Danit Cohen | Wellington Shields & Co. LLC

3Q 2020: Fasten Your Seatbelts

Posted on 08/01/202001/12/2021 by Danit Cohen

Market Performance and Liquidity
The first half of 2020 was extraordinary in many ways. The S&P 500 fell 20% in the first three months of the year — the worst performance since the fourth quarter of 2008, or the core of the financial crisis. The second quarter followed with a 20% gain — the best 3-month advance since the fourth quarter of 1998, or during the heart of a major technology boom. GDP surged over 6% in the last quarter of 1998. Looking forward, it would not be a great shock if the second half of 2020 held its own surprises and if markets became even more volatile. Many things are known. Countries still struggle with COVID-19. Brexit is scheduled for the end of the year and it could be messy. Political relations with China have been tense due to a lack of transparency regarding the pandemic, China’s aggressive actions in the South China Sea and a backtracking on the promises of political and economic independence for Hong Kong. And finally, November’s presidential election could be another nail biter. But those are only the risks that are known.

However, despite all the hurdles facing equities since the March low the market has steadily outperformed expectations. There is a list of reasons for this. First, to counter the drag of the pandemic, the US and many countries around the world have implemented unprecedented fiscal and monetary stimulus. Second, US corporations are demonstrating impressive creativity, flexibility, and the ability to adopt to a new post-COVID-19 environment. Third, an historic private/public partnership has been put in place to develop, fast-track, and deliver a US vaccine for the virus. Last, but far from least, the US economy and many Americans have demonstrated surprising resilience to weather this historic economic shutdown. As a result, unemployment never reached the 25% level forecasted by many economists, including Secretary of the Treasury Stephen Mnuchin. To date the unemployment rate appears to have peaked at 14.7% in April and dropped to 11.1% in June.

Massive liquidity programs have been a major factor supporting global markets. European Union leaders agreed on a record COVID-19 stimulus package worth $857 billion. The US government implemented three separate stimulus packages in the second quarter that totaled nearly $3 trillion. And though Phase Three of the stimulus package has not been fully disbursed, the Senate GOP is unveiling another stimulus plan of at least $1 trillion. This new Senate plan would include another round of direct payments to Americans, $105 billion for schools and universities, supplementary assistance for small businesses, $16 billion for testing and contact tracing in states, and $26 billion more to develop and distribute a vaccine. The proposal would extend unemployment benefits, although it would cut the current federal $600 weekly supplement to $200 a week through September. It also provides liability protections for schools, businesses, and health-care providers. To put this into a larger perspective, the combination of the $3 trillion fiscal stimulus already in place, the $1 trillion proposed fiscal plan and the $2 trillion of monetary ease, this $6 trillion equates to 28% of first quarter nominal GDP. In short, the government has “funded” over three months of economic activity!

But more importantly, much of this money is yet to enter the real economy. For example, of the $600 billion authorized for the Fed’s various Main Street Loan Facilities, we estimate only 28% has been tapped by businesses and organizations. The CARES Act was a $1.6 trillion program of direct aid to taxpayers, $600 in supplemental unemployment payments and forgivable loans to small businesses. While this direct fiscal aid has been disbursed, it remains mostly unspent by consumers. This view is based upon the $4.2 trillion increase seen in MZM this year. MZM is one of the broadest of the Federal Reserve’s money supply benchmarks and it monitors all forms of liquidity within and outside the banking system, including coins and notes in distribution, bank deposits, all checkable deposits, short and long-term time deposits, retail money market funds and institutional money market funds. May’s personal savings rate was a stunning 23% and total personal savings hit a record $4.1 trillion, an increase of $2.8 trillion since year end. This explains the record increase in MZM in 2020. Some equity strategists have been bearish on equities on the belief that many individuals are buying stocks with their $1200 COVID-19 checks and comparing the current environment with the speculation seen in 1999. However, the data suggests something quite different. It appears that individuals have actually saved their money, are sitting on large cash piles and could invest much money into equities if they chose. All in all, this sidelined cash represents potential for an extraordinarily strong economy and an even stronger stock market. But questions remain. Can the virus be controlled? When can children get back to school? And when can people get back to work? We believe these questions may be answered soon and if so, confidence will rise, and the economy can look forward to a great second half.

Presidential Election Nears
The third quarter of the year will bring the November election into focus. The traditional political polls currently have President Trump lagging behind Vice President Biden, but if there is a lesson to be learned from the 2016 election it is that polls have become irrelevant. It may be wiser to put your faith in the stock market rather than in political pollsters. There tends to be a unique seasonality in election years, and it usually begins with a weak opening, a rally in March and July and a third rally at year end. But monthly seasonality in an election year can also be broken down by incumbent wins or losses. When the incumbent party wins the White House, normal seasonality is upended, and equities tend to advance in March, June, August, and October. COVID-19 wreaked havoc in March of this year so the market has been trading more in line with a typical incumbent loss. But what is noteworthy about the equity market’s presidential prediction pattern is that the risk of a Trump loss increases if equities are weak in September and October. However, it could also reverse and predict a Trump win if equity prices rally in August and October. This would make August’s performance an important political indicato

Nevertheless, if Vice President Biden wins and Democrats sweep Congress it is almost assured that personal and corporate taxes will rise considerably. The New Green Deal may not get fully implemented but corporate regulations are expected to increase substantively. These two factors alone, coupled with the hit that COVID-19 has dealt to the US economy is a recipe for major economic weakness in 2021. In sum, the major risk of 2020 could be the election. The first presidential debate is scheduled for September 29 and it could be a market moving event. It may be wise for investors to approach the end of September cautiously.

Fundamentals Always Rule
August will also give us greater insight into how well or poorly corporate America coped in the midst of the economic shutdown. Second quarter earnings are predicted to be the nadir of earnings growth in 2020 and for that reason second quarter earnings season is crucial. Expectations were grim as reporting season began but to date results have been better than expected. Of the 312 companies in the S&P 500 that have reported earnings to date, 82% have beaten consensus expectations. This is well above the 65% seen in the typical quarter. But with over a third of companies reporting, the IBES consensus second quarter earnings estimate has recovered from a decline of 43.1% YOY to 33.8% YOY. For the full year, IBES is forecasting S&P 500 earnings to decline 21.5% YOY. Although this is a significant decline, we believe a 25% decline in calendar 2020 earnings was fully discounted when the SPX fell to an intra-day low of 2191 on March 23 (closing price SPX 2237.40). A main driver of equity prices in the second half of 2020 will be expectations of how quickly and how far corporate earnings can recover in 2021. Obviously, the longer the economic shutdown persists in 2020, the more elusive the 2021 forecast becomes. Still, consensus earnings for 2021 are consolidating at the $160 level and given the low level of interest rates and inflation, a PE multiple of 20 times would be appropriate for next year. This combination generates a target of SPX 3200. In sum, we believe SPX 3200 could become a base level for stock prices over the next six months, or until news of a vaccine or presidential election results become known.

