Over the past several weeks I've gone over in a myriad of notes why the buying opportunity here is on par, if not exponentially greater, than late 2018 when I was on hands and knees begging anyone who would listen to gain as much tech exposure as possible.
This opportunity, however, has a number of key differences that makes it potentially more lucrative than anything 2019 could offer in terms of upside:
- QE has been a decade plus project for the Fed that they have fine tuned in whatever mad science lab they have in the basement of the NY Fed building since 2008. They are now unleashing all of the weapons they have been perfecting on the market in a rapid fire, sequentially relevant manner.
- The virus has accelerated everything: Monetary policy, fiscal policy, social change, geopolitical tensions, energy policy. Every single thing that was moving at 55 miles per hour coming into 2020 is now flying into the stratosphere at warp speed. This acceleration cycle also influences price behavior. Price action that would take years is being compressed into a matter of weeks and months.
- The level of bearishness with respect to the current market is unprecedented during this secular bull market. In fact, it was be unprecedented in modern times. It only took two months of virus related Armageddon to get everyone to believe that society is melting into a hot blob of its former self, causing all types of financial decisions to be made that will ultimately be highly regrettable.
All of these factors when taken together create a synergy on the upside that hasn't been experienced during the entirety of this bull market. We have the prerequisite amount of bearish sentiment to allow for nearly uninterrupted upside; we have a force at work that has created an acceleration of price; and we have the Fed fanning the flames with high octane gasoline that they will be applying to the market for the entirety of 2020.
Where does that leave the market? Ever expanding, mind numbing volatility is ahead. In the current phase that volatility will be predominately on the upside, with a continued expansion of the multi-year pattern forming in the S&P 500. Here is what that looks like on the chart:
This translates to approximately 3600 on the S&P 500 by late Q3/early Q4. The possibility of an overshoot does exist to take the S&P 500 to 3700 in that time frame.
The only thing more jarring to investors than this level of volatility will be the persistence with which it pursues it on the upside. Of course, the current pace of gains won't continue, as we are coming off highly compressed levels. However, the manner in which the market has trained investors be fearful of the next limit down decline has been masterful. It now creates the exact balance needed to keep the prerequisite amount of investors out of the market in order to utilize those very same investors to propel the market higher at a future date.
In other words, the market is going to force those investors who believe that this is all some type of Fed induced farce into the market at much higher levels. They will be the ones who take the market well above its highs earlier this year.
Don't fight the Fed has never been truer than it is when the Fed's back is against the wall, within a QE strategy that they have had a decade plus to think about and master, for an event just like this.
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