Market Overview

20 August 2020

What's the Nature of a Current Technical Correction After the Fed Minutes?

The Bloomberg media site published an article just two days ago under the telling headline "Stock Market at Record Forcing Everyone to Become Believer".

On the same day, a Bank of America (BofA) fund manager survey showed that a net of 46% of investors said “it’s a bull market”, up from 40% the previous month. Since then, U.S. S&P500 and Nasdaq stock indexes have managed to rewrite the historical highs once again, and then immediately went into a relatively deep correction, losing some of last week's gains in course of the New York trading session yesterday and in early Asian hours today. 

Investors are their “most bullish” on financial markets since February, they said, as hopes of a COVID-19 vaccine and a steady revival of economic activity boost confidence. World stocks have bounced back by 51% from their mid-March lows, adding $24 trillion in value in five months. Of the 181 survey participants, who manage half-a-trillion Dollars in assets, a net 79% expect a stronger economy, which is the strongest reading since December 2009. “Green shoots” were appearing for inflation assets and rotation into Europe and emerging market equities, which have lagged tech-heavy U.S. stocks", BofA said. As global equities near record highs again, strategists said that "the quickfire bear-to-bull switch was not only justified but deserves to go further". 

A fun fact from the category of psychological paradoxes is the probable  delayed media reaction about big funds on months long market movements, but perhaps the main point here is just a mal-synchronization or schedule conflict of the market behaviour and analyst judgements? For more correct conclusions it would be useful to know more about both the arguments about the bullish nature of the market, and the new reasons -or just excuses - for a fresh downward correction. 

"From professional investors to market handicappers, it’s becoming next to impossible to stay bearish in the face of the rally in equities. Fund managers who went to cash when the pandemic broke out have been forced back into stocks, pushing measures of positioning towards historical highs. Wall Street forecasters, some of whom threw up their hands in surrender four months ago, are pushing up targets each day. Even Goldman Sachs Group Inc., which once warned that bad loans and falling dividends could drive a second leg of the bear market, now sees another 6% of upside in the S&P 500," as stated in the Bloomberg’s article. But at the same time, "the unanimity has become one of the biggest risk factors in markets right now, with positions getting crowded as everyone is forced to buy... and a custom gauge of sentiment compiled by Citigroup Inc. showed “euphoria” just hit the highest level since the dot-com era," they added. Even the most bearish respondents are 50% engaged in long positions, so even hard-headed bears were starting to buy, something not seen since late 2017. 

Many market forecasters, who quickly cut their price targets for the S&P500 index and share prices during the pandemic sell-off, are trying urgently to reassess their own predictions. One of the latest famous sceptics is David Kostin at Goldman Sachs, who has now raised his 2020 target by 20% to 3,600, which is more than 200 points higher than the current historical records, but he warned in May that the S&P500 prices would probably drop to 2,400 over the next three months. Most of the predictions are centred around near-zero interest rates and the expected future stream of earnings, which will probably be measured in devaluing currencies. 

But “there is a lot of optimism out there, which often makes breakouts harder to sustain,” said Jonathan Krinsky, chief market technician at Bay Crest Partners. Fear of missing out gave birth to the rally, as too many people are afraid just not to have enough time to buy later, before all the major assets may reach much higher. At some point, a saturation effect may occur, when the same investors are full, and new investors are not ready to open positions at even more expensive levels. It's high time to remember that even a secular bull market is the one where the prevailing trend is for higher prices, but with short corrections interrupting them. And the technical nature of these corrections is often looking for proper or suitable rational excuses in newswires, but this does not cancel out the prevailing tendency, which is probably going to resume after a short break, and then everyone may quickly remember all the bullish arguments again. 

This seems to be exactly the stage the market is dealing with right now. Because the minutes of the U.S. Federal Reserve (Fed) meeting, which are mostly cited as a major reason for the market's temporary disappointment, do not seem viable as a formal reason for the big or long-lasting technical correction. The Fed flagged the further coronavirus impact on businesses activity as a middle-term remnant effect, but is there anything new in these factual findings? It's clear that the pockets of the economy continue to feel the pressure, as some Fed policymakers just confirmed a strong rebound in consumer spending. Household spending has likely had recovered about half of its previous decline, but in combination with ongoing uncertainty for the enterprises in different sectors of the economy, which could also lessen the pace of the recovery in labour markets. 

The statements of that kind, which is more important, looked like the ground prepared for an unambiguous justification of the extremely dovish monetary policy measures. "Participants also noted that a highly accommodative stance of monetary policy would likely be needed for some time to support aggregate demand and achieve two percent inflation over the longer run," which is also the excerpt from the Fed minutes, while the interest rates would be kept near-zero until the Fed members are "confident that the economy has weathered recent events." Twelve years ago, the Fed cut rates to zero and then held them near zero for six years, long after the economy had recovered. 

The only gloomy thing is that the Fed "projected rate of recovery in real GDP (gross domestic product), and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast", but this is also a perfect reason to continue quantitative easing (QE) "printing money" programs and for more fiscal and budget stimulus. Newly printed trillions of Dollars remain a clear reason for some further growth of stock markets, when the investment community regains senses after the current technical correction. By the way, the Chinese Ministry of Commerce said yesterday that in the coming days, their trade negotiators are planning to hold a previously delayed phone conference with representatives from the White House to verify the implementation of "phase one" deal. 

A concerted adjustment occurred for the U.S. Dollar prices on the forex exchange market, after the Greenback just showed its record lows of the year on Wednesday, with EUR/USD, GBP/USD and AUD/USD then quickly dropping from fresh annual peaks following some safe-haven demand for the U.S. currency. However, the downtrend sentiment recovery for the Dollar also looks like just a matter of time, after each currency pair would get accustomed to a proper price range adjusted to the current technical conditions, and in sync with further S&P500 movement development.



Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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