Mr. Emori Tetsu U.S. stocks have rebounded sharply from their lows
Publication date: 2020/06/16 08:22
〔GLOBAL EQUITY & BOND MARKET〕
【Market Commentary and Analysis of the U.S. Stock and Bond Markets】
Dow Jones Industrial Average: 25,763.16 (+157.62) < +0.62% >
S&P 500: 3,066.59 (+25.28) < +0.83% >
Nasdaq Composite: 9,726.023 (+137.21) < +1.43% >
Nasdaq-100: 9,776.891 (+113.12) < +1.17% >
FANG Index: 4,040.94 (+71.71) < +1.81% >
Russell 2000: 25,763.16 (+157.62) < +0.62% >
VIX: 34.4 (-1.69) < -4.68% >
SOX: 1,931.01 (+27.16) < +1.43% >
U.S. stocks rose. Investor sentiment, which had been pressured by concerns about a second wave of COVID-19 infections, improved following announcements related to the Fed’s corporate bond purchase program. The Fed said it would begin purchases of corporate bonds through the Secondary Market Corporate Credit Facility (SMCCF) on the 16th as part of its response to the coronavirus crisis. Purchases will be based on an index that covers all U.S. corporate bonds issued by firms meeting SMCCF criteria. In response, the major three indices turned higher in afternoon trading. The S&P 500 Financials index led the gains, rising about 1.6%, while the S&P Banks index was up 1.6%. The Fed also announced that it had started accepting applications for the Main Street Lending Program (MSLP) for small and mid-sized enterprises on this day.
The NY Fed’s June manufacturing index for New York State released on the 15th came in at -0.2, a sharp improvement from -48.5 the previous month. The six-month outlook also rose to 56.5, up from 29.1. In New York, efforts to reopen economic activity that had been stalled by the spread of the coronavirus are spreading, and the six-month outlook improved significantly. Employment rose markedly, and capital investment turned positive. The New York Fed said companies are more optimistic about the outlook. In June, the share reporting that conditions had “improved” doubled to 36.1% from the previous month, while the share reporting that conditions had “worsened” fell sharply to 36.3%.
New orders were -0.6 (vs. -42.4 previous month), shipments +3.3 (vs. -39.0), and inventories -0.6 (vs. -3.4)—all improved from the previous month. In the employment components, the current employment index was -3.5 (vs. -6.1), weekly hours worked -12.0 (vs. -21.6), and prices paid +16.9 (vs. +4.1). The six-month outlook showed: new orders 52.9 (vs. 35.0), shipments 53.1 (vs. 33.3), capital expenditures 3.1 (vs. -8.1), and employment 19.0 (vs. 10.4).
US 2-year yield: 0.193% (+0.002)
US 5-year yield: 0.342% (+0.0163)
US 10-year yield: 0.72% (+0.0209)
US 30-year yield: 1.462% (+0.0151)
US 2–10 year yield spread: -0.527% (-0.0189)
US 10-year futures: 139.109 (±0) < ±0% >
US High Yield Bonds: 83.24 (+0.8) < +0.97% >
U.S. Treasuries yields rose. After an early dip, the stock market recovered, aided by improved market psychology as the Fed expanded its corporate bond purchases. On the 15th, the Fed announced that as part of its COVID-19 crisis response, it would begin purchases of corporate bonds via the SMCCF, covering all bonds issued by U.S. companies that meet the facility’s criteria based on an index. This showed the Fed’s continued willingness to expand its balance sheet to support growth.
The 10-year yield rose as the stock market initially fell on concerns about a second wave of COVID-19 infections, but later reversed to rise. However, it remained below the level touched on the 5th following the U.S. employment data release, the 11-week high. The 2–10 year yield spread widened. At the last week’s FOMC, the Fed signaled that extraordinary support would continue for several years. Powell is expected to testify before Congress on the 16th–17th and is believed to reiterate the same view.
Dallas Fed President Kaplan on the 15th warned that the U.S. economy would contract by a historically large margin in Q2 and the unemployment rate would remain high into year-end. Kaplan projected Q2 GDP to fall at an annual rate of 35–40%. However, he noted that the economy should begin to recover in the second half of the year if individuals and businesses work to contain the spread of the virus. The unemployment rate is expected to have already peaked and will likely fall through the summer, but could remain near 8% by year-end. He also noted that inflation is likely to remain subdued over the coming years despite some increases in food prices.
Regarding yield curve control (YCC), Kaplan said there is a need to continue discussions within the Fed, and while he personally has concerns about YCC, he would not rule it out, stressing the importance of ensuring the Fed does not distort financial markets any further.
