- I thought I saw a pattern forming with last week's selling starting last Thursday with the jobless number and strong selling into Friday.
- Instead, Monday rallied and every day this week including yesterday's dismal ADP numbers, and today's 3 million jobless didn't matter.
- At this point, I have to reassess, and admit that expectation was wrong. If tomorrow April unemployment causes a sell-off, it will likely not be severe.
- I still have a slug of cash and I'm holding on to it as my security blanket. I did finally break down and went long on some names that I think will give good returns longer term - Pinterest, Snapchat, and Twitter. I see that DraftKings looks like it might have a short retreat and I would look at loading up on that too.
I hate making excuses. My thesis was that today’s jobless number would restart the selling cycle
Patterns tend to repeat, except when they stop. In the case of the sell-off on Thursday that set up the bigger sell-off last Friday, I was counting on a repeat this week. I did say that if the pattern for the week doesn’t return then it becomes more of a “50/50” proposition. I could cite the huge news that Moderna (MRNA) got the nod from the FDA for phase 2 for the vaccine and it projects going forward that phase 3 will take place this summer. That news alone could be fingered as the cause of a change in the course of trading this week. No doubt, this news item is a game changer, and Dr. Fauci said as much. I'm not inclined to find excuses, wrong is wrong. What happens next? Well, I'm holding off on any new projections until I see that I have a handle on the current trading pattern. Clearly, I don’t. Permit me to share my thinking as of the moment and perhaps we could at least have a basis to analyze the current trading zeitgeist.
If I want to sound bearish I could easily call up a bunch of pieces of anecdotal information and data to buttress a bear’s view
I could cite that Warren Buffett has held back on any big purchases of mega-cap stocks. More to the point his wholesale abandonment of the airlines where he had 10% each of the four major airlines as an example of the wisest of the wise on Wall Street backing away from the stock market. Even the latest jobless number today of an additional +3.1 million people out of work to the prior 30 million has bearish concerns. How about ADP’s April payroll from yesterday that had more than 20 million out of work for April. The breakdown was interesting:
Small businesses 6 million jobs lost
Medium business 5.3 million and
Big business 9 million lost jobs
Yesterday James Bullard of the St. Louis Fed said he expected 22 million from ADP. So is this good news? No, it's decidedly not. Bullard added that the economy has 47 million workers in “high contact” jobs. These are clearly vulnerable going forward. When is it going to surface? When do we see the damage? 20-40% of businesses are not coming back.
Big companies will realize that they don't need middle management as much
This is my conjecture as is the general consensus that people are just as productive as they were going into an office, working from home. It seems very logical that the largest companies will find that many middle managers are just not necessary. These are the managers that are managing the line managers or project managers. With all the productivity tools, an organization can flatten out to an extent that many larger companies with legacy management structures would never try out unless they were in financial straits. That's never a good time to try a new structure since a sign of better corporate health would be to go back to the old structure when times go back to being good. This is an inadvertent experiment in a new flatter organization. I think it will end up being a lot of dislocated workers at all levels of experience and salaries. We may not get back to below 5% in unemployment in a very long time. I could wax on about all the negativity out there. They are there, and you are being bombarded with it. Yet in the face of all the negative numbers, the bull just snorts, paws the ground, and keeps on charging ahead. What gives?
The long and the short of it is the negativity is either in the rearview mirror or too far out to be relevant to the stock market
What do I mean? For all Warren Buffett’s wise counsel, and success in the market, he's looking at the damage dealt by the virus and expects (as I do/did) that there must be a reckoning to the bears, and when that happens he will be a buyer. The problem is everyone wants to be a buyer. I think and I will purport to show that many more people were wrung out of stock ownership in March that they want back in. They know that at some point we will be confronted by persistent unemployment. That will put a damper on the consumer. That, however, is in the far future and may never be a problem with all this money being pumped into the system. The old saw “Don’t Fight the Fed” is now also combined with “don’t fight the bipartisan fiscal stimulus.” It's leading to a very resilient market I'm being led to understand.
The point that I must make is that the stock market has its own mechanics
Whenever I'm stumped, I go back to the charts and what it can tell us. In this case, we need to have in mind that we just lived through the sharpest sell-off, going from a bull to bear market in the shortest span in recent history, down 35% in about 20 days. What's not talked about is how many shares were sold out of the market. It must have created a huge “air pocket” here.
In the sharp decline of March, it's my premise that more than the usual number of sellers were involved in that precipitous decline. If Warren Buffett dumped every last share of the airliners, other usually mild-mannered investors who are inclined to wait out the typical dip sold too. That means that the upward resistance that I expect above 2850 is not really there. I talked about a sideways motion from April going into this month. As you can see we have a clear uptrend, right into this first week of May where we really flatten out in earnest. The sale last week could have spilled over into this week, but instead, we’ve actually marked out a positive chart formation. Though it looks like we broke an uptrend I believe we will see the uptrend continue. See here.
The “Cup and Handle” formation is quite bullish. It boggles my mind that we lost 33 million workers and likely to get close to 40 million by the time we are done, and we seem to be shrugging it all off. I now expect tomorrow morning’s publishing of the April unemployment percentage of anywhere from 16% to 19% unemployment will not produce a panic-sell. In fact, I would venture to guess mild selling pressure tomorrow and probably should be bought. Otherwise, market participants would have sold hard today and perhaps yesterday with ADP’s poor numbers. Are there all sorts of bearish things that you can focus on? You bet. If you do, you have already missed out on some great alpha. I'm not saying you shouldn't be cautious, just don't let the bears keep you out of the market. The stock market has spoken and the message is that the market wants to go higher. A large cohort of very rational, steady investors have been forced out of the market and they want back in.
My trades: I'm largely out of this trade but it looks like DraftKings (NASDAQ:DKNG) is finally getting a little weak from its torrid run from $18ish to $26.85 all-time high today. It turned around and closed in the red at $23.51. That is the first time DKNG closed in the red, and in a retreat from a high. If it should further show weakness tomorrow, I would consider accumulating it. My premise is simple, every little data point of professional sports starting back up will boost the stock. I also have been accumulating Pinterest (PINS), Twitter (TWTR), and Snap Inc. (SNAP). I believe that any weakness in these names because of concerns about advertising will be temporary. These are not fast money trades and I'm buying in laughably small tranches since I still think that at any moment we will see that 10% whoosh down. I know that at this point it sounds like an irrational phobia. I'm keeping a big slug of cash around just in case.
This article was written by
David H. Lerner is an analyst with a decade of experience utilizing his professional background in software consulting and technology to identify market trends and provide long and short trade ideas. David employs a combination of technical analysis and market psychology to capitalize on narratives for outsized returns. He also utilizes “Cash Management Discipline,” a simple trading style to hedge against the volatility of today’s market climate.He leads the investing group Learn more .
Analyst’s Disclosure: I am/we are long DKNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am long PINS, TWTR, SNAP in equities
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