Market Analysis

Straight Talk #2

First off a big thank you to everyone watching last week’s debut of our webinars. We didn’t know what to expect, but we felt the issues we highlighted deserved a deeper look, not only in last week’s episode but in future discussions as well.

From the overwhelming positive feedback we received we sense you agree, and hence we decided to bring you another episode this week.

So thank you again for your interest and engagement, we are glad you find this format useful. We’ll see how it develops and we may also bring in special guests in future episodes. From my perch I couldn’t be more pleased and honored to have these important discussions with Guy Adami and Dan Nathan, two market pros who I greatly respect. Please keep the feedback coming and let us know your thoughts. We are seeing your comments and they help us greatly in guiding the episodes.

In last week’s episode we raised the alarm bells about the sustainability of the rally, structural concerns, and valuation issues and promptly saw these issues come to the forefront as market declined this week.

This week saw the valuation concerns also raised by multiple well known billionaires who expressed concerns that markets had too far disconnected from economic reality. Tepper, Druckenmiller, Cuban, all well known industry names highlighting similar concerns and suggesting markets may be far overvalued and the disconnect between tech and the broader market ended up becoming headline news in financial media as well.

It is then perhaps with some irony that suddenly (after our recording yesterday and literally 1 minute after market close on a Friday no less) the Fed sheepishly came out with a warning that asset prices are at risk to significant declines.

First outlining that the Fed’s action is directly responsible for improving investor risk sentiment which as clear as an admission one would get from the Fed that their actions are driving asset prices:

“Since late March, however, investor risk sentiment has improved, and risky asset prices have partially retraced earlier declines . Some of this improvement is likely due to strong and rapid fiscal and monetary policy responses as well as the measures taken by the Federal Reserve and Treasury”.

But then admitting that asset prices are elevated and subject to steep price decline risk:

“Asset prices remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse, or financial system strains reemerge. The improvement in asset markets since their troughs reflects expectations for a rebound in economic activity as well as the extraordinary policy actions taken. Uncertainty remains high and markets remain volatile relative to historical norms, suggesting the possibility of further price declines should developments prove more adverse than expected . Price declines could be especially pronounced in areas where valuations have remained high.”

Well, talk about covering your butt. My sense fwiw: The Fed knows the collateral damage of their intervention actions has resulted in market valuations incompatible with the economic risk profile that keeps revealing itself. Valuations are too high and they know it. And hence they don’t want to be seen not having been on the record highlighting it, even if it is on a Friday evening after market close. So bulled up investors, take note. The captain just got the lifeboat ready for himself. Why are you still partying on the deck above?

Economic data released this week has continued to show disastrous declines exceeding expectations. The Atlanta Fed yesterday dropped its Q2 GDP expectations to -42.8%. Jobless claims again exceeded expectations. Industrial Production has collapsed in never before seen ways.

So yes, asset valuations, especially in tech remain sky high, and hence the China issue Guy raises is an important one, especially considering we are in a politically charged election year.

And just in the week following us raising all these valuation concerns we saw a rejection of the April highs this week. This rejection was no accident, it was technically well founded and we are discussing it in this week’s episode and the prospect of an intermediate market top and prospect of new lows still to come.

We are also covering the escalating tensions between the US and China, the challenges of reopening the economy, $AAPL, $GOOGL, $FB, the tech sector, the lagging broader market, some causes for optimism, but also concern about the dreadful impact this crisis is having on vast segments of the population, the health of the US consumer, and the reality of what the economy will look like in a post criss environment.

And frankly the reality that is emerging should concern everybody:

Please join us for the latest episode of Straight Talk:

Note to subscribers of Market Videos: The next edition will come out next weekend, for now note the technical framework discussed continues to apply including the general targets discussed.


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18 replies »

  1. Great video, guys… of course you should come back next week…what the hell else do you have to do on a Friday afternoon 😉

    Thanks!!!

  2. Thank you to Guy, Nathan and Sven for insights and commentary last week and this week in Straight Talk. I especially appreciate a few charts by Sven to give background on recent market action to get the party started. All three participants give cogent arguments for how they see market events in the context of the public health issue, unemployment and restarting economies, the narrowing market with mega-companies, market disconnects with fundamentals and the election in the U.S.–fascinating!

  3. Great commentary; I agree with you, Dan and Adami’s rational points. I am overall bearish on the market but try to test this hypothesis . Can I raise a couple of points to consider?
    – Sentiment is extremely bearish. Hedge funds are under-invested in stocks, investors have record funds in money market accounts.
    – Fed obviously is a buyer of last resort and can use PPT at market close to avoid plunges
    – Positioning is net short as QQQ and SPY are “hard to borrow.”
    – Consensus is “wait for the retest” as investors sit on their hands
    – The economy is evolving to speed the digital transformation that was already taking place. Companies like SHOP, WIX, TEAM, TDOC, ServiceNow, Chegg, Twilio are performing better than ever in this environment and will continue to outperform. We are learning to work differently (remotely) and this eliminates a lot of inefficiency (commute times; hire the best talent anywhere vs. needing staff on-site).
    – We never got a retest after DEC of 2018.
    Does all of this above support a shallow pullback maybe to 2550 or so and then back up?
    A spike in cases will be an issue however this may not come until the fall.