Gail M. Dudack
Market Strategist

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Disclosure: The information herein has been prepared by Dudack Research Group (“DRG”), a division of Wellington Shields & Co. The material is based on data from sources considered to be reliable; however, DRG does not guarantee or warrant the accuracy or completeness of the information. It is published for informational purposes only and should not be used as the primary basis of investment decisions. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. The opinions and estimates expressed reflect the current judgement of DRG and are subject to change without notice. Actual results may differ from any forward-looking statements. This letter is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity.
This communication is intended solely for use by Wellington Shields clients. The recipient agrees not to forward or copy the information to any other person without the express written consent of DRG.
Copyright © Dudack Research Group, 2020.
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2020 Second Quarter Review – Don’t Argue With The Fed

Posted on 07/01/202002/08/2021 by Danit Cohen

While 2020 will undoubtedly be remembered as the year of the coronavirus, for investors it has also been a year of extremes. By the end of March, the S&P 500 average had fallen 20%, the worst three-month performance since 2005’s fourth quarter. Yet the second quarter saw an equally historic move to the upside with a 20+% gain—almost matching the gains in the first quarters of 1987 and 1975. While the coronavirus and measures necessary to combat it caused the decline, it was the unprecedented response by the Administration, Congress, and the Federal Reserve that fueled the swing back. Money has literally been thrown at nearly everyone and everything—people, banks, corporations—with $2.5 trillion in responses so far and a $3 trillion expansion of the Fed’s balance sheet. It would appear that still more is on the way.

For the moment, the response seems to be working, From depressed economic levels we continue to see some very large growth rates. In June the manufacturing Purchasing Managers Index returned to expansion territory in the U.S., rising to 52.6 with a surge in the new orders component. The Conference Board survey of consumer confidence rose to 98%, with increases in both the present situation and expectation components. The U.S. job report was also generally strong with non-farm payrolls up 4.8 million. But the effects of lingering unemployment are still being felt and at the last reading, was an elevated 11.1%. Initial jobless claims were 1.427 million for the week ending June 27^th and continuing claims were 19.29 million in the week of June 20^th.

High unemployment is unstable economically and politically, and with restaurants, hotels, and airlines, working at 50% capacity, at best, it will be difficult to get back to 2019 levels of GDP in a social-distancing world. Fiscal policy has patched the income gap over the past several months, but more is likely necessary. The second half of 2020 will be further complicated by the congressional and presidential elections. It would appear that former Vice President Biden is leading in the polls, and he is proposing $4 trillion in tax increases spread out over the next 10 years, or roughly 1.5% of GDP. How realistic these proposals will be in a still-struggling economy will be open to question, and difficult to forecast.

In spite of the uncertainties we face, we are optimistic that the American spirit of resolve and entrepreneurship will lead to a better future. Localities that have embraced proactive steps to mitigate the spread of the virus have been successful and there are more than 165 COVID-19 vaccines in development, including 27 currently in the human trials phase. Therefore it is a question of when, not if, businesses and economies return to sustainable growth, in spite of the virus. With all its fits and starts, the economy is gaining steam, most household balance sheets are flush with cash, and both Congress and the Federal Reserve have pulled out all the stops. In particular, history has proven that it does not pay to argue with the Fed.

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Live and let live… said the market to the virus.

Posted on 06/26/202001/12/2021 by Danit Cohen

DJIA: 25,745

At least that had seemed the case when the market’s negative reaction to the Apple store closings lasted all of two hours. Wednesday’s reaction to the virus surge was a little less muted – a 7 to 1 down day. As usual, these declines don’t come out of the blue, technically speaking. A poor close when the market is testing previous highs, that’s something else. That was the case Tuesday, both for the S&P and the NASDAQ. If they can push through those highs it would clear the air. We don’t typically pay so much attention to the price movement in the averages, but we do when there is the risk of leaving double tops, as now seems the case. And there’s the sentiment backdrop. We look back and smile at the dot.com bubble. Will we look back and smile at companies trying to sell stock when they’re already bankrupt?

Growth stocks in the Russell 1000 Index of large US companies hit a new all-time high Tuesday. Meanwhile, value stocks, those thought to be cheap relative to earnings, again are underperforming. To put this into even greater perspective, growth is doing better relative to value than it did even in 2000, arguably the greatest ever growth bull market, according to Bloomberg‘s John Authers. Investor’s preference for tech has pushed those shares to a near record high weight of the S&P relative to other sectors, exceeded only by 1999-2000. It could always go higher, as no doubt they said back then. Rather than just in terms of supply and demand, you have to think of this, too, in terms of investor psychology – over loved and over owned? Tech of today, of course, isn’t the bubble tech of 2000. Most dot-com companies, for example, never achieved inclusion in the S&P. The FANGs these days are genuinely profitable and have every prospect of remaining so. Still, with financials barely 10% of the S&P, the lowest since 1992, and Industrials only 8%, the smallest in 30 years, there’s quite a divergence. Most divergences simply don’t end well.

Another divergence is that in terms of time frames. We mentioned last time virtually everything has rallied above its 50 day average, but for all New York Stock Exchange stocks barely more than 40% have been able to rally above their 200 day. You might say all stocks have lifted, but the majority haven’t lifted enough to be in medium- term uptrends, even three months off the low. The S&P 500 has rallied more than 3% above its own 200 day average. The NASDAQ had rallied 7 days in a row to its own new high. Yet, fewer than 45% of stocks in the S&P are above their own 200 day, a pattern that has not happened since the year 2000. It’s curious this should be happening against the backdrop of the recent all-time high in the Advance Decline index, what we consider another measure of the average stock. The rationale, again, seems to lie in the distinction between stocks bouncing and stocks in uptrends. The laggards could always catch up, but the recent reading is actually down to 21%. Again, there are no good divergences.

