We have covered this now for a bit. Indeed, the trade range often mentioned is doing almost exactly what you want it to do. It is making the investor nervous.
The indications are many. We covered the pros last week – cash is rising everywhere and the NAAIM noted near record levels of cash not invested in the market.
That is what trade ranges do for the short-term trader. Fear is so deeply embedded that a churning process (a rest in the eyes of a long-term investor) breeds significant fear of “rolling over” for the short-term minded. A trade range creates that sensation of a trap-door opening underneath – especially at elevated levels.
It is more of the “altitude sickness” we have touched on before.
Let’s look first at the trade range – it is nearing two months long now:
And yes, as it evolves, fear is rising.
What is interesting on the data at the close on Friday is this: One month ago, the reading was 58. One month ago, the trade range was only 3.5 weeks long. Interestingly, the close one month ago on April 21 was 4,173.42 on the S&P 500 – or roughly one-half percent higher than the closing levels this past Friday.
Odd no? In other words, the sentiment has fallen from 58 to 34 and yet price has barely budged.
It is not just sentiment – money and positioning speaks volumes as well:
This is the put/call ratio for 2021 so far. Note that on Friday we neared some of the highest levels of the year where puts are the rage. The red box will show you that it only reaches higher on very few occasions.
Meanwhile, as already covered in detail – earnings are moving rapidly, far outpacing the analysts’ understanding of how much really changed in the “infrastructure” of business operations during the COVID adjustments.
Those numbers, by the way, continue to improve (from Zacks):
The expected percentage increase on earnings for Q2, 2021 rose every week that Q1 earnings were released.
One might argue that it is only because of the “Covid recovery.” That might be a little short-sighted. Note that the earnings for Q2 2021 will not only crush the comps in Q2 of 2020 (the pit of the shutdown so understandably so), they will also surge well past the Q2 2019 earnings mark as can be seen below:
But now, investors must do what they hate doing the most – wait.
On the other side of the ledger, traders will continue to get more nervous the longer the chop goes on. Please do not be surprised by the idea that with summer coming – and the end of this week kicking on the season of haze and laziness for markets – if we see the chop continue for a bit longer.
I would further suggest you pray for it to do so. Why? Trade ranges cause cash to rise, fear to rise and most important – foundations to be built. History shows that trade ranges break to the upside – not downside. The cash built up tends to chase the price increases after long trade ranges.
Yes, I know – confusing and perplexing at times – but factual nonetheless.
One More Thing – Inflation
Ahh yes – you recall – the new monster – inflation. Even the experts are suggesting it is no longer Covid – that is old news:
And then you have the “bad housing data” which leaves out that we are running out of houses. The problem is not demand – it is supply. A good problem to have by the way – and one that will be with us for many, many years to come:
Just one small issue with all the inflation fears igniting unnecessary chatter.
Companies abhor inflationary pressures. A few decades ago one had to wait awhile to move through the system and changes took months and quarters. Not today – investing in more tech kills off inflation quickly, increases output, kicks up productivity and then leads to better paying jobs.
That is why the siren’s call for the inflation monster has been stalled out by the baddest gang in the neighborhood: the bond hoard…still standing in line to get 1.6% for a decade:
In the last couple decades, we have beaten back a terrorist attack on US soil, massive market disruptions, numerous natural disasters here and abroad, a global “Great Recession”, bank failures, Wall Street failures – and now a Global Pandemic.
There will be a point in the not too distant future where capital markets will begin to say this collectively:
“After all that, do you really think we cannot outwit temporary inflationary pressures while the system gets back to normal and we re-position the global supply chain inside the US?”
Good question…and the answer is even better:
The US economy is the only developed economy on Earth with the correct answer.
Remember Friends – B.R.E.A.T.H.E.
These gyrations will become more numerous over time. Tech is why. Kids are why. Emotions are why.
Markets pay for patience and discipline.
They pay for fighting the emotional surges that plague so many results over time.
They pay for believing in the future ingenuity of this country and the people in it.
They pay for having faith in your plan and the forces that built our lives together.
This battle cry – like all previous Armageddons – will pass with time.
In the end, there is no end, really. Just a continuation of time (your greatest ally) and the trek up this very high mountain ahead. There will indeed be treacherous spots and perilous moments that will terrify many. It will be our job to keep one focused on the long-term current driving us all forward.
That said – the tectonic shifts ahead are massive.
We have stated this many times over and at the risk of sounding too darn boring, here we go again:
The leverage of change and the Generation Y technology waves ahead are creating massive changes in margins.
Earnings will be far more leveraged and see many more benefits than currently understood.
The pandemic shutdown had one benefit: if a company was not killed in the pandemic, we would argue it is now “unkillable”.
The armor created, the tools built, the technologies unleashed, the systems implemented and the capital invested during the shutdown storm has set the stage for a complete remake of all that we “know” – and the Q1 numbers are just a tiny glimpse into that benefit.
The Bottom Line
This chop during May has proven its value: New doubts, new fears and new monsters are all forming bricks in the new foundation being built for the next leg up as the spring dawns and the US builds into its “new normal.”
So what now? Cinch that belt tighter. And grab your popcorn.
The pace of change is going to be head-spinning – with plenty of gut-wrenching interruptions along the way.
Get comfortable with this process…as it is set to be with us, forever.
Corrections and setbacks serve a role – they build your value for the next run – and we are unlikely to get very many of them in the years ahead.
Even when pauses, sector churn and internal chop hurt in the near-term, they work to build foundations which then create the gains of the long-term.
We must all remain diligent and prepared to always stand tall against the storms. Standing apart from the crowd permits one to always be ready to do what most will not.
And remember, problems don’t come to stay – they come to pass.