July 13, 2020
testing-5093
Corona-Virus Who?
Good afternoon Forex Kings,
I have not done an article in a while and feel it is necessary to provide you with all the information we have on hand.
Global assets are surging higher completely ignoring the fundamentals currently happening around the world. On Friday night the Dow Jones rallied over 600 points on fresh hopes of a corona-virus vaccine. Stocks are absolutely loving the current market conditions with free money being provided in the trillions by the FED. It appears as though nothing will bring the market down. Not that I want to market to go down, I just want fair valuation based on all the fundamental data.
What is currently going on?
Corona-virus
The virus which crippled the global market is being completely ignored. Investors are desperate to keep the market moving in a risk on mode. What we do know is the virus has taken the lives of over 560,000 people and has a recovery rate of 93% (doesn’t sound too bad). The virus becomes more deadly when hospitals and health care systems become over run. Those in need of medication can not get the relevant treatment. In the US, Texas hospitalizations topped 10,000 for the first time and California suffered its second highest day of deaths. Florida also reported its largest number of patients in intensive care. The daily death rate curve is unfortunately rising.
FED – Money Machine
A special shout out to the FED who have kept the markets alive. The FED has printed the same amount of money over the past 3 months than the entire history of the FED QE since early 2000 (quantitate easing). Their balance sheet now sits at roughly $7 trillion USD. The question is what happens when the stimulus and free money ends? Can they realistically stop QE? On the 9th of June the FED began to cut their balance sheet, cutting almost 200 billion USD by Friday the 10th July. Last week’s cut was the largest weekly drop in 11 years.
What happened to the US stock market?
On the 9th of June all three major US indices took a dive lower without warning – when the FED began cutting their balance sheet. This shows a direct correlation between the FED balance sheet and the US stock market. After all, the FED has now stated they will begin to purchase individual companies through ETFs.
Tech stocks (FANG) and the NASDAQ have outperformed all other areas during the lockdown. Yes, it makes sense as more people are at home, working from home therefore using more technology. However, the surge higher appears to be coming from the money printing machine, the FED. Investors do not know where else to find value and would rather put their money into the stock market than hold US dollars. The safe haven FANG stocks, Microsoft, Amazon, Apple, Google and Facebook, you can also throw Netflix into the mix are providing that value. What the FED is potentially creating is a tech stock bubble. Let’s take a look at the data behind the scenes.
Market CAP to GDP ratio, the so-called Warren Buffet Indicator.
The US has a GDP growth rate of roughly -5%, they have had three consecutive contracting GDP scores which technically means they are in a recession. The Warren Buffet indicator takes the total market cap over the GDP, which is providing a value of roughly 151%. The indicator is approaching levels seen just prior to the so-called
Based on the indicator the US stock market is significantly overvalued.
Looking into single stocks, Apple has a PEG ratio of 2 and Amazon has a PEG ratio of 3. PEG stands for price/earnings growth ratio. Typically, a ratio above 1 suggests the stock is over priced and below 1 suggests the stock is undervalued. This does not take into consideration the cash balance of the companies.
The FANG stocks are pulling the rest of the stock market higher. However, looking beneath, the surface you can see trouble is brewing.
SP500 futures (market weighted) is in blue, this provides a valuation based on weighting of the stock. The larger the market cap of the stock the greater impact on the overall market. The SP500 equal weighted index is in red. As you can see, a divergence is being created, the equal weighted index is lagging behind suggesting potential trouble outside of the FANG stocks.
The FANG INDEX
The FANG INDEX on Friday reached the 1.618% FIB extension from the COVID crash in March. The index has moved in a vertical fashion. Will we see a sizable pull back from this level or a continuation?
We are also witnessing one of the steepest and sharpest wedge formations on the NASDAQ which will have to break at some point.
Earning season is set to begin next week. What that will bring is another question, as we know the market does not care about earnings growth, corona virus or basic fundamental data.
What I do know is we will be waiting on the
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