Back on November 1, 2016, there were two things we all knew. We knew Hillary would win the election, and we knew if Trump won the market would collapse. With that in mind, any comment about the upcoming election requires more than a little humility. That said, Trump is faltering. And, we do know when an incumbent Republican is at risk, the market is uncomfortable. We also know the market reaction doesn’t wait for September-October but, rather, starts in July-August. There’s no prediction here or political opinion, it’s just the history. Meanwhile, we are winding down what has been among the market’s best quarters in history. Since 1928, it ranks in the top 10 of all quarters according to SentimenTrader.com. Rather than the window dressing often thought to occur at a quarter’s end, there is a negative correlation in the last week when it comes to good quarters. Especially in June, this could be a function of rebalancing.

The momentum surge off the 3/23 low says higher prices 3 to 6 months out. Some of the issues we’ve alluded to above, however, argue for a flat to down summer. The advance decline numbers have flattened recently but there is no divergence – a higher high in the averages and a lower high in the advance declines. That comes about in a weak rally. It’s not the bad down days that cause trouble, it’s the bad up days – averages up, Advance Declines flat or down.

Sadly, for me personally, and for all of us at Wellington Shields, Linda Pietronigro passed away last week. Believe me when I tell you, the world’s cumulative IQ has taken a big hit. More than that, Linda was a friend and colleague to us all, always willing to share her seemingly endless expertise. With a dry sense of humor, her only unkind words were directed at me – I miss that.

Frank D. Gretz

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US Strategy Weekly: Breakout or Bubble?

Posted on 06/10/202001/12/2021 by Danit Cohen

Worldwide coronavirus cases reach 7.21 million and the death total moves above 400,000. The National Bureau of Economic Analysis (NBER) defines the US economy as being in a recession as of February 2020. Coronavirus wrecks demand and Germany’s exports and imports plunge in April, posting their biggest declines since data began in 1990. Canada and the US are about to extend their border closure and ban on non-essential travel through the end of July. Boeing (BA – $216.74) delivers four planes in May, down from six in April. And the NASDAQ Composite rises to an all-time high.

Even though bull markets are known to climb a wall of worry, these facts simply do not seem to fit together. Yet as we noted last week, history has taught us that equity prices are often better economic forecasters than economists. Recent market performance suggests investors are expecting a V-shaped recovery. This week the Federal Reserve will publish its first economic projections since the pandemic began and we doubt it will be optimistic. Economists are expecting the Fed to forecast a collapse in output this year and no change in interest rates for the foreseeable future. Still, investors are comforted by the fact that the Fed stands ready to support the economy; and in fact, the Fed eased the terms of its “Main Street” lending program this week by cutting loan size in half to $250,000 and lengthening the term by a year. These changes, along with zero required reserves, are in place to encourage businesses and banks to participate in making loans.

Perhaps investors are focused on what the 2020 fiscal and monetary stimulus packages can mean for future economic growth and earnings. First, we know that fiscal stimulus came in three packages (Phase 1 – $8.3 billion; Phase 2 – $171 billion; Phase Three – $2.3 trillion) totaling $2.5 trillion. The Fed’s balance sheet has expanded by nearly $3 trillion since the end of February. Together, this $5.3 trillion package of stimulus represents more than 25% of nominal GDP (March 2020 nominal GDP $21.5 trillion). In other words, the federal government has supported, or supplanted, the economy for an entire three months. And while businesses and consumption has slowed dramatically during the mandatory shutdown, this stimulus is still working its way into the broader economy. Or, in the case of taxpayers $1200 checks, it is sitting in checking or savings accounts. This may be why investors responded so joyously to the fact that there were only two months of job losses before a reversal in May. Jobs losses were 22 million in March and April and it will take time for all these people to get back to work. But as Americans move slowly back into the workforce and confidence builds, this liquidity should fairly quickly turn into consumption. There will be disruptions in the workforce; but we have faith in American ingenuity and the ability to rebuild.

Breakout or Bubble?
Despite our optimism about the economy, we still question whether the current surge in equity prices represents a significant bullish breakout or whether it is the beginning of a bubble. First, it is important to note that bubbles represent not only a complete disconnection from valuation but also a high degree of over ownership of equities, usually by the public. It is possible that this process is beginning today, but if so, the bubble will get very much bigger and prices will move much higher before the bubble bursts.

Our valuation model shows that the SPX is trading well above the fair value range today and is trading at a level forecasted for late 2021 based upon our 2021 SPX earnings estimate of $160.65 and the model’s predicted PE multiple of 19.6 times. However, we believe our earnings estimate could prove to be too conservative and this would support higher prices. Also note that while the SPX is trading above fair value range, it is still less extreme than what was seen late in 2009 when analysts caught up with the damage done by the financial crisis and cut earnings estimates dramatically. See page 13. Analysts proved too pessimistic in 2009 and the equity market rallied as earnings surprises turned positive later in the year. It is possible that a similar scenario will play out in 2020 as well.

Overall, we believe it is wise to remain vigilant to the risk that a bubble is forming; but investors who exit a bubble too early are often the same investors drawn into the market at the peak. Yes, bubbles are extremely dangerous but also enticing late in the cycle. In our view, we would rate the equity market as a strong hold. We are definitely concerned about the upside gaps we see in many of the popular indices which suggests market volatility will remain high in coming weeks. See page 14. But it is also likely that this rally could continue until economic news turns positive, in short, we would “sell on the news.” That day still lies ahead. In the near term we are watching for several of our technical indicators to make a clear confirmation of the breakout. To date, the cumulative advance decline line has done so, but we are waiting for further confirmation from our 25-day volume oscillator and the average of daily new highs. See pages 15 and 16.

A Look at May’s Job Report
As dramatic and unexpected as May’s monthly increase of 2.5 million jobs was, this gain put barely a dent in the 22 million job losses seen in March and April. In May, the household survey’s employment level was 137,242, the lowest since October 2002. The establishment survey suggests May’s payrolls were 132,912, the lowest since December 2011. In short, while job gains should increase in the months ahead, it will take time to reach the peak levels seen earlier this year. However, the shorter the shutdown the easier the rebound, so we are encouraged to see many parts of the US getting back to normal. See page 3. The good news is that according to the BLS, 78.3% of those unemployed in April classified themselves as being on temporary layoff. Those classified as being on temporary layoff fell to 73% in May which likely accounted for the large job increase in May. However, the 73% level indicates that the vast majority of unemployed expect to return to their jobs in the near future. See page 5. It was also encouraging to see that the ten areas of the economy with the largest job losses in April were also the areas of largest job gains in May. These ten sectors were leisure and hospitality, accommodation and food services, food service and drinking places, trade, transportation and utilities, education and health services, goods producing, professional and business services, retail trade, healthcare and social assistance, and administrative and waste services. See page 6. When we look at 2020’s job creation year-to-date, we were surprised to find a gain in net jobs in most sectors. In fact, the only categories with year-to-date net job losses were leisure and hospitality, mining and logging and other services. Note that retail stores are included in BLS data for the trade, transportation, and utilities category. See page 7. The biggest loser during the shutdown was the leisure and hospitality sector which lost 7.5 million jobs in April; however, it recovered 16% of this, or 1.2 million jobs in May. This is a trend we hope will continue in coming months. See page 8.

