The Easiest Game You'll Ever Play?

Fred Imbert and Eustance Huang of CNBC report the Dow rises more than 400 points, but Wall Street clinches biggest weekly loss since March:
Stocks rose on Friday in volatile trading as traders tried to regain some of the sharp losses from the previous session. The major averages, however, clinched their worst week since March as traders took profits and grew nervous of a resurgence in Covid-19 cases.

The Dow Jones Industrial Average gained 477.37 points, or 1.9%, to finish the day at 25,605.54. The blue-chip index had traded over 800 points higher earlier in the day. The S&P 500 rose 1.31% to 3,041.31 while the Nasdaq Composite added 1% to close at 9,588.81.

For the week, the Dow and S&P 500 lost 5.5% and 4.7%, respectively, while the Nasdaq shed 2.3%. All three notched their worst week since March 20.

The stocks of companies that depend on a successful reopening of the economy rose on Friday with Delta Air Lines up 11.8% and cruise-ling operator Carnival Corp. adding 14.5%.

Those stocks were hit heavily during Thursday’s sell-off as investors feared the reopening of the economy could be delayed by a second wave of cases.

“Given the magnitude of the rally, it would shock me if we had a one-day sell-off and that’s it,” said Morgan Stanley Investment Management’s Andrew Slimmon.

“The stocks that are up the most from the lows are still the risk-on, high beta, value, small-cap stocks,” Slimmon, who is a managing director and senior portfolio manager at the firm, told CNBC’s “Squawk Box Asia” on Friday morning Singapore time. “They’re still the big winners and I would suspect that there’s more pain to come near-term before the market clears out kind of this excessive speculation that we’ve seen recently.”

Wall Street’s fear gauge signaled more wild trading ahead. The Cboe Volatility Index rose to its highest level since April and traded above 43 before moving back below 36 by the closing bell.

The Dow, S&P 500 and Nasdaq on Thursday all recorded their biggest one-day losses since mid-March on Thursday, posting losses of at least 5%.

Wall Street’s weekly losses came as data compiled by Johns Hopkins University showed the number of new coronavirus cases has risen in states like Arizona, South Carolina and Texas as they continue their reopening process. Arizona cases have nearly doubled since Memorial Day.

Still, Treasury Secretary Steven Mnuchin told CNBC’s Jim Cramer the U.S. can’t shut down the economy again. Overall, more than 2 million coronavirus cases have been confirmed in the U.S. along with over 100,000 deaths.

Stocks had been ripping higher prior to this week, as investors cheered the prospects of the economy recovering as states and countries eases quarantine measures.

“We had gone straight up more than 30% without a real sell-off, so you’re due for one, and I don’t think it’s the worst thing in the world,” said JJ Kinahan, chief market strategist at TD Ameritrade. “As more states get back, the question becomes: Are they going to ramp up fast enough to please Wall Street? What you’re seeing is it’ll be hard to do that.”

The S&P 500 and Dow remain more than 37% above the intraday lows reached on March 23. Most of those gains have been driven by stocks that would benefit from the economy reopening, including airlines, cruise lines and retailers.

“Some of these stocks may have gotten ahead of their skis,” said Kinahan. “When you see some of the airlines being priced at the levels they were before this all started when they say they’re going to do 60% of their business just doesn’t make sense.”

The decline this week at one point pushed the S&P 500 back below its 200-day moving average, a widely followed level by traders. It managed to re-top the moving average by the end of the week.

“Once the S&P 500 crossed above the 200-day moving average [last month], it gave investors the green light to buy stocks; it said things are OK with the economy,” said Mitchell Goldberg, CEO of ClientFirst Strategy. “It also signaled hedge fund managers who got too heavy into cash are now way behind their benchmarks and are now performance-chasing.”
It's Friday, a day after the brutal selloff on Wall Street. Since most of you are wondering, here's how the stock market tends to trade after brutal selloffs like Thursday’s:
U.S. stocks on Thursday booked their worst daily plunge since fears about the economic impact of measures to curtail the spread of the COVID-19 pandemic took root in investors’ psyches back in March.

The Dow Jones Industrial Average tumbled roughly 1,862 points and the S&P 500 lost 5.9% to tally their worst one-day declines since March 16, according to Dow Jones Market Data.

Bespoke Investment Group noted that the broad-market S&P 500’s greater-than-5% tumble, on the back of rejuvenated fears of an emerging second wave of the illness derived from the novel strain of coronavirus and a sobering outlook from Federal Reserve Chairman Jerome Powell, was only the 28th time since 1952, when the S&P 500 converted to a five-day trading schedule, that the index has tumbled by at least 5% in a day.

