Stock Market Ready To Go Lower Again
If you read our weekly updates you saw that we called out an important break two weeks ago. Last week, Sunday we called for a near term bounce which saw the market up big on Monday. But we said we thought downside after.
I thought sideways last week because I thought two weeks ago was down too fast and oversold and needed to go sideways. Now that market condition has worked its way out. Last week went sideways and I think we're ready to head back down again.
What's Next For Stock Market
Markets ripped up and down 3% last week. Smooth is bullish, whippy is bearish. Last week was clearly whippy.
So many investors, traders and algos have been programmed to buy the dip.
The Fed and global central banks are programmed to keep adding free money. The Fed's chance to pull back free money was in late 2018 which crashed markets. They are trapped.
Here's the potential bad news combination.
Last week the Fed had a huge amount of buying. Market participants all assume that should lift markets. But The number of new Covid 19 cases picked up every day so far. We hope it stops but its very possible that everybody buying this dip can be overpowered by this global quarantine.
If people are quarantined, they can't work, they can't buy and growth rates get hit.
The Fed is going to be very close to 0% after this next meeting in ten days. They have limited ammo.
They have QE but their balance sheet is already huge.
But I don't think any amount of easing can jump start a quarantined populace. So all those buying this dip have created a situation that everybody's likely buying along with the Fed buys because that's what's worked. But all have stop losses lower. When or if those stop losses get hit if Covid 19 doesn't ease, then markets go lower because everybody sells.
I mentioned last week to subscribers that the first stop on SPY I think is 285 and a close below that can take SPY to 265. If there's no letup in Covid 19 I think it takes a little time to go lower than 265 maybe much lower.
Of course, as you know I take it day by day.
The other problem around the corner is repo. The Fed is forced to fund overleveraged hedge funds through that repo facility. They are not in a position they want to be in. They've said they will pull back by April 15th. They've tried to pull back then feel the need to reup again and again. They have not pulled back because they know pulling that back risks crashing markets. If hedge funds can't get their 'free money' through repo lending they'll have to unwind positions. I think that will cause a disruption in markets.
Subscribers have seen we've been very small in number of ideas right now and keeping it to the short side in our portfolio using ETFs.
We're living in the longest economic expansion in modern history that's been artificially inflated by tools that have kept us afloat at only 2-3% growth. But Covid 19 has been a surprise that any amount of stimulus cannot fix.
I've seen that a cure may not be here for a year or more. People are hoping the weather of Spring and/or Summer cures things. But we can't know.
For now, market's hate the unknown. We have one big unknown in front of us. Along with that I think the market worked out of its oversold position. So I see we can start breaking down again.
Let's continue to respect markets, direction and the fundamentals.
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