【U.S. Stock Trading Strategy】
U.S. stocks rebounded from a sharp fall. The Fed’s corporate bond purchases appear to have been a material factor, but volatility remains high. From today's moves, it is clear that the rise in stock prices is largely dependent on Fed support—a clear display of the “Fed Put.” The question remains what impact this artificial price support will have going forward, though based on BoJ policy, some downside support may exist. A major difference between U.S. and Japanese markets is that money from around the world flows into U.S. equities first and in large volumes, helping to keep prices higher. In this sense, Fed policy has become more palatable.
With the spread of COVID-19, President Trump’s promises of “high growth,” “low unemployment,” and rising stock prices are beginning to unravel. His recent remarks have included more bearish tones, suggesting a waning will to win reelection. Health concerns are also rumored. The previously aggressive stance may be weakening. Also, history shows incumbents facing recessions have struggled to win reelection. Trump pushes for a rapid reopening, but the risk of a second wave is rising, and rushed actions could backfire.
Trump has boasted that May’s unemployment rate of 13.3% improved from April’s 14.7%—the worst since the postwar era—and called it “the greatest comeback in history,” praising the reopening strategy. Yet, recently about half of the states have seen renewed infections and some restrictions on movement are being re-tightened. The National Bureau of Economic Research has said the economy entered a recession in February, but Trump aims for a late-year “V-shaped recovery.” He is touting new cash payments, large tax cuts, and infrastructure spending, signaling that next year could be the best ever.
However, Fed Chair Powell has said that a full employment recovery will take several years, signaling substantial caution about the outlook. Trump’s repeated talk of additional measures reflects concern over a drop in his approval rating tied to initial COVID-19 responses and protests. Since World War II, three incumbents who sought a second term failed, and all faced downturns during their terms. Trump is likely aware of this.
Bush Sr. lost in 1992 amid the Gulf War recession. In 1980, Carter failed to win reelection during the second oil crisis. Gallup polling before elections showed both with approval in the 30% range. Trump’s latest polling around 39% sits in a “danger zone,” though Biden, who would challenge him, does not appear to hold a sweeping lead. This race appears broadly even at present. Still, issues like U.S.-China tensions and other foreign problems remain. As repeatedly noted, 2020 will be a major turning point for the global order. Regardless of who wins, China’s ascent may be difficult to halt.
On investor behavior: as the U.S. economy begins to rebound from the sharp downturn caused by the coronavirus, some fund managers are showing interest in value stocks that had lagged in the recent rally. Value investing typically targets low P/E stocks, but in long-running U.S. bull markets, such stocks tend to lag behind. This tendency has been reaffirmed recently. In the past month, while the S&P 500 Growth index rose 5%, the S&P 500 Value index rose only 4.5%. The small gap is not trivial for fund managers.
Nouriel Roubini, the professor famous for predicting doom, says: the Fed’s balance sheet is expanding and this will lead to inflation. He adds that globalization peaked after the financial crisis and the pandemic amplified this trend, with a return to nationalism, de-globalization of supply chains, and deteriorating U.S.–China trade frictions. While he anticipated inflation, he does not expect a rise in interest rates soon, since higher rates would hurt governments and corporations with large debts. He is concerned about distortions in the U.S. economy and notes that while the government has aided large firms, smaller businesses are suffering. Wealth is concentrated among the few, and about 40% of Americans reportedly do not have $400 in cash for emergencies, fueling protests. He argues the protests reflect broader social divisions beyond race alone.
Yet, while inflation is anticipated, he does not expect rising rates. If rates rise, the government and corporations with enormous debt would be hit hard, so he expects rates to stay low. He also cautions about structural distortions in the economy, with large firms receiving government support while small businesses struggle. He notes that wealth concentration leaves many Americans without emergency cash, contributing to protests that reflect deeper social fractures beyond racism.
Roubini also notes that in Lower Manhattan, about three-quarters of demonstrators are White, many of whom belong to the new lower tier of the developed services economy rather than the traditional working class. Those not in regular full-time work may lose unemployment benefits after three months, underscoring the structural issues behind the protests.
On the other hand, Trump is said to have exploited such social divisions effectively, likely so. However, recent reporting suggests the strategy is not working well. In crises, the president’s approval has not risen significantly. His handling of the pandemic is a major factor. Rubini is also critical of the Democrats. He argues that for Biden to move Washington as he wishes, he would need a strong victory to overcome Trump.
