and trend survive the testing both emerge stronger than ever and far from equilibrium conditions in which the normal rules no longer apply become firmly established. If the bias and trend fail to survive the testing no bubble ensues. Bias and trend have survived the testing thus far.

5. The moment of truth when reality can no longer sustain the exaggerated expectations.

6. A twilight period when people continue to play the game, although they no longer believe in it.

7. A crossover or tipping point when the trend turns down and the bias is reversed.

8. A catastrophic downward acceleration; commonly known as the crash.

For stimulus to stem the tide — assuming the bias has indeed finally reversed — it’ll have to have the economic punch to quickly turn the prevailing bias back to bullish. 

We’ll know soon enough: I.e., if the coming rallies consistently peak at lower than the latest-high levels, we’ll have to assume that the worst is yet to come. If, on the other hand, new heights are reached — and the waning data referenced above begins to markedly improve — we’ll then be having an altogether different conversation.

Stay tuned...


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