Five of those declines have been in the past three months alone. The investment and research provider also noted that an unraveling of the market on a Thursday is also a rarity, with all such previous Thursday 5%+ drops occurring amid the 2008 financial crisis and none before that, going back to 1952.

All that said, declines of this magnitude have historically been followed by sizable rebounds in the days, weeks and months to follow (see attached table).

Bespoke notes that, on average, the S&P 500 has rallied 2.14% the day after a decline of 5% or more, and has been positive the next day 81.48% of the time.

Of course, the longer the time horizon, the greater the likelihood and intensity of the bounceback. About a year after such drops, the S&P 500 has averaged a gain of 18.92% and has had positive returns 82.6% of the time, Bespoke noted.

Check out the attached chart:

It’s important to note that Thursday’s selloff may not represent the end of a bullish phase for stocks after they hit their lowest point in a coronavirus-inspired selloff on March 23.

Keith Lerner, chief market strategist at SunTrust Advisory Services, said that valuations for stocks had gotten lofty after the run-up for equities from their lows. For example, the Dow remains up 35.2% from its closing low on March 23 at 18,591.93, the S&P 500 has gained 34.2% from that low, while the technology-laden Nasdaq Composite Index COMP, 0.51% is 38.4% above that nadir, even after Thursday’s punishing decline.

“After a 40%-plus rebound in the S&P 500 since March, stocks became stretched to the upside and vulnerable to bad news,” wrote Lerner in a Thursday research report.

“Markets started to bake in a very smooth economic reopening process, even while we continue to expect it to be positive but uneven. Last Friday’s much-better-than-expected jobs report further lifted investor expectations, and with elevated expectations, bad news surrounding the coronavirus went a long way in hitting markets,” he wrote, referencing the Labor Department employment report last Friday that showed a surprising 2.5 million jobs were created in May.

Powell on Wednesday, following the Federal Reserve’s policy update, said during a news conference that investors shouldn’t overestimate the degree and pace of the recovery for the jobs market, noting that millions of jobs may remain unfilled due to forced closures and business shutdowns.

That said, Lerner also is of the view that the current retreat for the stock market represents a bump in the road and possible point for investors to digest the powerful gains from the lows of the past few weeks. He drew parallels to the rebound from the 2008 financial crisis, when the stock market saw a similar sharp pullback on a longer road to recovery.

“Notably, this setback has come around the same period as it did during those bull markets, where stocks took a pause to digest gains and subsequently traded in a choppy sideways pattern,” the SunTrust strategist wrote.

“While history is only a guide, we believe this is a reasonable road map for the market’s near-term direction,” he said. Check out the attached chart:

To be sure, past results are no guarantee of outcomes for the future and the pandemic has managed to befuddle a number of investment pros already. The continued threat from the deadly pathogen that has infected ore than 7 million people worldwide is a serious one. Bloomberg News on Thursday reported that Houston-area officials are “getting close” to reimposing stay-at-home orders as cases rise.

Some 20 states are seeing signs of rising cases of COVID-19, and although there has been movement on remedies and cures for the illness, there are exists no bona fide vaccines or treatments.
Earlier this week, there were other pros like Jurrien Timmer, Director of Global Macro at Fidelity, warning that stocks were due for a breather:

Still, for some reason, many investors were caught off-guard by the ferocity of Thursday's selloff.

I wasn't surprised, these markets were running up like crazy as Wall Street enjoys its last liquidity orgy and if it's one thing I know, these type of liquidity moves always exhaust themselves at intervals and are punctured by severe selloffs.

This week, quite predictably, traders used the Fed's statement which was ultra dovish to sell. "Why is the Fed keeping rates low till 2022? There must be something wrong."

It's all a bit silly but on a more serious note, the amount of dumb speculation going on by all the Robinhoodies reached extremes and is still going on:

When Hertz shares (HTZ) are up 37% and trading on massive volume after the company filed for bankruptcy, you know there is a subset of the market which is totally insane:

Unbelievably, after the bell, Hertz was granted approval to sell up to $1 billion in shares:

You can't make this stuff up, we are truly living in the Twilight Zone!

But the real kicker for me this week was the daytrader who called Warren Buffett an "idiot" and said "daytrading is the easiest game I've ever played".

That's when I knew we reached an interim market top, when a daytrader high on cocaine comes out to slam Buffett, take your profits and run! And believe it or not, this moron has over 1 million followers on Twitter:

John Kenneth Galbraith used to say "in a bull market, everyone is a genius."

In a liquidity orgy, a lot of young and dumb traders think they're the next Steve Cohen or Ken Griffin and they're all going to get destroyed.

Did I ever tell you the story of the great tech melt-up back in 1999 when I was an economist working at the National Bank Financial in Montreal?

Our offices were on the fifth floor of the Sun Life building, we were a small team of economists working our tails off and these young stock traders on our floor were making a killing as tech shares melted up.