Consumer confidence will only recover once the uncertainty of job losses ends and people can return to work. If there are no substantial spikes in coronavirus cases in the next two weeks following the massive and extensive protest marches seen in the last week, we believe businesses and consumers will become more confident about returning to a more normal lifestyle. This will help small business confidence as well. In May, the NFIB small business optimism index did recover from 90.9 to 94.4; but it remains well off its high of 105.0 in May 2019. Still, business confidence will be a key indicator in coming months since it will be the major source of jobs for the rest of 2020. See page 9. As dramatic and unexpected as May’s monthly increase of 2.5 million jobs was, this gain is barely visible in the chart below. In May, the household survey’s employment level was 137,242, the lowest since October 2002. The establishment survey suggests May payrolls were 132,912, the lowest since December 2011. In short, job gains should increase in the months ahead, but it is a long road to reach the peak levels seen earlier this year.

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US Strategy Weekly: May is a Transition Month

Posted on 05/06/202001/12/2021 by Danit Cohen

May should be an important transition month in the fight against COVID-19 and all its repercussions. On this week’s earnings call, Disney’s CEO Bob Chapek (DIS – $101.06) announced that Shanghai Disneyland will open its doors on May 11 based on limited reservation-only attendance and Disney will employ temperature screenings and provide clear safety guidelines for guests. We expect this reopening will be watched carefully by many government and business leaders around the world since Shanghai could eventually become a blueprint for other theme parks, resorts, and businesses. The Ultimate Fighting Championship (UFC) has also announced plans to hold three Fight Night events in Florida between May 9 and May 16. All three lineups will take place at the VyStar Veterans Memorial Arena in Jacksonville without a live audience and with protections to safeguard athletes and staff. Most importantly, 32 states have announced individual plans to restart their economies based upon their own unique scientific data and circumstances. All of these announcements have received both praise and criticism by people and the media.

This is our take on the situation. COVID-19 is now part of the world’s long list of communicable diseases. It is far more contagious than normal flu and far more dangerous for those with underlying medical conditions. It will be impossible to ever totally eliminate the risk of contracting this virus and a vaccine is many months away, at best. But at this juncture, everyone has had the opportunity to learn how to reduce one’s risk of contracting the virus by washing their hands, keeping their hands away from their face, wearing a mask, social distancing and being sensible about activities outside the home. The underlying purpose of the nationwide shelter-in-place guidelines was not just to prevent deaths, but it was vital to slow the number of cases of COVID-19 so as not to overwhelm the capacity of hospitals and healthcare workers to care for patients. It was important in order to give the healthcare industry the time to gather necessary materials, drugs, and space to treat COVID-19 victims. It seems that this latter goal has been accomplished.

The Path to Resiliency
In the last two months the capacity for most hospitals and healthcare workers to address a possible second wave of COVID-19 has been markedly increased. New therapies for COVID-19 are being tested and multiple vaccines are moving closer to the testing phase. And therefore, we believe it is time to holistically take care of all Americans in terms of not only their physical, but also their mental and financial health. To do this, life needs to be restarted. And with the exception of a few COVID-19 hotspots, it seems appropriate for most Americans to start carefully down the path toward normalcy.

Still, the war against COVID-19 revealed disturbing weaknesses in our nursing home system, our drug and medical equipment manufacturing pipeline and other industrial areas that will require addressing in coming months. In short, two decades of globalism has not made American stronger nor more resilient against a variety of ominous threats. Perhaps this was the most important lesson learned from this plague.

Discounting Bad News
Meanwhile, the stock market has absorbed an amazing amount of bad news. From an economic perspective, first quarter GDP is estimated to have dropped 4.8% quarter-over-quarter and some economists are forecasting the second quarter to decline as much as 40%! See page 3. Real personal disposable income only grew 0.1% in March and is apt to see an actual decline in April. Personal consumption expenditures fell 3.8% in the first quarter led by a decline of 12.9% in durable goods. See page 4. All segments of personal income fell in the first quarter while unemployment insurance payments rose from an annualized rate of $26.2 billion in February to a $65.3 billion pace in March. We expect this to increase again in April. See page 5. The savings rate jumped from 8% to 13% in March, which was predictable since we noted that demand deposits at commercial banks jumped 26% YOY in the week ended April 13. They rose to 32% YOY in the week ended April 20. Likewise, money supply, as measured by M1, rose 24.1% YOY as of April 20, setting a new record. See page 6. Sentiment indicators for April were abysmal tumbling to levels last seen during the 2009 recession. These include the National Association of Home Builders housing market index, the University of Michigan consumer sentiment, Conference Board consumer and NFIB Small Business confidence indices. See page 7. Total retail sales for March fell 7% YOY and were down 2.3% YOY excluding vehicles. Auto and auto parts sales fell 24.3% in March, which was the worst since the recession. ISM indices for April were bleak with the manufacturing index falling to 41.5 and the nonmanufacturing index dropping to 41.8. Both indices were clearly below the base line of 50 which denotes recession. See page 8. The Refinitiv/IBES S&P 2020 earnings growth estimate fell from minus 17.2% to minus 20.9% this week and the S&P/Dow Jones consensus estimate fell from minus 13.4% to minus 20.1%. Both are now at the negative 20% level we expected. See page 12. Nevertheless, the good news is that the bad news is out, and it is being discounted in equity prices. Investors appear to be noticing and the market is demonstrating impressive resiliency.

