Six Reasons Why This Rebound Has Legs

A Buy-Signal With Strong Tailwinds

It is clear the market has hit a bottom. The S&P 500 (SPY) hit a key support level and has been trending higher ever since. In my post yesterday I laid out the case for why this bounce could be the strongest trend-following signal you will ever see. Today I will provide six (6) reasons why this bounce has legs.

1 - The Technicals, They Are Bullish - The technical picture is quite bullish and not just in one time-frame. The daily charts show a clear bounce from a long-term secular support level, a bounce that has confirmed at a higher price point and is supported by the indicators. The indicators, both MACD and stochastic, are showing strong entry signals of their own and have room to move higher. Today’s price action, the early action at least, is yet another confirmation of this signal as it has moved above the 30-day EMA. Longer-term, the weekly and monthly charts are both showing early signs of bottoming and reversal that are in line with the prevailing secular trend, a trend that has yet to break despite the 35% stock market correction.

2 - Stimulus, There’s A Lot Of It - The Federal Government and Federal Reserve have not been shy with their application of the economic stimulus. The FOMC has interest rates at their lowest levels ever, the Federal Reserve is back-stopping the financial system everywhere it is needed, and the bank is guaranteeing loans and stimulus enacted by the government. The government has approved trillions in aid packages that, while slow to get out the door, promise to stave off the worst of the virus-related economic effects. Eventually, the pandemic will end and the economy will get back up and running. With so much stimulus there is a real chance the recovery will be more than robust.

3 - Peak Virus - It may be early to say for certain but there are signs emerging we are in peak virus right now. China, the epicenter of the outbreak, is slowing reopening its economy while the second-wave nations like South Korea, Italy, and Spain have seen a marked downtick in new cases. News out of Germany is they are forming a plan to reopen their economy as soon as next month. Even here in the U.S. NY Mayor Cuomo says his city is peaking, all indications the pandemic could be over sooner rather than later.

4 - VIX, Irrational Fear Is Subsiding - The VIX is probably the most spectacular chart related to the whole pandemic-inspired correction. The so-called “fear gauge” shot up more than 400% to set a new all-time high well above the previous decade high. Assuming this spike reveals a sudden, overwhelming increase in fear due to black swan event of generational proportion, its subsequent fall below previous resistance is a great sign. At the very least, the VIX shows a market still scared but in control of its emotions. At best, the VIX retreat is the start of a slow reduction in fear associated with the pandemic’s peak and shifting focus. Where the focus was on “how bad is the virus going to hurt the economy” it is turning to “look how strong the recovery might be.”

5 - Earnings, The Outlook Is Great - Not to sugar coat things but the outlook for EPS is great. Yes, the 1st 2nd and 3rd quarters of this year are not going to be good, we are expecting negative EPS growth, but there are caveats to be aware of. First, most of the S&P 500’s 2020 EPS decline can be chalked up to the Energy patch, oversupply, and the oil price war… not the coronavirus. The Energy Sector is expected to post negative growth in the range of -76%. The next worst-hit sector, a sector whose EPS issues can be laid at the feet of coronavirus, is only looking at -15% decline in 2020. Six sectors are still expecting positive EPS growth this year.

Looking to next year, the EPS consensus estimates reflect a belief we will make a strong recovery from the virus. The S&P 500 is expected to post EPS growth above 15% and the estimates are rising. Once the recovery begins, assuming stimulus provides the tailwind I think it will, these estimates will continue to rise. If there is one thing I like most about a bull market it’s when the EPS outlook is positive, the trajectory of growth is accelerating, and the estimates are rising.
6 - I’m not crazy - As crazy as it may seem to be so bullish during such an economic upheaval I’m not the only one. Analysts across Wall Street have been upgrading stocks and raising their outlook (on a case by case basis, of course) for 2020. FactSet reports the bottom-up consensus price target for the S&P 500 12 months from now is 3318.80. That’s a 30% upside from today’s levels and likely a low estimate. Again, once the recovery begins in earnest I expect to see a wave of upward revisions across the broad market.

Just this morning, the JP Morgan analyst who turned bullish two weeks ago says the pandemic is peaking much sooner than expected. In his note, he says this could lead the economy to reopen sooner than expected and that would be a boost to the stock market. Likewise, strategist Jeff Saut of Capital Wealth Planning has been talking about a bottom since March 10th. According to him, the S&P 500 could hit and exceed its all-time high before the end of the year.