• Out of the Covid-19 crisis

    When I wrote my last weekly comment on April 9, the S&P500 had already bounced back up by 400 points. This pointed to a short-lived crisis.

    http://www.effectivevolume.com/conte...ovid-19-crisis

    Two months later, the S&P500 had gained another 500 points. The crisis is clearly over, at least in terms of assets prices. You will note that the last push was on increasing volume, which tells us that large funds have come back in the markets.



    The NQ100 has broken out to new highs.



    The NQ8 sector is still leading equities higher.



    You will note below that money has moved out of the 10Y Treasuries since late May, that the US$ has been continuously weakening and that large investors have been increasingly buying S&P500 Futures. It is as if everybody has been forced into the market in order not to be seen as underperformer by the end of the year.







    We will note below that large index investors have been slow to move back into the SPY and have not been chasing the QQQ higher. This could be due to foreign funds refraining from buying US equities due to a weaker US$.





    Interesting to see that energy attracted the most money on Friday. The surprisingly good unemployment numbers have initiated a shorts covering push into that sector. This was also helped by the continued uptrend of oil prices.





    Below is a Table of the optimistic analysts price targets for the end of 2020, published on April 9.



    I was rather skeptical of such a strong optimism, knowing that Q2 earnings would be very negative in a context of high unemployment and an expected -7% US GDP growth for 2020.

    https://conference-board.org/publica...ic-Forecast-US



    However we can see below that after only two months current prices have made about 50% of their end of the year target.



    There is also a small phenomenon that has emerged in this market: the confinement has helped the emergence of new retail day traders. This has been rather visible last Friday, when I noticed that some very liquid small/low priced stocks had impressive price gains on very heavy trading volumes.













    Some of these moves are mostly linked to retail investors.







    So yes, speculation runs high, but the S&P500 1000 points surge from the bottom is not due to speculation. Speculation is a consequence of that move which lifts all boats and attracts in the arena inexperienced musical chairs gamblers.

    Conclusions:

    What should we do here?

    In all probabilities, this upward momentum will continue. Upside money is there, optimism is there, unemployment numbers tell a reversal story that was widely anticipated and the Fed is backing that move higher.

    We can see below that the Ratio of sectors on a short wait mode indicator is almost at its highest point. However, such an exuberant move does not signal a market top (Pink arrows.) This indicator signals tops when it falls below the 40% level (Red arrows.)



    On the other hand, we can see below that the IWM/SPY ratio points to a pullback in the small caps. Pull backs have occured when the ratio was reverting down from peaks (See Red arrows.) Bottoms are shown with the Pink dots.



    You will note below that the small caps attracted sellers on Friday.



    I believe that the small caps will pullback early next week, but that the general market will go sideways before another push higher around the FOMC announcement.

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    PS: I'll be taking a few days off. The next daily comment will be on Thursday morning. The RT system will however be accessible and the EOD database will be updated.