Do not Fight the Fed or Fiscal Stimulus
This brings us to the important Wall Street adage “Don’t fight the Fed.” The Fed’s balance sheet grew by $2.5 trillion between the end of February and April 29 which is a record surge in liquidity in eight weeks. See page 9. We are monitoring excess reserves, which are liquid assets held on the balance sheets of banks beyond the level of required reserves. This represents monetary stimulus that is not entering the economy. Excess reserves are reported on a delayed basis, but in the month of March, excess reserves increased by $409 billion. In sum, Fed-driven liquidity still sits on the balance sheets of banks which means there is more potential stimulus from the monetary side. And we expect there is more stimulus coming from the fiscal side as well in terms of business loans, unemployment checks and $1200 payments. See page 10. To date, the total amount of monetary and fiscal stimulus put into effect by the government equates to more than 22% of nominal GDP. This liquidity not only supports stock prices, but we believe it points to great economic potential in the second half of the year. However, it requires businesses to open and people to get back to work. There is a counter side to the stimulus which is the growing deficit. The federal deficit grew by $387 billion in the first quarter and on a 12-month moving average basis this means the deficit as a percentage of GDP grew from 4.7% to 5.7% in the first three months of 2020. See page 11. However, the deficit is a problem for another day.

Watching Those Technicals
We have been impressed by the charts of all the popular indices. All indices were able to better the first level of upside resistance represented by their respective 50-day moving averages. They continue to trade above these levels and the longer this continues, the more the 50-day moving averages will become support and the more convincing the current rally becomes. The Russell 2000 index has been the laggard index for the last twelve months, but it too remains above its 50-day moving average. See page 13. Our 25-day up/down volume oscillator was in overbought territory for two consecutive trading sessions, before the 90% down day recorded on May 1 carried it back to neutral. This was not the long sustained overbought reading that would have implied a V-shaped bottom was materializing. Nonetheless, this indicator, along with all sentiment indicators, suggests that the March 23 was a major low. We remain long term bullish.

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The virus … that’s so yesterday’s news.

Posted on 04/24/202001/12/2021 by Danit Cohen

DJIA: 23,515

Well, maybe not for you and me, but for the market. The virus had its bear market—down some 34% worth. Then diminished fear of the virus, the “plateauing,” had its bull market—some 28% worth. It’s time to give something else a chance and unfortunately, that could be the economy. As Matthew Klein of Barron’s put it, the U.S. Economy has likely shrunk more in the past six weeks than it did in the entire Great Depression. Back then people were living in Central Park, now there’s a hospital there. Back then there were soup lines, now there are food banks, the unemployed back then numbered 20 million, now it’s 27 million—only 12% of the workforce versus more than 30% back then. We don’t see a great depression, but what we do see we doubt is discounted. Back then the Fed actually raised rates. More important, back then we were on the Gold Standard—the Fed couldn’t print money. They can now, which seems a compelling reason to own Gold.

A credible low seems in place. History favors some sort of retracement from these washout lows and the sheer magnitude of that retracement rally—some 50%—would itself suggest some period of retracement. If the market now focuses on the economic repercussions of the pandemic, this could take a while. A paper written by Oscar Jorda of the Federal Reserve Bank of San Francisco looked at 15 major pandemics and armed conflicts since the 14th century. He found wars had little lasting effect while the fallout from pandemics lasted about 40 years. That’s not good news for Airlines, while it also suggests Zoom (177) and the other stay-at-homes are more than a flash in the pan. It also suggests for the market as a whole it will be a slog, with enough volatility to make you doubt your opinion more than a few times, regardless of what that opinion might be. History isn’t much help when it comes to these retracements—they’ve varied from 25% to 75%.

Riddle this: what rallies $47.64 to close at $10.01? That would be the May WTI futures contract where, for a time, they were paying you to take the stuff. Tango, fandango, contango, someone got stepped on. Surprisingly, oil stocks didn’t seem to care. Last Friday crude fell sharply and the stocks rallied sharply. Typically there’s a very high correlation here. So much so a day like Friday has come around only six times in the last 30 years, according to SentimenTrader.com. Five of those times oil shares continued higher in the short term. The decline in oil demand has exceeded the decline in production, so it’s hard to see much upside. As it happens, much the same seems true of the economy as a whole. The saving grace for oil stocks and stocks generally might simply be both are pretty much sold out. And there are those special situations like Cabot Oil & Gas (20)–less drilling means less gas, a plus for COG.

The stay-at-home stocks, you might say, seem here to stay, whether we’re at home or back in the office. Whether it’s Zoom or Microsoft’s Team and the others, now that we’ve used them, they’re not going away. That’s not the best long-term news for Airlines. If you think about where people will go when we come out of this, we all probably will have enough left to buy a cup of coffee, even at Starbuck’s (75) prices. And they do have their China experience in terms of coming out of this. Technically it’s a correction in a five-year uptrend, and much the same can be said of McDonald’s (182). Then there’s Shopify (618), which may not be as well-known as Amazon (2408) and Netflix (426), but the picture is the same—a little stretched, but definitely leadership. Our favorite “investment” and we’re not bugs, is Gold. They’re printing money—that’s inflationary and good for Gold. Look at Oil—that’s deflationary and good for Gold. A 10% position in Homestake Mining back in the deflationary Depression offset the losses in the rest of your portfolio.

We’ve seen a credible low, a buying surge that left the low even more credible, and now a market that is stretched to the upside of all things. Following these “washout lows” typically there is a retracement of varying degrees. They call it a “test of the lows,” which here seems a misnomer. The test we see is that of your patience. A low is one thing, a new uptrend another. The test we see is one of time more than price and, time takes time. Monday the Dow was down 600, Tuesday down 600, Wednesday up 450. What you’re seeing likely is what you’re going to be seeing. As Will Rogers sagely advised, buy good stocks and hold them until they go up. If they don’t go up, don’t buy them. We would advise, buy stocks you consider an “investment,” like a Microsoft (171). Don’t chase it, don’t be afraid of buying weakness and don’t be afraid to take a trading profit on some.

Frank D. Gretz

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2Q 2020: Patience

Posted on 04/01/202001/12/2021 by Danit Cohen

Record Setting
The first three months of 2020 were difficult for investors and the 20% loss in the S&P 500 was the worst decline since the 2008 financial crisis. The Dow Jones Industrial Average’s 3-month drop of 23% was its poorest quarterly performance since 1987. But these percentages were only half the story. From the DJIA’s all-time high of 29,551.42 on February 12, 2020 to its March 23 low of 18,591.93, the index plunged 37% in only 40 calendar days (27 trading sessions), exceeding in both time and percentage, the 36% decline made in 55 calendar days in 1987. In short, the global fight against COVID-19 has been an historic struggle and the decline in the US equity market has been equally historic.

