SPY reaches 200-day Moving Average: What next?
Updated
Impressive +30% rally off March 23 lows, capped by last week's bear trap and Monday's bounce to new cycle highs. Most of the fundamental news behind the rally long priced into stocks. So what to expect now? Pick your side and let me know your rationale in the comments!
3 for bulls:
- So far COVID-19 is evolving in line or slightly better than predicted by health authorities. The 'Lockdown' narrative has made way for the 'Reopening' narrative.
- Money printer is still going 'brrrr'. Federal Reserve committed to boost stimulus as much as needed to support the real economy (and of course stocks are the main beneficiaries of QE). Another round of fiscal stimulus also seems to be just a matter of time.
- 'This time is different' attitude to valuing financial assets here. Bond yields at or near all-time lows, so everything else is trading at rich valuations and that's fine. There's no alternative (crypto, metals still failing to gain traction w/ most institutional investors). And barring unexpected bad news, stocks will keep grinding higher.
3 for bears:
- P/E ratios near historical highs and above pre - COVID-19 crash levels. markets.businessinsider.com/news/stocks/stock-market-trading-highest-valuation-years-pe-ratio-earnings-unemployment-2020-5-1029197856
- The market is pricing a V-shape recovery but that's NOT the Federal Reserve's base scenario! Historical evidence suggests that spikes in the unemployment rate - such as the one currently in place - are persistent and are correlated with widespread business closures and insolvency.
- Incremental evidence that one of the drivers behind Monday's rally (MRNA COVID-19 vaccine phase 1 trial) is actually a flop. Most importantly, it reflects how an uncertain macro backdrop increases headline risks.
bloomberg.com/opinion/articles/2020-05-20/moderna-vaccine-fiasco-shows-power-of-stock-market-narratives
3 for bulls:
- So far COVID-19 is evolving in line or slightly better than predicted by health authorities. The 'Lockdown' narrative has made way for the 'Reopening' narrative.
- Money printer is still going 'brrrr'. Federal Reserve committed to boost stimulus as much as needed to support the real economy (and of course stocks are the main beneficiaries of QE). Another round of fiscal stimulus also seems to be just a matter of time.
- 'This time is different' attitude to valuing financial assets here. Bond yields at or near all-time lows, so everything else is trading at rich valuations and that's fine. There's no alternative (crypto, metals still failing to gain traction w/ most institutional investors). And barring unexpected bad news, stocks will keep grinding higher.
3 for bears:
- P/E ratios near historical highs and above pre - COVID-19 crash levels. markets.businessinsider.com/news/stocks/stock-market-trading-highest-valuation-years-pe-ratio-earnings-unemployment-2020-5-1029197856
- The market is pricing a V-shape recovery but that's NOT the Federal Reserve's base scenario! Historical evidence suggests that spikes in the unemployment rate - such as the one currently in place - are persistent and are correlated with widespread business closures and insolvency.
- Incremental evidence that one of the drivers behind Monday's rally (MRNA COVID-19 vaccine phase 1 trial) is actually a flop. Most importantly, it reflects how an uncertain macro backdrop increases headline risks.
bloomberg.com/opinion/articles/2020-05-20/moderna-vaccine-fiasco-shows-power-of-stock-market-narratives
Comment
May 28: SPY broke the 200d MA to the upside and today's price action seems to confirm the move. Notably, this came along some Tech underperformance and Value/Real economy outperformance (widely seen as bullish for the broader market). I wouldn't be surprised to see bouts of selling against the trend, especially if the current move overextends. But the 200-day MA would now act as support, and overall it shouldn't be hard to reach 310 on the SPY within the next two weeks.
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