However, Rubini argues that even with support from White working-class voters, it would be a binary choice whether Trump serves a second term, or loses narrowly and refuses to concede. If Trump is reelected, the U.S. would endure four more years of uncertainty. If he loses narrowly, he would blame China, Russia, Black people, and immigrants, potentially provoking more unrest and prompting armed supporters to roam the streets—a terrifying scenario.
In the past, the 2000 presidential race between Bush Jr. and Gore dragged on, with a Florida recount. Gore’s side sought recounts, but ultimately accepted the Supreme Court ruling. Would Trump accept such a path? Probably not. The U.S. political situation ahead of the election is likely to become even more chaotic. The stock market will likely react negatively to this.
Short-term trading strategy: positions are limited to a long position in the VIX. At present, it is not the time to invest in the major U.S. stock indices. Waiting for the next move is prudent. Participate in the market only when there are profit opportunities. Bluntly buying and selling is not wise. When trading short term, it is essential to gauge market momentum and participate only when that momentum is evident. There are ways to trade within a range, but often the market moves in the opposite direction and you can lose most of your profits. This is not a wise approach.
The fundamentals of a short-term trading strategy remain trend-following. This method is still used by CTAs because it allows survival in the market. If you sell into an uptrend, you may not withstand a large rebound like this and your losses could grow. It is best avoided, and trend-following helps; buy in rising markets and sell in falling markets. In the end, the stance of “Trade Based on What the Market Is Doing” matters.
If Trump’s administration becomes unstable and stocks fall, take advantage by selling. Conversely, if the Fed supports the market and stocks rise, buy. Criticizing policy and doing the opposite is the worst possible approach. While it’s natural to want to criticize, the goal is to make profits. Be resolute and act. Leave policy critique to commentators, and market analysis to analysts. Act before overthinking the reasons behind movements.
Long-term portfolio strategy differs greatly from the short-term. This is an asset-management approach and does not seek to make big moves. If prices fall, buy the dip. Keep funds available to buy on declines of 30%, 35%, 40%, 45%, and 50% from February’s highs. In addition, considering risk, be prepared for declines of up to 55% to 75% to be able to buy on dips even during a Lehman-like drop. By diversifying across assets and time, you can buy the dip on major declines and monetize it in the future. Always keep cash on hand to be ready to buy at lows, which is crucial for long-term wealth growth.
For long-term investing, buying in physical form via ETFs, etc., is essential. Physical holdings can withstand declines, and should not be used as collateral for futures, CFDs, etc.—that would double your risk. Prices will eventually recover. Yet global growth is slowing, and stock returns are unlikely to be as high as in the past. Over the last 20 years U.S. stock returns have fallen to less than half of previous levels. With slower growth and lower rates, this is inevitable. We must accept it.
＜U.S. Stock Market Short-Term Trading Strategy＞
Dow Jones:
S&P 500:
Nasdaq Composite:
Nasdaq-100:
FANG Index:
Russell 2000:
VIX: Long
SOX:
【Japanese Stock Market: Market Commentary and Analysis】
Nikkei 225: 21,530.95 (-774.53) < -3.47% >
TOPIX: 1,530.78 (-39.9) < -2.54% >
Mothers Index: 958.28 (-40.96) < -4.1% >
Nikkei Volatility Index (Nikkei VI): 39.59 (+6.17) < +18.46% >
Tokyo Stock Exchange REIT Index: 1,635.73 (-80.95) < -4.72% >
Japan 2-year yield: -0.173% (-0.02)
Japan 5-year yield: -0.117% (-0.019)
Japan 10-year yield: 0.003% (-0.017)
Japanese stocks continued to fall on concerns about renewed coronavirus infections overseas, triggering broad-based selling. The Nikkei averaged fell for the third day, and TOPIX dropped for the fifth day. About 87% of stocks declined, and 12% rose. Trading volume was 1.36392 billion shares with turnover of ¥2,353.5 billion. On the 15th, the Tokyo market softened due to concerns over renewed infections, and selling accelerated in the afternoon. During the session, the yen strengthened, and U.S. stock futures softened in after-hours trading, which dampened sentiment. Real estate and airlines—sectors hurt by the spread of the virus—saw selling. The Nikkei average fell further in the afternoon, with the drop exceeding 700 points from the previous close.
Market opinions on the sharp drop included that infections are spreading in China and that U.S. stock declines were already priced in, among others. It was noted that the market’s rapid rise makes it highly sensitive to negative news.
Meanwhile, the Mothers Index and the JASDAQ Average also fell for the third day. Amid renewed concerns over the spread of COVID-19, individual investors sold to raise cash. The morning started positive, but selling gradually increased, pushing both indices into negative territory. The continued rise in infections in the U.S. and China sparked anxiety among individual investors, leading to a downtrend in the afternoon.