The Bottoming Process
Statistics on the coronavirus pandemic are certain to become worse in coming weeks, nevertheless, signs that the equity market is in the process of forming a bottom are accumulating. Between February 24 and March 24 there were eight extreme trading days in which 90% or more of the day’s volume was in declining stocks (90% down days). This is a simple definition of panic selling and it identifies an emotionally wrought market. Historically, once a string of 90% down days is followed by a 90% up day, it signals that the worst of the selling is over, and buyers are re-entering the marketplace. A 92% up day appeared on March 13 followed by a 94% up day on March 24. We believe the bottoming process has begun. More extremes occurred at the March 23 low of SPX 2237.40, when our 25-day up/down volume oscillator fell to its deepest oversold reading since July 2002. The July 2002 reading preceded the October 2002 low by a little over two months. Similarly, at the end of March the American Association of Individual Investors’ survey showed bearish sentiment was over 50% for three consecutive weeks – the longest stretch since the four-week reading in early March 2009. Nevertheless, these signals, just like in 1987, 2002 or 2009, show that a bottoming phase is in place, but it will take time. In most cases, the process takes two to three months. And though two months can feel like eternity in an era of 24-hour news, high frequency trading, smart phone alerts and hourly updates on the COVID-19 pandemic, it is important to remember that a long bottoming process is not only normal, but healthy for the equity market.

The equity market is a discounting mechanism and it can deal with bad news better than it can with the unknown. March’s perpendicular selloff was clearly fear of the unknown. This coupled with margin calls and the unwinding of leverage created a frightening environment in two very intense weeks. And while the real economic fallout of COVID-19 is still uncertain, what is clear is that economists are predicting a recession of huge proportions. Recently, Goldman Sachs’ forecast for second quarter GDP fell from negative 6% to negative 24% and to negative 34% in fourteen days. And as disturbing as this forecast is, the good news is that this negative 34% GDP forecast is in the public domain and one can assume it is now discounted by stock prices. Forecasts of economic weakness and poor corporate earnings are a critical part of the bottoming process. We expect first quarter earnings season, which begins in mid-April, will be another important part of the “informational” bottoming process. Keep in mind that first quarter’s earnings reporting season and peak COVID-19 numbers are apt to coincide in the month of April and both are nearly certain to bring more bad news. Therefore, investors should expect more volatility. However, it is likely that the shock and awe stage of the bottoming process is behind us and the adjustment phase to the new reality has begun. This is when information about the economy begins to appear and bargain hunters usually tip toe back into the market.

It is not unusual for the equity indices to retrace as much as one-half of the decline during this adjustment phase. This would equate to roughly SPX 2810. And while it is too simplistic to suggest that a bottoming process is the equivalent of a trading range, we do believe there are upper and lower levels that will be significant in coming weeks. On March 23 the intra-day low of the session was SPX 2191. This is noteworthy since there is major support between SPX 2120 and SPX 2200 which was major resistance for all of 2015 and 2016. All of this implies that most of the bottoming process in coming months should be contained within a range of SPX 2200 to SPX 2800.

Any test of the SPX 2200 level will be important in coming weeks and we will be looking for a decrease in total trading volume and a less severe oversold reading in our 25-day oscillator to confirm that the lows are clearly established. Again, a bottoming phase takes time and requires patience, but knowing what to expect and having a good roadmap can make the process not only less stressful, but more profitable in the longer run.

The Stimulus Packages
The CARES Act, or the $2 trillion coronavirus relief bill, was a good stimulus package in our view since most of the stimulus was focused on individuals and small and medium sized businesses. The goal of the bill is to keep workers and businesses financially afloat during this mandatory shut down in order to prevent evictions, defaults and bankruptcies. And though we believe most of this money will find its way back into the economy, the onus in the next few weeks is for the government to get the money quickly into the hands of consumers and businesses that need it. President Trump has indicated he would like to follow up with a “phase four” stimulus bill in the form of a $2 trillion infrastructure program. Together these two stimulus packages would equate to more than 18% of nominal GDP which is in line with the four-part stimulus seen in the two-years that followed the 2008-2009 financial crisis. However, the construction of these two stimulus programs is quite different. In 2008 the TARP stimulus went directly to banks and auto companies to bolster failing balance sheets. It was not a direct stimulus for the economy. The 2009 shovel-ready stimulus package went directly to government agencies, employed many bureaucrats, but it did little for the economy. Only the 2010 tax relief bill gave a boost to the economy by lowering FICA taxes and giving workers more take-home pay. In contrast, the current stimulus package is designed through direct deposit, individual checks, business grants and loans, to directly support the employees and businesses that need money now to pay for necessities. As a result, it should help prop up the economy during this difficult time. Simultaneously, the Federal Reserve has stated it stands ready to provide as much liquidity as is necessary to support the banks and debt markets. It has already added aggressively to its balance sheet and this is in conjunction with similar monetary stimulus programs throughout Europe. This robust combination of monetary and fiscal stimulus should not only help relieve the stress on the economy but help reduce tension in the securities markets.

Melding Market Technicals and Fundamentals
The SPX 2120-2200 range was successfully tested on March 23 and is an area of good long-term technical support. Plus, this SPX 2191 intraday low discounted a large amount of the earnings uncertainty seen for 2020 earnings. Using a four-quarter estimate of $156 for the end of March, the trailing PE fell to 14.0 times on March 23 – a PE that is well below the long-term average of 15.5 times . Even after the rebound to SPX 2584.59 at the end of March, the trailing PE rose to 16.5 times matching the trailing PE seen at the December 2018 low. In short, there are many technical and fundamental signs that the market began a bottoming process in March. But as history suggests, lows are made to be tested and that still lies ahead. It will require patience.

Gail M. Dudack
Market Strategist

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2020 First Quarter Review – Seeing The Forest Through The Trees

Posted on 04/01/202002/08/2021 by Danit Cohen

The first earnings season of the coronavirus recession is coming up soon, and the results will not be good reading. Through February it appeared that the economy and corporate earnings were on track for a steady expansion, but by early March it was clear that this would not be the case as the full extent of what we were facing became apparent. Current analyst estimates are for S&P 500 earnings to fall 5.5% in the first quarter, 13.3% in the second, and 3.8% in the third. There is consensus in forecasting positive growth in the fourth quarter, which assumes that the country goes back to work over the summer. The three biggest drags on the economy will be in the energy, industrial, and consumer discretionary spending sectors, and it is quite possible that nearly all current economic data series will show record weaknesses. Unfortunately, with the novel COVID-19 virus having no immediately effective drugs or vaccine, there was only one option: shutting down economic activity to slow the spread and buy time for doctors and scientists to apply current treatments and devise new pharmacological solutions. This resulted in 6.6 million U.S. unemployment claims for the final week in March—on top of the 3.3 million claims from the prior week. These statistics are expected to increase in April.

