So, let's examine the non consensus view - some reasons why I have started to do some buying:
* China has moved on. Coronavirus cases are down and its stock market is well off the lows. (Interestingly, today the China H share Index and the Hang Seng closed up on the day.) Will this be the blueprint for the rest of the world as well?
* When China sneezes... The last two major selloffs in U.S. equities were China-induced (devaluation fears and a trade war with the U.S.) - these proved to be great buying opportunities.
* A point of maximum fear? There are many examples of this - Dr Roubini in the Financial Times, Mohamed El-Erian on CNBC, etc. "This time is different." But will it be?
* Market structure systematics created a perfect storm. We entered into this selloff with CTAs near record long with a need to sell substantial sums of stocks if the market inflected. This has more or less been absorbed now.
* Corporate buyback bids could trump systematic supply at this point.
* Volatility has spiked and the market may be pricing "guaranteed" panic.
* Speculation is no longer running amok and the "everything bubble" has been pierced. Stocks like SPCE, downgraded by Credit Suisse this morning (and many others) are in free fall now - erasing much of the recent gains as speculators run to the hills.
* As discussed in yesterday's "After The Fall" and "Brokedown Palace", stocks are swiftly moving towards oversold as market and economic expectations have quickly soured.
* If the old narrative comes back - it looks more sold than ever with yield gap support (and a 10 year U.S. note yield of 1.31%) coupled with a President Trump reelection (despite Sanders' ascent) at the highest probability this year.
* If financial TV and "talking heads" are viewed as a contrary indicator - the confident Bulls of only 1-2 weeks ago have confidently reversed their bullish views and now see little opportunity to buy.(Reminding us of Divine Ms M's wonderful phrase, "Price has a way of changing sentiment.")
There is no doubt that short-term oversold conditions are rapidly replacing short-term oversold conditions and a significant number of global stock market indices are back trading at areas of potential support. It is therefore a logical time to begin to think about where opportunities may reside.
Bottoming generally is a process rather than an event and the determining factor on how much of a bounce we see will likely be strongly influenced by the willingness of central banks and governments to supply liquidity.
The bond market has already priced in rate cuts by the Fed in March but the ECB is still unwilling to lend assistance. Part of the reason for that reluctance is they generally tend to wait for clear evidence of deterioration before acting. That’s why central banks are so often accused of being late.
The biggest piece of evidence to support a recovery hypothesis would be a higher reaction low. We haven’t seen a bounce yet but considering the uncertainty, a retest of any low posted is likely in my view. That’s suggests no great urgency in buying the dip, particularly since infections are still accelerating higher internationally.
The tourism and leisure sectors are likely to represent the epicentre of risk because people are going to be slow to book vacations or cruises while they are afraid of being infected. The recent story of the South Korean Air stewardess who was infected and flew to Tel Aviv and Los Angeles is not exactly confidence inducing.
Royal Caribbean has just about halved in the last six weeks and Carnival Cruises has been trending lower for some time already. Marriott pulled back sharply over the last week but is exhibiting relative strength by comparison.
There is a lot of concern about the integrity of technology supply chains but software is likely to be comparatively unaffected and could benefit as more people work from home. The First Trust Cloud Computing ETF is now testing the region of its trend mean and the upper side of the previous range.
The clear evidence of opportunity in a future recovery will be demonstrated by relative strength. It is too early to make that call but the pervasive selling will undoubtedly have resulted in some companies being sold off too aggressively. Those that bounce back best and subsequently do not retest their lows will be the best candidates for future leadership.Back to top