Many of them (the arrogant ones) thought they were invincible. Every Thursday night, they'd go out on St-Laurent street and party it up at Buenanotte (now closed), getting drunk and coming in late on Friday at the market open to boast about their book and nightly escapades. They were living the high life, all based on fumes and hype.

Anyway, I remember one day, a veteran trader who had enough, stood up and screamed at them: "You're all delusional, you're going to lose your jobs and more if you don't stop acting like cocky idiots."

They ignored him but he ended up being right. All of them lost their job during the tech meltdown, the bank closed its stock trading operations, and only three of them made a long-term career out of trading stocks and are still around today. And that veteran trader? He most likely retired after witnessing that mania.

My point? The Fed has engineered another liquidity bubble and wait, it's far from over, when the Robinhoodies get completely wiped out, that's when you'll know this was just another massive bubble.

And by the way, these neophytes buying stocks that got slammed should listen carefully to what the great Peter Lynch once said about bottom fishing in the stock market:

Maybe I shouldn't be so rough on Robinhood traders, after all, I'm not convinced they are behind the insane moves in some stocks:

Robinhoodies get blamed but I wouldn't be surprised if some large quant fund is pumping and dumping small stocks. The again, even the best quant funds are getting roiled in this market:

[Note: Renaissance is known for their Medallion fund. Back in mid April, that fund was up 24% YTD.]

So where do stocks go from here? Well, everyone is convinced the Fed is capping the downside but nobody really knows what will happen next:
  • Will they continue climbing up, making new highs but with some severe pullbacks along the way?
  • Will they retest March lows?
  • Will they slice right through March lows and make new lows?
The bulls will tell you don't short central banks and there's a V-shaped economic recovery on its way which the market is anticipating:

The bears will tell you there's a severe recession or depression headed our way and this will be more like a U-shaped recovery:

Nobody knows, stocks are moving to the Fed's tune right now, and this week, the Fed took a V-shaped economic recovery off the table.

However, when I look at the 1-year daily and 5-year weekly charts of the S&P 500 ETF (SPY), Thursday's brutal selloff looks like a little blip:

And the mighty Nasdaq looks mightier than ever, as if the pandemic never happened, tech shares got hit Thursday but the dip buyers can't get enough of them and strategists remain bullish on tech:

That's why I don't get too excited about a terible day in stocks, don't be fooled, Wall Street's liquidity orgy isn't over yet.

Still, it was a bad week and all sectors got hit, especially the cyclicals -- Materials, Financials, Industrials and Energy:

What happened to the "healthy rotation into cyclicals"? The Fed killed it by killing hopes of a V-shaped recovery.

So what lies ahead? I agree with those who warn to brace for gut check summer selloff:

But who knows? With rates at ultra-low levels and the Fed pumping massive liquidity into the system, we might get a hot summer melt-up in stocks.

On that note, let me open my Robinhood account and follow that moron daytrader on Twitter.

Seriously, if you want to trade stocks, I say you stick to the S&P 500 ETF (SPY) but those of you who want to really keep your pulse on the action can bookmark these sites:
You can switch to small and mid cap and change the period to look at one month or year-to-date, but I suggest you stick to large caps, especially if you don't know what you're doing.

I use these screens to gauge speculative activity and it's still very high.

You'll know when it's a real bear market when there's nowhere to hide and the wealth of Bloomberg billionaires is sliced in half.

We're not there yet, nowhere close. Uncle Fed has made a mockery out of capitalism by throwing another liquidity party:

And there's nothing more that Wall Street loves than money for nothing and risk for free!

Oh, by the way, in case you think banks have been behaving well, take the time to read this article over the weekend:

Frank Partnoy explains the real reason why the Fed won't raise rates until 2022, it wants to avoid a full-blown banking meltdown.

Below, Barstool Sports’ Dave Portnoy had bought just one stock in his life before the quarantine hit. When the country shut down in March, canceling sports and sports betting, the founder of the brash media empire considered sexist by some dusted off his old E*Trade account and started day trading.

This week he boasted about his track record and called Warren Buffett "an idiot" saying "he's washed up" and that he's killing Buffett at picking stocks.

Move over Buffett, Dalio, Cohen and Griffin, you have big competition to deal with here. I can't wait for this guy to open up a hedge fund and charge 2 & 20 while he "kills it" in the stock market. That's where the real money is made, but this cokehead will never make it past this year.

Then again, CNBC's Leslie Picker breaks down why day traders are outperforming hedge funds, so maybe this greater fool market isn't over just yet.

Lastly, on a more serious note, Mohamed El-Erian, chief economic advisor at Allianz, joins "Squawk Box" to discuss the market volatility and the Fed's policy action.