In response to this national emergency, the Federal Reserve Bank cut its benchmark interest rate to near zero and began a campaign of open-ended bond purchases. The Fed’s moves will prevent credit from drying up and allow companies to borrow cheaply. Most global central banks have created similar programs.

On March 27^th the CARES Act was signed into law at the urging of the Administration and a congressional majority. This will be the biggest fiscal stimulus package in modern history, totaling almost $2.3 trillion or approximately 9% of U.S. GDP. It specifically targets households, with $250 billion in direct payments to tax filers and an additional $250 billion going to expanded unemployment benefits. $367 billion is earmarked for loans and grants to impacted small businesses. An additional $425 billion goes to the Federal Reserve to provide loans and liquidity via the Fed to financial markets. Support to state and local governments, hospitals, and farmers totals $330 billion. Additional stimulus packages are in the works by the Federal Reserve, the Administration, and Congress. All of these measures are unlikely to actually stimulate growth, at least until the economy is no longer shut down. Rather, they are a means to cushion the economic impact from the virus containment policies.

Forecasts of the economic downturn and recovery vary wildly, but most see a recovery underway by the end of this year, and historically equity prices anticipate a recession end by about four months. Clearly, enough money is being pumped into the economy to make the recovery vibrant when it takes hold, with low interest rates and more progressive economic and regulatory policies. We believe the lows for the popular averages registered on March 23^rd may have been what technicians would call ”the internal lows,” accompanied by maximum selling pressure. The lows may be tested again, but if so, and with less selling pressure, we can assume that a new upturn is in place.

As such, we are optimistic about the future.

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US Strategy Weekly: What We Are Watching

Posted on 03/18/202001/12/2021 by Danit Cohen

Stats and Treasuries
There will be a lot of news impacting the equity market in the coming months including economic data that could become quite ugly. But if we had to choose only two bits of data to watch in order to measure the risk/reward of the equity market, it would be the daily statistics on the virus in the US (looking for a peak in both new cases as well as deaths) and the 10-year Treasury bond yield. To a large extent we believe the debt market will be the best guide for equity investors in coming months. The 10-year US Treasury bond is valuable because it is a global market instrument, and as such, it incorporates information regarding global economies, politics, sentiment and liquidity. Since many investors view the US Treasury bond as a safe haven investment, it may be the best sentiment indicator to monitor in 2020. If this is true, it is possible that the March 9 record low of $4.99 in the 10-year Treasury yield index (TNX – $9.97) represented a peak in global panic; and if so, it is also possible that this panic low marked the beginning of a bottoming process for many financial markets.

Fundamentals are Fuzzy
Still, there are many things we are monitoring and perhaps the most challenging is assessing fundamentals. It will be months before we have data on first and second quarter GDP. But in mid-April first quarter earnings season will begin and the corporate guidance that accompanies these reports will give us our first clues as to how corporate America will be impacted by the COVID-19 crisis.

We can expect that it will generally be bad news and earnings estimates will come down. But keep in mind that many segments of the economy are doing well. Healthcare, pharmaceuticals, personal care products, communication services, utilities, e-commerce, delivery services, and videoconferencing will be among the industries that will be beneficiaries of the current situation. Yet many companies will be hurt, and one can expect shakeouts in some sectors such as energy and retail. In the interim, we can try to measure the risk in the overall market by assuming there will be an earnings recession in 2020. Therefore, it is reasonable and prudent to look at the risk in the equity market if earnings decline 10%.

Based upon the current level of inflation and the benign interest rate backdrop our valuation model suggests an average PE of 17.2 X is appropriate for both this year and 2021. S&P Dow Jones estimates earnings were $157.10 in 2019 which means a decline of 10% would suggest earnings of $141.39 in 2020. Applying a PE of 17.2 to $141.39 translates into a fair value target of SPX 2430 for 2020. As seen in our valuation model on page 3 and the charts on page 6, the SPX has already traded below that level. Yet, if we take this one step further and project a second 10% earnings decline in 2021, SPX earnings fall to $127.25 and the mid-point of our forecasted trading range drops to SPX 2340 in 2021. We believe this is very unlikely, but it is a valuable exercise and it shows that the March 16 close of SPX 2381 came close to discounting a two-year earnings recession, or a 20% decline in earnings.

Another way of looking at a worst-case scenario for the market would be to use $141.39 earnings in 2020 and a long-term average PE ratio of 15.5 times. This lower PE multiple could apply if there were uncertainty regarding the longer-term prospects for earnings growth. Earnings of $141.39 and a PE of 15.5 X translates into downside risk to SPX 2191. All in all, these exercises indicate that fundamental factors point to a wide range of possibilities, but the SPX 2400 and SPX 2200 levels tend to be areas of fundamental support.

Technicals Worth Noting
In the last 17 trading sessions, there have been seven trading sessions where volume in declining stocks represented 90% or more of the day’s total volume. These days are classic examples of panic selling and three of these seven down days were Mondays, representing classic Panic Monday selling sprees.

History suggests that the worst of the selling pressure tends to be over once buyers come back to the market in earnest and this shift is represented by a 90% up day. Indeed, after the March 12 close of SPX 2480.64, a 93% up day materialized on March 13 (Friday). Nevertheless, this 93% up day was followed by another disastrous Monday decline in which 93% of the volume was in declining stocks, the advance/decline ratio was 1 to 15 and the daily new high/low ratio was 1 to 65 and the market fell to a new low of SPX 2386.13. Volume was only slightly above the 10-day average since circuit breakers interrupted trading twice during this session. These circuit breakers are one of the ways the current market structure differs from historical precedent. They make it more difficult to find that high-volume big-decline capitulation day that washes out the market and often defines a significant low. Nonetheless, there is no doubt that volatility is at record levels and as we showed last week, to date, March 2020 has been more volatile than any month during the Crash of 1929. This is amazing since that crash preceded the Great Depression, a global trade war, a broken banking system, and the Dust Bowl that joined forces in 1930. Things are far less dire today.

