Commenting on the stimulus bill and today’s trading Gorilla Trades strategist Ken Berman said:
Q4 2019 hedge fund letters, conferences and more
Even though equities were squeezed hito the close, credit markets continue to diverge substantially, despite the flood of liquidity provided by the central banks. You could almost smell the burning shorts on Wall Street today, but as credit spreads regher inmain wide, one has to wonder how much ‘real’ buying is behind this week moves, besides the bailout-induced short-covering.
Markets Get A Boost From The Stimulus Package
The major indices all finished significantly higher, with the Dow and the S&P 500 rising for the third day in a row thanks to the huge and well-targeted stimulus package that got unanimous support in Senate. The Dow Jones Industrial Average (INDEXDJX:.DJI) was up 1,352 or 6.4%, to 22,552, the Nasdaq (INDEXNASDAQ:.IXIC) gained 413, or 5.6%, to 7,798, while the S&P 500 (indexsp:.inx) rose by 155, or 6.2%, to 2,630. Advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, where volume was extremely high again.
U.S. Treasury yields were little changed, despite the risk rally, which is yet another confirmation that the rally in stocks is mostly fueled by short-covering. That said, the monster stimulus package could drive yields higher going forward, but for now, Treasuries remain the most important global safe-havens. The deteriorating U.S. COVID-19 numbers weren’t enough to hurt the bullish investor sentiment, even though the slowing European improvement warns of a possibly long lockdown period, despite the Trump administration’s plan to ‘reopen America’ by Easter.
The stimulus bill Overshadows Spike in Jobless Claims
Today's new jobless claims release was nothing short of disastrous, as even though analysts expected a number north of 1.5 million, the actual figure of 3.238 million surpassed even the most bearish forecast. The number of claims soared across sectors, and although the stimulus bill puts an emphasis on saving jobs, the size of the spike in unemployment will ultimately come down to the length of the lockdowns and the pandemic's long-term impact. What's seems sure, that temporary and gig workers will take the biggest initial hit, but those areas will also be quick to recover as the situation improves.
The Dollar Index (DXY) fell for the fifth day in a row today amid the global short squeeze in equities, as currency markets welcomed the European Central Bank‘s (ECB) intervention in the bond market, pushing the euro higher. The fact that the ECB started buying periphery, such as Italian and Portuguese, bonds could have major long-term implications. The already fragile Italian economy could outright collapse due to the virus, should the local government lose its ability to fund its budget, which could even lead to the feared breakup of the Eurozone.
Normally, the Core PCE Price Index, the Fed’s favorite inflation measure, could have a major impact on stocks and bonds alike, but it's unlikely to make huge waves tomorrow, due to the pandemic. Personal spending and personal income will also be released before the opening bell, but investors will likely focus on the stimulus bill in early trading. There seems to be strong bipartisan support for the historic package in the House, so the bill will likely pass on the first try.
Despite this week’s furious short-covering rally, the charts of the major indices are still wounded, and all of the key trend indicators continue to be in bearish territory. The benchmarks are all well below their declining 50-day moving averages of 3,047 for the S&P 500, 8,772 for the Nasdaq, and 26,427 for the Dow. The benchmarks are also well below their 200-day moving averages of 8,404 for the Nasdaq, 3,031 for the S&P 500, and 26,969 for the Dow, with the previously lagging industrial average bouncing back the hardest this week.
The Volatility Index (VIX) pulled back significantly compared to last week's near-record levels, but today, it still closed well just above 60, suggesting that hedging activity remains very high. For reference, today's closing level is still higher than the VIX's maximum during the 'Volatility Apocalypse' in 2018. The 'fear gauge' is still well above its 200-day moving average and its surging 50-day moving average, and although volatility likely hit its cycle-high last week, the calm bull market days aren't coming back to Wall Street anytime soon. Stay tuned!