Fed Put Suffices

Sharing below my characterizations (in terms of what they say about the state of the equity market) of the multiple analyses we perform on a weekly basis:

Relative performance by sector: Neutral to Bullish
The U.S. Dollar: Bullish
SP500 200-Day Moving Average: Bullish
Monthly Bollinger Bands: Bullish
20 through 60-week moving averages: Bearish to Neutral
Weekly MACD and RSI (converging/diverging): Bearish
Monthly MACD and RSI (converging/diverging): Bearish
SP500/Transportation Rato: Bearish
SP500/Smallcap Ratio: Bearish
SP500/Bonds Ratio: Bearish
SP500 Breadth: Bearish
PWA Macro Index: Bearish
PWA Global Macro Indices: Bearish
PWA Financial Stress Index: Bearish
PWA Equity Market Index: Bearish
PWA Fear/Greed Barometer: Bearish (mild greed)

While, clearly, red dominates our overall weekly analysis, there’s, nevertheless, cause for optimism reflected in the indicators that follow shorter-term price trends. As, of course, and by definition, short-term trend reversals precede longer-term ones. 

Question therefore being, what could it be, amid a recession for the modern ages, that has traders keeping such a relatively strong bid under equity prices? 

Clients, because we’re presently using them in their portfolios, understand that a “put option” is protection against a fall in price of the underlying security the put is placed on. The term “Fed put” is used to describe the fact that the power of the printing press is forever brought to bear when economic conditions point to high odds of a major stock market meltdown. And, yes — while we can talk about the hoard of hoarding retail traders presently gobbling up today’s storied stocks (read Tesla, for example), and the professional investor class that feels it has to keep up (read FOMO [Fear Of Missing Out]) — if we were to bottom-line what’s presently going on, “Fed put” suffices.

Prevailing thought — and I’ve heard this a bunch of late even among credible market actors — is that as long as the Fed is printing, and fiscal stimulus has no bounds, stocks simply can’t go down and stay down for long…

Well, as you may know, I struggle with that notion. Or, at a minimum, I struggle with the idea that it’s safe to go swimming against such a strongly negative economic tide without a serious life preserver strapped around our clients’ waists!

Institutional volatility trader Jason Buck, I gathered from a RealVision interview I took in this morning, shares my concerns (and/or my experience):

“The more complacent people get, and the more they rely on the Fed put, the more disaster we could have on the downside when the Fed put is no longer relevant.”

“At the end of the day, we’re human beings trading markets when we’re emotional.”

John Kenneth Galbraith, in his must-read accounting of The Great Crash 1929, points out (agrees) that even amid an environment flush with liquidity, stocks (historically-speaking) ultimately give way to economic gravity:

…the explanation obviously assumes that people will always speculate if only they can get the money to finance it. Nothing could be farther from the case. There were times before and there have been long periods since when credit was plentiful and cheap—far cheaper than in 1927–29—and when speculation was negligible.

Yeah, but what about what Treasury Secretary Mnuchin keeps saying; that we’re essentially fine and the prospects for the economic recovery are very strong?

Well, clearly (per Galbraith), Treasury Secretary Mellon’s comments were bullish for markets as stocks recovered (to the tune of 47%) from the first leg of the 1929 experience as well. That is, until they weren’t:

“Andrew W. Mellon said, “There is no cause for worry. The high tide of prosperity will continue.”

Mr. Mellon was participating in a ritual which, in our society, is thought to be of great value for influencing the course of the business cycle. By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will in fact continue. Especially among businessmen the faith in the efficiency of such incantation is very great.”

Well, again, that “ritual” helped pump a 47% stock market rally against a most ominous macro backdrop, but ultimately real world gravity prevailed:

While I am in no way making a prediction herein — just identifying risk — here’s a look at what the Fed and Mr. Mnuchin have succeeded in promoting thus far against the present most ominous macro backdrop:

Interesting times ahead, for sure!


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