by bragghy
Markets are moved by nothing more than fundamentals, but the pricing is never efficient because of expectations, miscalculations, uncertainty and reflexivity. That’s because there are thinking participants involved, and almost all of them are dumb humans.
Phase 1 (SPY goes from 338 to 222):
The virus news drops, the market sells off quickly with exponential fears and bearish expectations. Huge volatility because nobody can price equities accordingly, because the virus is an unknown force and we don’t know how countries and economies will react. We are anticipating a full depression at this point
Phase 2 (SPY goes from 222 to 285):
Near the bottom the FED announces monetary expansion, and the important thing to understand here is that nominal interest rates will stay at zero for the next few years, because that’s exactly how they did it in 2008.
At this point institutional investors and smart retail traders realize that they need to slowly unload all the bonds they have (and the FED will buy them, or some dumbfuck boomer will). That’s beacuse, contrary to what you might believe, bond investing is only profitable in a falling rates enviroment, since in a rising rates enviroment, bond stay dead flat (you lose money in the present because bonds you already hold devalue, and you make money in the future because you buy bonds with higher rates but the net result is a fat zero). If interest rates are zero, the only thing they can do form here is go up, and that is bad for bondholders.
The institutions start naturally looking for yields elsewhere, and since they are expecting long term stagflation and a weak dollar (because some dumbfuck economist said so), they think it’s a good idea to start buying equities and gold for long term gains, and the FED encourages them to do so, jacking up the futures every night and driving expectations of a quick market recovery up and up. It does not matter if the economic data and employment data is bad, beacuse there is nowhere else to put money. This thing is a trend that has constantly happened in the last 10 years, simply because we are at the end of a long term macroeconomic debt cycle and the governments of the developed economies have no ammo left.
Naturally, if you buy stock today, you trim the loose weight and go with stocks with great fundamentals, that are going to be affected less by the virus, and that represent the future of innovation and industry development: tech stocks.
The majority of the trading volume of the rally happens before the prices start to get too high, and at some point, the rally starts to loose momentum because we reach the prices that are believed to be fair by analysts. From this point onwards, stocks will be overvalued.
Phase 3 (SPY goes from 285 to the fucking moon):
Some strong bullish days are enough to encourage dumb retail investors and traders to join the party. As you know, registered activity and trading volume by retail has increased by a lot. It’s not a coincidence that FAANG, MSFT, TSLA are the ones that are carrying the market higher: they are household names and they attract retail traders because they have seen how these stocks have soared in the past 10 years. The mainstream culture abount invetsing for the past decade has been to buy the dip and hold it, and a lot of people that missed out on 2008 saw this as their chance to get in long term.
Notice that after a small dip caused by profit taking at 320, the volume has been low: that’s because institutional investors are not moving. They know perfectly well that we are in a risky space, and you can clearly see that by looking at the relative price of put options. Everybody is hedging, but they are not selling because they are expecting the market to go higher. Everyone thinks it’s a bubble and the prices will keep rising because dumb money coming in, but because everyone thinks that, nobody takes the money out and keeps holding.
The expectations of the presence of a bubble have now created a bubble.
And if nobody is selling but dumb retail demand is very high because now everybody is talking about the stock market (and everyone is at home more), prices keep going up and you get insane P/E and Price/Book ratios and stock charts that look neraly vertical
My humble predictions
Only changes in fundamentals can move the market. As long as they stay the same, more average people will hear online about invetsing and will be attracted to the market. you will start to hear people talking about stocks on social media and at the supermarket. Even the fact that there are so much newfags around here asking for help without knowing anything is worrying. Expectation will drive the stocks higher and the stock being higher will drive expectations up. It’s a vicious cycle. It’s plausible that we could arrive to 380-400 levels.
In my opinion fundamentals will change only with the arrival of november. There will be uncertainty because of new corona waves, Q3 earnings, and most importantly, whoever wins the elections, the market will tank. If Biden wins, Trumps will tank the market the spoil the party. And if Trump wins, the market will tank regardless, because they cannot let the asset bubble machine run for too long, otherwise fiscal policy become useless because all the money is going into equity and consumer spending stays down.
The targets for the correction are 310, then probably 270 if there is a massive overreaction and panic selling, and if we fall further it will be no man’s land
TLDR Bubble up until november, then the markets tank
Personal positions at the moment: I am long on SPXL and got short dated calls. Short on TSLA hedging with calls. Edit: I rely a lot on technicals for the entry points of my trades. I am bullish for the next 2 months, but if I see a good opportunity to short on technicals, I will probably do it sooner. I don’t think it will come though
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.