But when we look at current breadth data, we do find similarities to the 2011 low. The 2011 decline was precipitated by a well-anticipated downgrade of US sovereign debt on August 8, 2011 and it was linked to a belief that a recession was at hand. The choppy August to October 2011 period was characterized by a confusing pattern of alternating 90% down and up days; yet when we look closely at that period we find that the first 90% up day occurred on August 9, 2011 (see arrow on page 7). This up day followed the August 8 low of SPX 1119.46. Although the ultimate low for 2011 did not materialize until October 3, 2011 at SPX 1099.23, this lower low in October was merely 1.8% below the August 9 close. In sum, the first 90% up day did indeed indicate that the worst of the selling was over, and the bottoming process had begun. We believe this may also be true of today’s environment. While we expect much volatility in the weeks ahead, the March 12 low of SPX 2480.64 and the March 16 low of SPX 2386.13 (4% lower), is hopefully the beginning of a bottoming phase for equities. Note that the December 2018 low of 2351.10 — a significant support level — was also tested on March 16. When we look at the chart of the SPX, it is clear that the uptrends from the 2009 and 2016 lows have been broken. But the SPX chart also shows important support levels are found around SPX 2400 and SPX 2200. See page 6. Both of these levels coordinate well with the valuation benchmarks discussed earlier.

No Comparison to 2008
To date, the 29.5% drop seen in the SPX is greater than the long-term average decline of 24% and is the largest decline since 2008. See page 5. Although there may be reasons to compare the current marketplace to the 2008-2009 period, keep in mind that this is a medical crisis and not a liquidity crisis. Therefore, the recovery from this crisis should be much easier to accomplish once the virus subsides and/or a therapy and vaccine are in place. In 2009 earnings for the S&P 500 index went negative for the first time in history. To have the S&P 500 report a deficit for the year is far different from earnings declining by 10% or more. The SPX’s deficit in 2009 was due to massive profit losses in the banking sector. Today, after the virus peaks, the prospect for a rebound in earnings is substantial due in large part to a low unemployment rate and a strong banking system. It will not be simple, but the federal government has made it clear it plans to support small and medium sized companies and their employees during this unusual period. In short, the 2020 equity market is apt to provide investors with an excellent buying opportunity, but we expect prices will remain unpredictable and volatile for a long while.

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Never let emotions cloud your judgement … sound advice to Sonny from Don Vito Corleone.

Posted on 03/13/202001/12/2021 by Danit Cohen

DJIA: 21,201

Sound advice for markets like this as well, at least on an individual basis. When it comes to investors en masse, that’s different. There you want emotion, fear, even a little panic. Selling makes market lows, not buying. Stocks go up with relative ease once you get the sellers out of the way. And that usually takes bad news—news bad enough to turn complacent, ride-it-out holders to scared sellers. Certainly Monday, and then Thursday, had that look. It’s relatively rare to see 50% of stocks in an S&P sector all reach a 12-month new low. When it does happen, it’s typically a sign the sellers are exhausted. Monday saw 50% of the S&P make a 12-month low. Fewer than 2% of the S&P stocks were up on Monday and they accounted for only 3% of the total volume—another sign of exhaustion selling. That said, the only way to be reasonably sure the selling is exhausted is by the way they go up. They should go up almost as though a vacuum had been left on the upside.

So what does this “vacuum,” this absence of sellers, look like? After a “washout,” 18-to-1 down day in the A/Ds on Monday, it looks like a 5-to-1 upside A/D day at the minimum. That’s the simple rule, less simple is 90% volume days to the downside, of which we’ve had a few, followed by 80-90% volume days on the upside, where at 89% Tuesday, obviously seemed positive. We’re a bit dubious, however, that Tuesday’s up-volume number wasn’t somehow distorted. It seems very strange up stocks numbered only 2,900 versus 1,090 declining stocks, not even a 3-to-1 up ratio, and yet volume was so one-sided. In any event, the up-day you should be looking for is at least 5-to-1 in terms of the A/Ds, and 80-90% up in terms of volume. The other catch is that violent declines like this one more often than not require several such days.

We’ve all had drummed into us, the trend is your friend. What they really mean, of course, is an uptrend is your friend. Those downtrends are friends to few. In a market like this, the question naturally arises as to whether the trend remains up, in this case the long-term or overall trend. We have our proprietary, very sophisticated method of determining the overall trend, one involving very complex equipment—a pencil and a ruler. The long-term trend remains up. A slightly more sophisticated trend analysis was offered by Ned Davis several years ago. The study involved the 50-day moving average of the DJIA compared to the 200-day moving average. We haven’t seen an update of the study in a number of years, but for some 113 years, all the net gains in stock prices have come when the 50-day smoothing was above the 200-day smoothing. The DJIA 50-day (28,044) remains well above the DJIA 200-day (27,208). As you can see on the other side, that’s also the case for the S&P and NASDAQ 100.

There are 28% declines and there are three-week declines—there are not many 28%, three-week declines. Precedents are hard to come by, especially when it comes to Monday’s halt in trading. The only other time circuit breakers had been triggered was October 27, 1997. Once trading resumed on October 28, futures dove about 3% and then recovered. Obviously a sample size of one isn’t much help. SentimenTrader.com looked at other times the S&P fell the most in the shortest amount of time, from at least a multi-year high, and even here the current plunge stands out. Others fell this much, but not as quickly. The closest comparison in time and magnitude was 1990, when the S&P fell 18% within 52 days of hitting a new high. Looking at returns going forward, by the time the S&P fell at least 18% within three weeks of a multi-year high, returns were good—the exception 1929

It’s like ’87 meets 9/11. Thursday markets suffered one of their worst declines ever. On the NYSE, 77% of issues traded hit a 52-week low. Everytime that figure has been above 60%, the S&P was higher one-to-two months later, according to SentimenTrader.com. On the NYSE, 95% of volume was in declining issues for the second consecutive day. That’s only happened three other times, each in the midst of a selling climax. Stocks look sold out, but you could have said that last week. Before the ’87 crash, we remember there being a high level of Put buying, making it unclear how so much was lost. The story told is that Put buyers turned to Call buyers half way down. Prices have become so compelling, it’s difficult to keep your fingers out of the cookie jar. When stocks finally are sold out, there will be a sharp rally. Just when you think you missed the low, there will be another move down—a “test of the low.” That’s the safest time to buy, unless you happen to enjoy those knife wounds.

Frank D. Gretz

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