Welcome back to Cook’s kitchen! In today’s video, I look at the predictable rally of relief and how long it takes to test bearish market casualties.
I say a manifestation of “predictable” relief because we did just that at the end of March, when we were buying the lows with leveraged ETFs. Here were all the negotiations started and closed since March 1, 2020 …
We managed to do this because I have a risk / reward and volatility assessment process that I call “Scenarios and Probabilities”, where I assess these factors in advance. And in April, here’s how I mapped them out on March 31 …
Let’s map anyway
Predicting the weather for 2 to 3 weeks is already quite difficult. The market? Fuggedaboudit.
Still, we can and should place probability-weighted bets of various sizes and durations.
My “scenarios and probabilities” market map is most useful when volatility and uncertainty are high and the market is in the middle of a wide range.
So, here is my market climate for the next 3-4 weeks at the start of the earnings season, when the corporate outlook will have a lot of weight …
April scenario and probabilities market map
SPX increases to 2900-50 with the fall of VIX and fear: 20% chance
SPX trades in the violent range between 2750 and 2450 until the peak of the virus: 35% chance
SPX resumes bear status in the COVID-19 lineup, testing 2300-2200: 25% chance
SPX discounts the full severity of the recession with the drop to 2100-2000: 20% chance
This map implies a Chance of 80% of the minimums in April.
It also implies a 60% chance of the primary price action between 2250 and 2750.
And finally, says I think we tested the minimums and then some before we reached above 2950.
(end of March 31, excerpt from TAZR Trader comments)
Who is supporting the market? The famous names
In the video accompanying this article, I explain how I use my “S&P Maps”.
Then, I look at the charts at S&P and Nasdaq to explain why I think we have tested the low points of the low flash market.
An optimistic part of the market equation that still looks strong at the moment is the strength of FAAMNG’s actions: Facebook FB, Apple AAPL, Amazon AMZN, Microsoft MSFT, Netflix NFLXand Alphabet GOOGL.
I say that this is as much a “safety escape” trade for institutional investors as it is Treasuries, gold and the dollar.
Large investors cannot spend 20% of the money, so they rush to these cash flow giants who will certainly be able to cope with the pandemic of the paralyzed economy.
In the video, I show a graph of Bank of America research that shows what percentage of the S&P 500 these big names have become.
How long they can sustain the stock market with so many economic unknowns is an important question for any investor looking to rebalance themselves as the recovery gets tired.
Finally, I show you a graph of my favorite capitulation indicator and why I think it has a “W” reserved for the market in May or June.
Kevin Cook is a senior stock strategist at Zacks Investment Research, where he manages the TAZR Trader and Healthcare Innovators portfolios. Click Follow Author above to receive the latest reviews and recommendations.
5 actions adjusted to double
Each of them was handpicked by a Zacks expert as the No. 1 favorite to win + 100% or more in 2020. Each comes from a different industry and has unique qualities and catalysts that can stimulate exceptional growth.
Most of the actions in this report are flying under the Wall Street radar, which offers a great opportunity to enter the ground floor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.