If you would like an email sent to you when I update the blog please send an email with "subscribe" in the subject line to traderbob58@gmail.com. To be removed use "unsubscribe".

Search This Blog or Web

Monday, March 16, 2020

Update 3/16

I did not expect the FED to act over the weekend.  The action of cutting a full point Sunday night and ramping up QE indicates they expect a recession is unavoidable at this point.  The FED has now fired all the ammo they have.  I have been worried about the next recession for years because I believe there has been a gross misallocation of capital because of the extended period of low rates.  A lot of investors were buying all kinds of risky bonds to get the higher yields.  I think a lot depends on how fast we can get this virus under control and get the economy running again.  Too long a recession will probably start causing considerable financial stress.  I have no idea how long is too long.  There is far more uncertainty in the economy now than anytime since the early 30s.  I don't think there is any hurry for investors to rush in and buy.

The weekly chart shows SPX is approaching the Dec. 2018 low.  Everybody that bought into SPX last year and still holding is underwater.  I suspect that is a considerable amount of people due to the rapid decline.  About the only thing I can predict is that the market will be volatile for quite some time.  We just blew through a number of potential support levels as if they were not there.  Emotions are running the market and there is no way to analyze that technically.  If the emotions were not enough of a problem we are in the dreaded margin debt unwind I have been talking about for years. Back in 2017 in Daily update 4/5 What Could Possibly Go Wrong? I wrote:

"I was listening to one analyst today saying he did not see the ingredients for a big decline.  Here is the problem I have with that statement.  If one studies the history of the market and margin debt it becomes obvious that high levels of margin debt relative to GDP (>2%) have caused more crashes (including 1987) then any other factor.  We have record levels of margin debt today.  The ratio to GDP is lower then it was in 1929, but probably a record high otherwise.  Margin debt is like a loaded gun.  It can sit around and not be a problem for a very long time until the trigger gets pulled.  All of a sudden the market is crashing uncontrollably.  Wall street has many ways to measure risk, but they never include margin debt.  I understand that because the risk can't really be quantified.  Just because it can't be quantified does not mean the risk does not exist.  In my book margin debt is the single biggest risk in the market any time it is above 2% of GDP.  Its north of 2.5% now.  However, it has been high for years.  That is the very trouble with it.  Nobody knows when the trigger will get pulled.  So while things are calm and the volatility is very low the market could still crash much more severely then people think.  The problem is it may not happen anytime soon.  This is a subject that has bothered me for years when doing this blog.  I am 100 percent sure there will be a very ugly margin debt unwind some day.  But when.  It is highly likely to happen during the next recession.  When the market sniffs out a recession is coming people will unload in mass and surely trigger many margin calls.  That is why I spent so much time going through the economic data in 2015.  I want to know as early as possible when a recession is happening. "

I never expected a virus to be the culprit for a crash.  I have no idea how this plays out and I see no point of guessing.  I think we are in a full fledged bear market and rallies will be sold by the pros.

Peace and good health to all.  Stay safe.


No comments:


The information in this blog is provided for educational purposes only and is not to be construed as investment advice.