Options Wonderland

[3xBuBu]

The stock market is more vulnerable now
https://www.marketwatch.com/story/a-lot-of-bad-news-is-converging-on-the-stock-market-heres-how-to-deal-with-it-2020-06-25?mod=home-page

1. Sentiment is turning bullish. Not feverishly so, but enough to make this a less compelling time to buy stocks in the contrarian sense, meaning you should get less bullish as the crowd gets more bullish. The dozen sentiment indicators I track are all now either neutral or bearish (showing too much bullishness). Excessive optimism is seen in the high levels of call buying at the Chicago Board Options Exchange, for example, and the record number of new accounts at discount brokerage firms and Robinhood.

2. Insiders have shifted to neutral. Insider buyers have left the building. On Tuesday there were only 12 companies whose own executives bought more than $100,000 worth of stock, which is low. Part of the decline is because we are moving into earnings reporting season. So insiders are getting locked down. But this doesn’t explain all of it.

3. Covid-19 risks are rising. In the early days of the coronavirus resurgence, you could argue case counts were rising because of more testing. No longer. The infection rate per number of tests is going up because the coronavirus case count is rising as people circulate again. Epidemiologists I talk with, including Dr. Michael Mina at Harvard, caution that the chances are very high that we will see even more serious outbreaks in early October when flu season returns.

4. Political risk is rising. Polls show Joe Biden is now the favorite to win the White House. Betting odds at gaming sites suggest there is a good chance the Senate will go Democratic. Both events would be perceived as negatives for stocks since tax and regulation policies of Democrats can be viewed as bad for stocks. Democratic presidential candidate Joe Biden’s policies would impose $3.5 trillion in costs on businesses and investors by increasing the corporate tax rate, and capital gains and dividend tax rates, according to Cornerstone Macro.

5. The seasonally weak time of year lies just ahead. That means July through the end of October.


Not all bad news
Offsetting those negatives are six factors that suggest any selloff won’t be too dramatic and that the current Covid-19 resurgence won’t be as bad as the initial phase.

1.?Cash levels are really high. Money market funds now hold $4.8 trillion, says the Investment Company Institute, above the prior high of $3.8 trillion in January 2009. Deposits in commercial banks increased sharply in March-May (by $2 trillion), moving those levels up to a record $15.4 trillion, or around twice as much as 2009 levels, according to the Federal Reserve. Those numbers suggest a lot of investors who sold the March selloff never got back in. They are itching to do so, which means they will support the market in any significant decline.

2.?The personal savings rate has increased dramatically. This boosts consumer-spending power. Defined as the percentage of income left after people spend money and pay taxes, this rose to a record high of 33% during April from 8.2% in February.

3.?The Fed and the federal government have injected massive amounts of stimulus in the economy. They are not even done yet. Phase 4 with an infrastructure-spending component awaits. To consider infrastructure stocks, here is a recent column I wrote on this theme.

4.?We probably aren’t going back into full lockdown mode. That’s because the trillions of dollars in costs seem too high, in economic damage and government stimulus funding to offset it.

5.?Covid-19 immunity for people who get it seems to be real. Mina, at Harvard, notes we see very few cases of people getting infected twice, and when it happens it’s because of severe immune-system problems. Meanwhile, we have learned a lot about how to track and contain virus spread, even if adequate testing and surveillance infrastructure is not in place, according to Mina.

6.?The Covid-19 resurgence may be limited geographically. The biggest spreads so far are happening in the Sunbelt. This suggests it may be linked to staying indoors because of the heat, with air conditioning recirculating viruses. People stay out of the heat and use air conditioning in the North, too, but less so. Many relatively cooler states currently do not show as much of a resurgence.