Don’t be misguided, markets bottom will be signalled by low VIX and actual economic data, not huge rallies

by coffee-trader

Today is pure optimism and the reaction to good news (or what looks like good news). Fiscal stimulus is anything but certain by tomorrow, FED is doing unlimited QE, and Trump thinks the US can open up by Easter.

Fiscal stimulus takes time to kick in and for many people and businesses comes a week too late. It helps putting money in the pockets but doesn’t suddenly restart the economic apparatus -only consumer and investment confidence do that.

Unlimited QE is like fishing with dynamite: quick results but a lot of underlying damage. lts worth noting that this is not a financial crisis but a public health crisis with financial implications. The FED can at best alleviate some symptoms but that’s it.

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The US is not testing nearly as fast as Korea (17 times less tests per capita when I checked this weekend), nor is it taking the lockdown serious. Unless a million tests appear by this weekend so the virus can be traced and narrowed down, Trump has to face the reality that he either locks down fully now or blows this crisis out of imaginable proportions in less than a month by opening.

So in my opinion, how does a bottom look like? 20-30% drop from the current level, with decreasing volatility starting in one or two weeks when the spread of the virus becomes more clear and the economic data hits us hard. Shy but ever more common gains and then more big rallies than drops (but not 10% if that’s what you want).

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We’ve only had one VIX spike, in 2008 there were 3. Also plenty of examples of fake rallies like today’s and the first Friday of the month. The sp500 was grossly overpriced in February, so whatever it fell until the first days of March was barely an overdue correction. Now you have to input recession to get the true dimension of the collapse.

Disclaimer: this is just my opinion and I’m not offering investment advice