The Bear Market has not Started Yet 4-25-20

Eureka Perspectives April 25, 2020 Uncategorized No Comments

A Little Perspective..

Having spent 50 years of my life in the markets, as a trader, fund manager, and AI Systems Trading developer, I think I have a perspective on what we have seen since mid-February. We had a market that went down and then came back up, not all the way back, but a little more than one would expect.

Joe Public and Pension Fund Managers Rode Things out..

It appears to me, and keep in mind that one cannot analyze a whole bunch of private accounts, but a vast percentage of market participants rode the scenario out, having a lot of paper loses, but held on by shutting off their TV’s and putting their heads under pillows. So they are back to where they were in March 2018, and are waiting for the bull market to restart. How else could a Morgan Stanley analyst forecast new highs for the market later in the year?

I think a very small portion of the market caught the right side of the downturn and made a big profit. We were fortunate to be part of that select group. We did that, not because we heard about the virus, but because we were building a short position based around the fact that solid economic conditions did not exist. This went on for two years , from January 2018, shorting on all the major rallies, ending up with triple short position with average around 3100 basis the S&P in mid February 2020. One has to keep in mind that there were a number of false starts to the macro decline, and contrary to CNBC commentary there was no way to know ahead of time when the real decline would start. Who would have guessed a little virus would undo things.

So we got out of our shorts when the screaming got frantic around 2500 S&P. My guess is that alogo’s were the entity selling into the hole under 2450 on the S&P and then buying back. No real traders or investors were much a part of that scene.

Major Hedge Funds don’t really Hedge

Another piece to the puzzle, most Hedge Funds don’t really hedge, the SEC should mandate them to change their names to Leveraged Carnage Apostles.

Ever since the 2017 Corporate Tax Refund Act was passed all that one heard on CNBC was how this was going to start a big round of capital investment and a whole new economy. Guess what, It didn’t happen, but the stock market bought the story and in October 2019 President Trump figured that with the election a year away, he needed to kick off his 2020 campaign but corporations were not investing and interest rates were too high for him to Make America Great Again.

Another Leg of the 2011 Bernanke Funny Money

This part is kind of a conspiracy theory that I cannot prove but believe nevertheless.

Bernanke back in 2011 started a way of thinking, QE, about how to make markets act like there is not a problem. It worked so well that Central Bankers around the world adopted it. So the conspiracy that developed started with trying to figure out a way to get the FED to crumble, they knew Powell was no Volker, so the big money crowd started buying bonds, rates crashed, the FED relented, and Volla, we had a bull market in stocks.


So we are back to March 2018 levels with everybody waiting for the Bull market to restart. But there is a big problem, the fundamentals have changed. We are in in a new 18.6 year Macro Economic cycle, now that the one that started in 2000, and got extended by events for a year, has ended. And there is that little pesky virus which is making everyone rethink how they live.

And Now, How to Handle this Situation

It is not going to be easy, regardless of ones goals.

For me, the fair value guesses for S&P value at the end of 2020 range between 1530 and 2450, a wide range and well below current prices.

One has to keep in mind that there are major factors that are trying to hold the markets above fair value. Namely the FED, the Treasury, the Worlds Central bankers working in concert, the 2020 Election with every politician wanting to help, and Trumps obsession with the DOW value being a representation of his success as a President.

If one had an ideal environment where there were not all these factors trying to build an artificial world, it would be easy.

As few investors or traders took the opportunity to sell in February, now would be a second chance to get out and watch, but you will have to stand for ridicule from all your friends and advisors on any rally. (maybe isolation would help)

If one is a trader thinking you could short the market, it will take nerves of steel, but you have good odds of having a great trade by October.

And then again, you could go to Amazon and buy Jim Cramer’s book “Getting Back to Even” and settle in for a while.

Comments are closed.