When the dam breaks

The confidence is back! Okay, maybe not back but it is peaking its head again. A 50% recovery from the crash of last month and people are feeling a lot better already. Never mind the fact that they are still at home 24/7 and they are having to wear a mask to go get groceries during the only time they step out of the house. Never mind the bodies piling up randomly in a retirement home. Never mind we have given back all the job gains from 2008.

Fine you don't care about any of this so let me contrast it in market terms. Never mind that the energy sector is still down more than 50%. Never mind the travel industry is down more than 50%. Never mind home builders are down more that 50%. Never mind the financials are down 30%. Never mind REITs of all kinds are decimated, especially the retail ones.

So what gives us all the confidence to gain back 50% of the 30% drop in markets. Does a 96% drop in air travel not give us pause? Or the 22 million people who have lost their jobs cause us something to think about? Or the fact that we still don't have a cure for the virus give us something to fear?

The answer lies in who owns stocks. Only 56% of the American population today owns stocks. Institutions have no choice but to own assets to provide a reason to exist. And there are still pockets of the market that have not seen the pain.

The last point here is crucial for true capitulation in the market. In the past month everyone took a hit. Most industries suffered a down draft of about 30% while the industries in the front line of the virus took about a 50% haircut. But in the past couple of weeks the buyers have come back. But they came back asymmetrically. Semiconductors are back to with a bang. Some of them even trying to get to their 52 week high. High-tech has also found a lot of buyers in this market and some of the beaten down industries like the home builders have seen a come back based on the assumption that things are not going to stay as bad as expected earlier. The rational is that operating leverage and demand for these things are very durable and hence will survive this downturn.

With parts of the market coming back, the sentiment begins to turn and even when ground reality has not changed the buyers feel like the are missing out on the comeback. The problem is a disruption like this does not go away overnight and supply chains and demand-supply balance does not restore that quickly. So eventually the last standing pillars will break and when the break is when confidence erodes completely and then eventually the capitulation happens.

Either that or the dam holds and if it does hold I will be crying over missed opportunities six months from now.

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