【Japanese Stock Trading Strategy】
Nikkei Average dropped to the mid-21,000s. Meanwhile, U.S. stocks recovered from their lows, bouncing back to the 21,900 level in Chicago. Ultimately, this market is still reliant on U.S. stocks and, in turn, on Fed policy. It is unclear how long this will continue, but at least when prices fall, the Fed’s support tends to cushion further declines. Market participants will likely buy the dips at lower levels. However, as seen this time, an abundance of late buyers can push prices higher but also make the upside harder to sustain. It is clear that price movement is driven by position and demand rather than fundamentals. Even with Fed support, buying at high levels and then facing declines can be risky.
As the buyback rally progressed, the market may gradually enter a phase of evaluating whether buying at current levels can yield future profits. It depends on how long the central banks’ support lasts. If this support ends, the economy and corporate earnings will have to take the lead again. The market tends to anticipate; the important thing is not to act against the market’s direction. Buy on uptrends, sell on downtrends. The rationale can be evaluated later; for now, this is the key approach to the current market.
While the day saw a sharp drop, the level is still high for shorting. It is unlikely to generate profits from shorting unless the Nikkei falls below around 20,500. If such a sizable move does not occur, shorting will be difficult. If the market does rise, it remains challenging to short. A level above 22,500 could justify a long, but without momentum to push higher, a long would not be justified. This implies the current rally has run its course for now. After the market stabilizes, it is important to observe which way it moves next rather than rushing to take positions.
In the short-term trading strategy, the Nikkei, TOPIX, and Mothers Index remain on the sidelines. It is prudent not to take action at the current level. The market does not disappear; wait for profit opportunities. In my Global Macro Strategy, the market universe includes about 100 instruments (not investing in individual stocks, but using indices, bond futures, currency pairs, and commodities). At present, there are almost no positions. It is as if one market has just ended. Nearly all positions were closed on the 11th, and I am now observing. It is easier to understand this when looking at Japan’s market in the context of global market conditions.
Next move—long or short—depends on the market. It is important to stay neutral and avoid preconceived notions. On the other hand, the Nikkei VI is signaling a long position. Therefore, I am long on 2035 to anticipate volatility spikes. It seems calmer today, but for the time being, a high-volatility environment is expected to persist. One can hold volatility positions without carrying stock positions. I am also long on VIX-linked 1552. The market is signaling potential turbulence. It is prudent to be prepared.
The long-term portfolio approach remains unchanged. I will not be adding to long-term positions at current levels; buying is still too expensive. Going forward, I will increase long-term purchases only after substantial declines. Existing long-term holdings are generating gains, so I will continue to hold. The next dip-buying target lies much lower. For the Nikkei, that means at least a drop of 6,000 points. Markets are unpredictable, so I plan to keep about 30% of my assets in cash to prepare for buying at lows.
＜Technical Indicators＞
Advances/Declines Ratio: 25-day average 103% / 6-day average 47% (short-term overbought)
PER: 18.13x / EPS: ¥1,187 (reference)
PBR: 1.05x / BPS: ¥20,505
Short-sell ratio: 44.5% (slightly down)
Number of new highs: 36 / Number of new lows: 3 (bullish pattern remains, though new highs are capped)
Nikkei VI: 39.59 (sharp rise)
Dollar-denominated Nikkei: $200.92 (down, barely holding the $200 level)
NT倍率: 14.07x (upward trend continues; Nikkei overvalued vs. TOPIX)
Margin debt ratio (as of June 5): 2.13x (down from 2.30x; increase in short positions / decrease in long positions)
Margin impairment rate (as of June 5): 14.65% (improved from 15.51%)
Trading by investor type (as of June 5)
Foreign investors: net buying of ¥2,613.33 million
Individual investors: net selling of ¥2,980.35 million (cash market selling ¥2,818.77 million, margin selling ¥161.58 million)
Investment trusts: net selling of ¥154.742 million
Trust banks: net selling of ¥2.433 million
＜Japan Stock Short-Term Trading Strategy＞
Nikkei Heikin Kabuka (Nikkei Average):
TOPIX:
Mothers Index:
Nikkei VI: Long
Tokyo Stock Exchange REIT Index:
Nikkei Leverage (1570):
Nikkei Double Inverse (1357):
TOPIX Leverage (1367):
TOPIX Double Inverse (1368):
Mothers ETF (2516):
Nikkei VI (2035): New Buy
VIX Short-Term Futures (1552): Long
REIT ETF (1343):