  4. we get the real crash when BIG TECH falls apart…and they will…and when they do…we will see SPX below 1000…

  5. Thank you all for making the second iteration of your webinar. Fantastic thought processes on the markets and geopolitical concerns……great work!

  6. Dan, Guy, Sven – Great session!  Really appreciate you guys sharing your thoughts on US/China trade talks and specifically to how it relates to $NDX.  Interesting to note the market reaction on 5/12-5/13 to negative China trade news(via Peter Navarro) and how the markets ignored some of the worst economic readings(jobs/retail,etc) in history to only move up higher 5/14-5/15.  This goes along with the narrative in your session that the impact of US/China trade to F-MAGA(stealing from Dan..lol) is going to weigh heavy on these stocks and could possibly serve as a rollover trigger for $NDX.    Seeing the market reaction like clock-work on Friday afternoon Larry Kudlow came out to ease fears about trade-talks going south.  An interesting predicament is developing as the Trump administration is wanting to “have its cake and eat it too”….slamming, blaming & scapegoating China about virus but yet having to promote the greatest deal in history which looks to have direct impact of markets.  Hard to make any predictions but if history is a barometer the market seems to always take priority.    I totally enjoyed session and man it didn’t seem like 30 minutes.  Really nice how session was presented with initial high level market overview (via SP charts, etc)  and narrowing down the discussion to more pertainment/specific topics.  I noticed on the $SPX 2nd rejection on 200EMA there was a bearish engulfing candle. 
      Apologize for long comment as how this plays out is going to be really intriguing. Thank you guys so much.  I really look forward to listening to your collective perspective.  Another topic of interest is :1.  Inflation??  – I actually noticed it myself when I was @ Wegmans & Sams.  Once a week I am in responsible for pickup/shopping and typically pick up same set of items.  This last week receipts seems like its higher given I usually pick up same set of items.  Gas is cheap..food prices however seem to be moving up.   Also wondering how US/China trade going effect inflation.  Might be a little premature to be concerned about this. Cheers….

  7. Gold and silver moving higher screams ‘reflation’. PMs don’t do well in deflationary environments. The market is saying all the current stimulus won’t go away once the economy improves.

    High call to put ratio on vix options tells me investors are buying protection from market crash. Protected investors can buy stock without fear. Markets don’t decline quickly once everyone has their vix calls and stock puts in hand.

    The S&P removing all the duds from its books (and maybe some fiddling with its proprietary divisor) should give the S&P a makeover. Expect the rules to change. 2860 on the S&P can become 3000 in a flash.

  8. Excellent again. I’ve been watching AAPL closely, too, I think it’ll be the canary. The markets seem like a balloon floating on water with all the dire economic data (almost all worse than expected, as you point out) trying to drag them down but liquidity, I presume, keeping them up.

    So far nearly all the bad news has been ignored. Will the weight of economic data gradually pull the balloon down or will something pop it and a plummet ensue? Or will the the weight lessen and the balloon sail off into the stratosphere? ‘Tis a fascinating time.

  9. 2000 = Interest rate cuts. No QE.
    2008 = Interest rate cuts. QE after (!) the crash.
    2020 = Interest rate cuts to zero (sub zero soon). QE unlimited. Junk Bonds buying. “What ever it takes!” (and much more, if necessary). Government money rain. Bailouts. Helicopter Money.

    The one and only question is: “Who will win, the markets (bear market) or the central banks?”

    And for all the FB and GOOG fanboys. These companies make still the most money with online-ads. The first two things companies do in a recession: 1. Job cuts. 2. Marketing budget cuts (less or none online-ads). Think about it.

  10. You bears should just go to hibernation, much safer then to be stampede every week by the bulls. FAANG to the moon once again.

  11. Yeah, Carsten you summed it nicely up on FB and GOOG, but the question for me is also about timing.

    We all agree on economic data points being the most ugliest in our career, but these seem already to be discounted. Remember, never to fight against the FED, until they stop printing.

    As Sven already pointed out above, the FED seems to feel increasingly uncomfortable with the valuation levels they created with their emergency rate cut accompanied with a new and much bigger round of QE. In retrospect that could be the pivot when followed by FED non-actions especially on the junk market.

    Thus I recommend to follow AAPL closely to see if and when that happens.

    Greetings from Germany and thx to Sven, Dan and Guy for their great input.

  12. Sven tells viewers on the other video that he’s not a permabear or “always bearish” but instead views that he’s realistic about the market. Well…if he had indeed listen to the markets for the past 6 – 8 weeks, it’s realistic that the bulls are in FULL CONTROL and will eventually take it back higher….much much higher than when COVID-19 came aboard. Why fight the trend? Sven, time to put on the bull cap and stop complaining how markets are being irrational. The time to act is now, buy these golden dips just like everybody else before the S&P train leaves the station past 3000 once again.

  13. Agree, those that continue to drink Sven’s KoolAid will surely be disappointed when markets make all time highs again in the not too distant future. Literally, Nasdaq is 7 – 8% from its 52-week high and can sense bulls wants to take it to 10,000 before end of the year the way Healthcare and Technology is leading the pack!

  14. Re Sven’s Kool Aid:
    We play a game of probabilities, not certainties. Concentrate on Sven’s superb technical pattern analysis rather than his conclusions, which are his as a trader. We make our own trading decisions. You may or may not agree with his trading decisions, but his technical analysis is top shelf.

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