3 (damn good) Reasons Not to Trust this Market Rally

Updated: Apr 20, 2020

Don't Kill the Messenger

The S&P 500 has recovered over half of the down-move from February's highs and continues to rally on bad news:

  • Historic Unemployment

  • Economic Carnage

  • Zombie Economy

  • No Cure

  • Terrible Bank Earnings

  • China's GDP contracted 6.8% in Q1

3 reason's why this rally is a trap:

1. Volatility Index (VIX) spikes rarely coincide with the absolute low in equities

SPX (upper) VIX (lower)
S&P500 (upper) vs. VIX (lower)

2008's high in the VIX (Wall Street's Fear Index) did not coincide with the ultimate lows to come in March of 2009. The recent spike in March, 2020 will likely play out in a very similar way.

2. FED is purchasing Junk Bonds, essentially high-yield corporate debt, in order to keep liquidity in the system & manage bankruptcies. Market participants are currently viewing this as a "show of good faith" by the FED. However, FED intervention at this level can only indicate worse times ahead (AKA the Fed see's something you can't yet).

3. SBA's PPP has run out of funds. Congress has been in political gridlock over a move to bring more funding to the paycheck protection program, intended to keep workers employed and paid. Unfortunately, I believe that once Congress does eventually pass a solution it will be viewed as too-little, too-late by the market. How could this play out? If they fund the program with too much money, it could signal to markets that the economic carnage is more severe than anticipated. On the other hand, too-little will appear weak & impotent. Moral of the story? Either way you slice it, this market is toast!

#VIX #SP500 #Stocks #Covid19 #SBA #FED #JNK

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