Most of us are done with 2020. It's only April. I mean, we're all stuck at home. I hear how people are eating like crazy and wine glasses are always full. There's nothing to do, right?
It's our nature to seek distraction. You ever hear someone say, "If I'm not busy, then there's too much room for thoughts to take over?" We're all running from ourselves in some way, yet now we're literally forced to stop and reflect. Many just can't handle it and are going stir-crazy.
So it's doubtful that anyone sees 2020 as being full of opportunity; it seems nearly impossible that we will one day look back at this as the "year of wonders."
But quarantine reflective go-getters might love quarantine. Such was the case for arguably the brightest scientist in history – 1665 found (not-yet Sir) Isaac Newton at Cambridge University in his early 20s. The Great Plague of London hit, eventually claiming 25% of the city's population. Cambridge and other universities did the early version of distance learning – they sent students away from campuses. This was social distancing in the 1600s.
Newton suddenly found himself out of his prestigious school and stuck at home 60 miles away. With no Netflix to binge-watch, he did the next best thing – he altered human understanding forever:
- He continued his Cambridge work and completed his concepts that became calculus.
- He messed about with prisms and developed his theories on optics and light.
- Outside his window was an apple tree. Yeah, that one. Historians debate whether an apple actually fell on his head or not, but it was there and then (in quarantine) that he birthed his theories of gravity and began the laws of motion.
Not bad for self-isolation time. Naturally, I'm not suggesting everyone can go into a cocoon and emerge as a history-altering scientific genius. But at a bare minimum, this should show what's possible with some "free time." I'm using the time to learn a new programming language and finishing music projects I've been "meaning to do."
I'm particularly excited about collecting market data during the most volatile market since the Great Depression. What that data is saying is fascinating. It's different from what the ugly news says: deaths mount, new cases slow but are still growing, and the global economic shutdown is causing disastrous effects. We even have Ray Dalio saying that we will be in another Great Depression. But news lives on spin. I don't see the fair comparison:
- The post-1929 stock market crash found the Fed raising interest rates. This crash finds rates cut to effectively zero.
- Post-1929, there was no liquidity. Fed chair Powell just announced an additional $2.3 trillion of loans to provide liquidity to the US economy.
- We are not alone – Europe and Asia are also pumping liquidity into the system.
- On May 15, we see the first signs of a reopening – largely optics.
- By June, we have a functional "soft" opening.
- By September, we see signs of more "normal" economic activity.
- We start to see growth in December.
- By March 2021, year-over-year comparisons will be hard to beat at any point in history.
Those are my thoughts. More importantly, the data says that stocks have bottomed. Bears still call for lower lows, but there's always a bear somewhere. In reality, as bad news peaks, the market has juiced from lows. Equities are finding a base. Volatility is coming back toward earth. The CBOE Volatility Index (VIX) peaked at 85.47 on March 16 and fell 50% to 41.67 on April 9. We need another 50% VIX drop to feel "comfortable."
The Big Money Index agrees. It's an index of unusual buying. When it's high, buyers are in control. When it's low, sellers are. It bottomed at 9% on March 27 and has risen to 24.9% on April 9. Remember: 25% and below is oversold, so we are about to emerge from oversold. That's the most powerfully bullish indicator over Mapsignals' 30-year data history.
It's important to know that this index of big money buying is not rising because of a bunch of buy signals. We are quite depressed in terms of levels for any large buying to be taking place. The index is rising because selling has evaporated. This makes sense, as the major fund liquidations are behind us. This means that the Big Money Index can rise quickly even on low buy/sell signal counts.
All this means is that we just need to observe how the market behaves in the coming weeks. We want to see more stocks making buy signals, indicating that the market is beginning to price in a more controlled recovery. The data clearly says market lows are in, and once volatility dies down, the outlier stocks reveal themselves.
I am 100% data driven. Emotion has betrayed me in the past. And sentiment often doesn't correlate: the market cavern was the fear summit.
As for what's next? I think the worst case is that the S&P 500 pulls back by half of the rise from the low. Translation: worst case, the S&P 500 falls to roughly 2,550. I wouldn't bet on us revisiting 2,192.
Data helps describe long-term models of reality. Emotion can cause major short-term dislocations. We know that happens, but it's important to keep perspective. When it comes, find answers in data. Sir Isaac Newton took the time he was given and used it to the fullest. He saw opportunity dressed in tragedy and fear. He also knew that emotion could be logic's enemy. He said: "I can calculate the motion of heavenly bodies, but not the madness of people."
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see moments like these as areas to pick up great companies.
Disclosure: The author holds no positions in any mentioned securities at the time of publication.