In our last submission, I said that we had to be generally constructive barring something major happening, which led me to my caveat: while the technicals were fine and so was the sentiment, we felt that international events could swamp both the economy and the stock market. We said that a true, uncontrolled pandemic would have lasting negative effects and easy visibility -- which is a bad combination for the stock market. As of the writing of our last update, things seemed to be contained and the death rates seem to be falling and relatively low outside of ground zero. We said that if this were to change meaningfully for the worse, especially outside of China, we would become much more cautious.
Well, the news last weekend was bad and we became much more cautious and came out of the market Monday. All of our work went negative. This type of situation is bigger than a quick panic. It has the potential to devastate supply chains and economic activity, even if most folks are generally unscathed by the disease. It doesn't HAVE to be devastating, but we simply can't rule it out at this point. That is why the stock market has fallen so far, so fast. In order to make a good low, we are going to have to get some sort of feel for what this coronavirus mess is really going to mean for us. And we simply do not have enough hard data. What we have coming out of China is not reliable and contextually unhelpful. What we have coming out of the rest of the world is a woefully small dataset. It is likely to take at least a couple more weeks to get that data. When that happens, chances are the market will have either begun bottoming or have overshot the mark, then beginning a sharp rally that likely will take us back to the highs, eventually (probably a few months).
So, if we look at the Relative VIX, it is screaming "Buy!" at us. Normally we'd be buying, or even already long. This is a great indicator. It's telling us that there is motive to take the stock substantially market higher. But, with the obvious likelihood of weeks of uncertainty and bad news ahead, I fear that the market will not respond to this spectacular setup immediately.
In this context, what do we do? Will the market fall to zero? Assuredly not. In fact, it was clear to these old eyes that there was intervention in the market today (Friday). We can expect more of this when things start looking like they're getting out of hand. We're going to get some bounces from this, and we're also going to get some bounces from "sellers fatigue"... Basically, folks will eventually get so bearish there's no one immediately left to sell, but a whole lot of premium to collect. We've got that premium, as we can see in the chart above. The problem is that, until Thursday, I wasn't seeing that much put Buying and, even then, it wasn't dramatic or commensurate with the historic decline we're experiencing. Moreover, look at NAAIM and AAII.
We can see that the median advisor's exposure level is still at 75%. Most of these advisors were net long as of Wednesday, despite obvious negatives and bearish price action. That's not the stuff bottoms are made of. At the Dec. 2018 low, they were at 18% long. I accept that this decline was fast, but indicators were turning obviously negative last Friday, Monday and Tuesday. Exposure levels may not have time to fall to 18%, but, at 75%, advisors are holding and hoping. There's work to do yet to get those exposure levels down and supportive of higher prices.
It's not just professional investors who are still not bearish. AAII shows just 39.10% Bears. That's nowhere near buy territory, even as the market is rapidly approaching bear market status.
I'm looking at a lot of sentiment measures trying to get an edge, and I'm fairly sure that, if we get enough fear and pessimism, it won't matter what the news is because the worst case will have been fully and excessively discounted. At that point, most of the risk will be out of the market and we should be accumulating aggressively. The good news is that this could happen fairly quickly. The bad news is that it doesn't appear that we are near that point just yet. For now, we can expect bounces, but it's not likely that they will hold. Soon, though, I suspect that we will be buying with both hands!
Have a prosperous week!
Mark Steward Young
Wall St. Sentiment
http://www.wallstreetsentiment.com/trial.htm
