May 9, 2020

What the Hell is Going On?

What the Hell is Going On?

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One big question so many people currently have that are knowledgeable about economics and investing is “What the hell is going on with the stock market?” 

As the pandemic expanded around the world in late February and early March economies of entire countries and then U.S. states started to shut down and quarantine their citizens the stock market starting to sell off into a downtrend. However, the downward path was not one way as it was met with some of the biggest rallies in history due to so much uncertainty from the beginning of how all this would work out. The stock market indexes did eventually fall over -30% approximately and into a bear market but there was no easy money on the short side for more than a day as almost every plunge was followed by a big reversal to the upside. March was a downtrend but not an easy one to just ride down with a short position due to the extreme price volatility in both directions. 

By the last week of March at the peak of fear the downtrend stopped and a low was put in on March 23rd and that low in price was never breached. Incredibly, in the midst of a two month economic shutdown around the globe the NASDAQ is positive year to date. 

How in the hell can the stock market rally off the lows and stay in a trading range during some of the worst economic numbers since the great depression? With 20.5 million unemployed and a 14.7% employment rate in the U.S. how can the stock market be bullish now? We have entire sectors closed like movie theaters, the travel industry, sports, restaurants, bars, and shopping malls.

Crude oil was even at negative prices in the futures market as delivery day approached last month and its price remaining below production  costs for most producers is setting off a whole new chain of systemic risk for oil company earnings and their credit markets. 

How is the stock market not selling off here and staying in a prolonged bear market like it has in the past during economic recessions and depressions?

What the hell is going on with the stock market and why is it not falling?

  • Traders and investors don’t believe this is a long term economic problem they think the virus is a short term event and things will be back to normal this year. 
  • There is hope in an effective treatment for Covid-19 symptoms making getting it in the future a non-issue.
  • The models projecting the spread of the virus were wrong versus the actual outcome so far. 
  • The belief that the government mandated quarantines were effective in stopping the spread.  
  • The stock market made a bottom as everyone that wanted out got out during the quick March crash and it simply ran out of sellers at lower prices. 
  • The stock market prices in the future as it is thought to be at any given time. The projections changed quickly from March to April as everyone looked at the statistics play out for infections and deaths as a percentage of the population as well as those groups most affected. 
  • The U.S. politicians are ready to do whatever it takes to prop up the economy through small business grants, one time pay outs to citizens, and expanded unemployment benefits. 
  • The Fed funds rate is 0% so money is cheap to borrow to create economic activity. 
  • Liquidity is the most important fundamental and the Federal Reserve is holding nothing back ready to inject money into the financial system with loans and as the buyer of last resort for depressed assets. 
  • You can’t fight the Fed. 

Fortunately, you didn’t have to know all this to make money in the stock market in 2020 you just had to follow the signals of a price action system that captures trends and swings in the markets. 

For now the stock market is pricing in a fast recovery from this pandemic and quarantine in 2020. If this sentiment changes so will the market direction, until that happens, enjoy the ride. 

What the Hell is Going On?

Chart courtesy of TrendSpider.com