S&P Dead Cat Bounce and the Bottom explained

2020년 4월 18일

The destruction of money and global economy has been extremely violent due to the Pandemic and Economic Shutdown. People ask me when the Sucker's Rally will end and when its a good time to go short/long everyday. They also ask me, how much the FED is going to pump. Here is my response to these 2 questions and where I think the bottom will be.

First, the US and Global economies have never been through such a large economic shock as big as what we are currently going through in this moment of history. This for sure is to be written in future economic books and taught in Universities going forward. The FED for instance initiated the largest Stimulus Package in history amounting to 6.3T - backing every asset class available, and there could be more to come soon. This is due to the abrupt shutting down of the world, raking up the highest unemployment numbers in history, and creating the largest economic tragedy since the Great Depression. So why is the Market moving up? Well, much like a tsunami, the water recedes into the ocean first before rushing into land killing everyone. What's crazy is people are in amazement of it, and actually follow the water into the ocean gazing at what is occurring. Then all of a sudden, they realize what is about to happen, but its too late...

In reference to the questions that people ask me daily:

1) The FED does not buy Stocks. However they can purchase U.S. Treasury bills, notes, and bonds. They can also bailout Banks & Wall Street Firms, which in-turn purchase equities in an attempt to lift the markets.
2) The market bottom is mostly mathematical and a good range can be determined to understand where the bottom may be. We can most of the time, get pretty close with a standard deviation of 5% or so.

Now, some of my Wall Street friends may curse me out after I say this, but I don't care. The Monster Firms out there don't like losing money and they have a pretty good playbook not to do so. Once the market sells off (violently in this case) the large equity firms step in to create a temporary bottom. In this case, it was roughly a 20% slide from the high. In 2001 & 2008 it was roughly a 15% slide. After the temporary bottom has been created, they then immediately start buying into the market furiously - creating what's called a Dead Cat Bounce or Sucker's Rally. My Wall Street people here, know where I'm going with this...

This move up is to try and create a FOMO reaction and intice retail investors to buy back in. Most of the time during economic tragedies, this is done with bailout monies that have a 0% interest rate attached to it (free money)! The large equity players must make back their losses from the initial slide, making enough of their value back before they commence the BIG SHORT. After a certain fib level is reached, they then turn their positions around and short the market intensely, all the way back down to new lows. After a new low has been reached, they usually turn their positions around again to go Long. This is why its called a Sucker's Rally - now you know.

Depending on the initial slide, would depend on the Fib retracement level the Hedge Funds take the rally to. Here are a couple of Historical reference points for your understanding:

2001 - 15% initial slide / Retraced to the .310 level. This was followed by a 48% decline from the Market high at that time.
2008 - 15% initial slide / Retraced to the .382 level. This was followed by a 54% decline from the Market high at that time.
2020 - 20% initial slide / (PENDING) Retrace to .50 or .618 level. This will most likely be followed by a 55% - 60% (respectively S&P 1300-1450) decline from the Market high at this time.

The are 2 outliers in this scenario:

1) The FED Stimulus and their proactive behavior will help some, but how much can it help? In my opinion, not as much as one may think. They have to be careful as to not add a deficit that stagnates the economy in the coming years, creating a diminished returns effect and Stagflation (something they may have already done).
2) Secondly, we are in uncharted waters, as something this grave has never happened before on a Global scale. The Economy is going into a deep/sharp recession which can last several months/years.

So, to conclude. I believe the big short is close, as I write this, we are 50pts away from the .50 retracement level. Invest wisely and be careful everyone.

JP - OUT