The Bull Case, The Bear Case and What "The Market" is Saying About Them

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Key Points

  • SPY Continues to March Toward the Next Stop on the Roadmap Near $311
  • Both the Bulls and Bears Can Make a Strong Case in the Current Environment
  • Large Cap Growth Remains Strong Across Time Frames in Equities
  • Signs of Curve Steepening as Long-Dated Treasuries are Sold
  • Gold and Gold Miners Remain Strong and a Core Portfolio Diversifier

The SPDR S&P 500 ETF (SPY)

SPDR S&P 500 ETF (SPY) closed above the important $300 level that we have been highlighting in our notes for the past few weeks. Interestingly, the fund is now lagging the IWV (Russell 3000 ETF) in a sign that smaller names in the market are beginning to join the rally in equities. We have noted that a move above the $300 mark opens the door to the $311 level. Last week’s high of $306.83 took the fund to within 1.35% of this level which we have been highlighting. A pullback to support in the $285 - $295 range (which holds the gap from May 18th) can’t be ruled out. A break below the $285 mark would make a move to the $265 - $275 range probable.


In the current market environment, both the bulls and the bears have data points on which they can stake their case. In this note we highlight both sides of the argument and then look at each asset class in an objective way to get a sense for what the market truly believes.

I am of the view that the bull case for equities rests on three main points: economic reopenings, hopes for a COVID-19 vaccine and record amounts of fiscal and monetary stimulus. The first two are somewhat subjective in that we don’t know what will actually happen post the reopening. Will consumers show up? (the large increase in saving rates seems to point to pent up demand). If they do show up, will businesses be able to operate profitably at reduced capacity? Can a restaurant that can only fill half its tables make money? We don’t know the answer. Perhaps it can make money by only hiring back half its staff.

As it relates to a vaccine for COVID-19, there are many companies who are hard at work and in various stages of development. You can take a look at this blog post on our PortfolioWise site from Karina Kovalcek for more color on who are the key players in the race for a vaccine. My view here is that betting against innovation is likely a losers game in the long run. In the short run, it is anyone’s guess. Regardless, this is a key part of the bull case for equities.

Finally, we have stimulus. On the fiscal side of the ledger, the IMF gives us the following information as of May 28th for the United States.

On the monetary policy side of the equation, we present this chart of the Fed’s balance sheet. That’s more than $7 Trillion and the Fed has reiterated time and again that they are not out of ammunition.

The bear case hinges on the economy. More than 40 million Americans have filed for unemployment since the COVID-19 pandemic began. It has been estimated that more than 40% of these jobs are likely not coming back. The four week moving average of continuing claims currently sits at more than 22 million. At the same time, the GDPNow model estimate from the Atlanta Fed for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -51.2 percent as of May 29th.

Another point in the bearish argument is that some of the fiscal measures, such as the additional $600 in unemployment benefits, are set to role off at the end of July. Will these measures be extended? Will additional measures be announced. Listen to recent speeches from Fed Chairman Powell. He is pleading with Congress for more help from the fiscal side.

Finally, tensions between the US and China are escalating once again. It is fair to say that this will be an ongoing point for the bears in the weeks ahead.

This is the framework, this is the environment for making investment decisions right now. A strong case can be made in either direction...and that’s the problem. If you are a bull, you can hang on the bullish data and ignore the bearish narrative. If you are a bear, the opposite is true. But, what if you were just an investor. What if you didn’t give yourself a label? The problem is that when you announce that you are a bull or a bear (either in public or to yourself) you have a vested interest in a specific outcome. You want to feel like you are right and you want the market to prove that you are right. To me this is a bad game to play. By keeping an open mind and simply following price with a risk management overlay, we can avoid falling into the trap of labeling ourselves.

Within equities, we can see by looking at a blend of 3, 6 and 12 month momentum, that Large Cap, Quality and Growth remain the dominant market themes.

Using the Invesco QQQ as a proxy for the group, we can see that the fund has a Very Bullish Chaikin Power Gauge ETF Rating to go along with its outperformance. The biggest issue for the equity market currently is that the main ETFs appear stretched to the upside. However the outperformance of growth that has been pervasive in a slowing growth world remains in place. The Power Bar Ratio for QQQ also remains bullish.

In Fixed Income, the story remains much the same as it has for the past 12 months. Favoring treasuries makes the most sense. However, there are early indications that the move is toward the curve steepening. Yes, over the blended time frame (3 , 6 and 12 months) long duration is leadership, but we can see that in the past month, they have been a source of funds. Shorter duration and corportates are benefitting in the near-term and it remains to be seen if this trend will continue.

With this in mind, we continue to favor treasuries that are closer to the middle of the curve. We remain bullish on the iShares 7 - 10 Year Treasury Bond Fund (IEF) and we also see opportunity in the iShares 3 - 7 Year Treasury Bond Fund (IEI).

In the alternative and thematic landscape, gold continues to be the leader (in particular the miners, GDX). This group includes assets that are levered to commodities and Real Estate as well as popular themes such as innovation, cyber security, video gaming and blockchain / crypto. For now the miners remain leadership leveraged to the strength in gold as an asset.

Dan Russo, CMT
Chief Market Strategist

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