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Fed Cut Equities Stimulus 86% This Week and Stocks Are Falling

By Chris VermeulenStock MarketsMay 01, 2020 03:16PM ET
www.investing.com/analysis/fed-cut-equities-stimulus-86-this-week-and-stocks-are-falling-200523327
Fed Cut Equities Stimulus 86% This Week and Stocks Are Falling
By Chris Vermeulen   |  May 01, 2020 03:16PM ET
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What happens to the global markets when the U.S. Fed begins to weaken stimulus activity and when the global markets must begin to function on their own?  Are the global markets capable of sustaining current price levels without the Fed supporting them?

A recent news article suggests the U.S. Fed has drastically slashed stimulus activity over the past 5+ days. From a peak level of nearly $600 billion a week to current levels near $83 billion per week – an 86% decrease. How will this reflect in the market's ability to sustain current price levels in the face of disastrous Q2 expectations? Yup, markets are falling fast and hard going into the weekend as expected.

Buffet Indicator

Another common tool for skilled traders is the Buffet Indicator, which helps us understand stock market valuation levels and measures extreme trends by measuring Standard Deviation ranges.

Currently, the Buffet Indicator is near the highest levels ever recorded over the past 60+ years. Additionally, a “detrended” version of the Buffet Indicator suggests a broader global recession would require a further
devaluation before a true bottom is likely to complete.

This first Buffet Indicator chart shows the current market value to GDP and highlights the recent peak as being the highest level ever recorded. Notice how this level is much higher than the peak in 2000.  This indicates that the stock market valuation level is excessive compared with historical norms.

Detrended Buffet Indicator

This Detrended Buffet Indicator suggests the recent peak may not reflect the same excessive valuation levels as we experienced in 2000, yet are historically near the upper range of extended valuation levels. Notice how price devalues as a process of setting up a valuation advance throughout time.

When prices become overvalued (think of simple supply/demand theory), demand typically collapses – sending prices lower. At this time, we have the global COVID-19 virus event disrupting the demand-side
of this equation. When demand collapses, where do prices go?

Our research team believes the current trend will eventually end, and global stock market prices will collapse again as a much deeper price low/bottom sets up. Skilled traders need to understand that as long a the U.S. Fed was pouring $600 billion a week into the credit/stock market, the recovery in price was going to be substantial. Once that stimulus ends, and the markets are left to function on their own, the aspects of the demand collapse become more evident.

In a way, the Fed acted as a “demand supplement” for the U.S. and global markets. Buying up assets and supporting the credit markets in an effort to transition us past the crisis event that took place in late
February and March 2020. How quickly will the global markets transition back into a declining mode?

Custom U.S. Stock Market Index - Weekly Index

Our original targets where price may attempt to form a deeper bottom near the 2015~2016 price range is still very valid. Near the peak of the recent selloff, price levels reached these predicted levels just before the U.S. Fed began the stimulus programs. Now, price levels are nearly 35%+ above these low price levels.

Custom SmartCash Index - Weekly Chart

It seems obvious to our research team that continued lack of consumer demand and lack of central bank intervention will likely result in the U.S. stock market moving lower in the near future and attempting to
establish a true price bottom. We believe that bottom will likely happen near July or August 2020 and will likely reach levels near, or below, the 2015~2016 price range but this analysis will change as we progress forward with new events and analysis.

You can see our predicted price bottom on this Weekly Smart Cash Index chart. The lines we've drawn into the future show where we believe the first attempt at a true price bottom may take place near July
or August 2020.

Concluding Thoughts:

Remember, this type of price rotation is very healthy for the U.S. and global markets. The price must rotate through these types of trends to eliminate excessive risk/froth and to secure a proper price equilibrium where valuation levels can begin to appreciate again. This process is almost cathartic in a sense. The ability to regain a “true valuation base/bottom” in price (consider Fibonacci Price Theory)
allows the future appreciation cycle to function more efficiently (having eliminated excessive risk valuations).

We will get through this and the global economy will continue to function. We just have to get through the next 6+ months and the relative economic disaster of Q2 and Q3 (likely) before we're going to see
any real chance at true price appreciation.

At this point, when the Fed-induced upside trend breaks – watch out below.

Fed Cut Equities Stimulus 86% This Week and Stocks Are Falling
 

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Fed Cut Equities Stimulus 86% This Week and Stocks Are Falling

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Comments (16)
E W Eight Waves
E W Eight Waves May 02, 2020 12:50PM ET
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One month ago all bears and naysayers were predicting one huge crash in earnings, and an awful terrible first quarterly earnings reports for tech giants and the Nasdaq 100. However, that didn't happen, and all tech giants including Netflix (NFLX), Facebook(FB), Apple(AAPL), Amazon(AMZN), Google(GOOGL), Intel(INTC), Microsoft(MSFT) reported solid, surprisingly good quality, impressive earnings, and they ALL have BUY ratings. Now, the same bears who lost their shirts and pants are again wishing and dreaming of one terrible Q2 earnings reports for tech giants and wishing again for markets to crash so that they can punish the exact same companies who beat the estimates and reported above expectations great quarterly numbers. They are wrong, You do not punish the good student who studied hard day and night to pass the test with an A+ score. Good students should be rewarded, not punished. Markets are going higher.
Canis Lupus
Canis_lupus May 02, 2020 12:50PM ET
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Anyone who knew anything did t thing this quarter would be too bad. I think only 2 weeks of this quarter were during the shut town. Next quarter will include the bulk of it, so naturally next will be worse. That bring said, also anyone who knows anything knows that 2019 was mostly the year of the earnings scam. EPS was out the park every quarter, but most of that was the price being manipulated by stock buybacks to affect the EPS. Besides that, year if year growth was stagnant. The jacked up prices were not supported by corporate growth. That is part of the reason we fell so far so fast. Everyone knew it was a hoax then so it gave everyone the reason to bail all at once.
silver fox
silver fox May 02, 2020 12:50PM ET
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So, most of the shutdowns began at the very end of the quarter. those shutdowns began with a buying spree and hoarding. So what's your point?
noob investor
noob investor May 02, 2020 12:50PM ET
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yes. buy when economy destroyed! lets go!! lmaooo
Canis Lupus
Canis_lupus May 02, 2020 9:32AM ET
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It's funny you wrote this analysis. I had posted somewhere, and talk with some people about the curiousness of Friday's price action. I found it peculiar that prices were falling, yet the 10Y didn't budge as there was a flight to safety buying bonds. I had said the first 2 reasons that come to mind is: 1) This is a big bear trap because the bond market doesn't confirm the sell off. Or 2) We know the Fed is ramping down it's buying (I didn't know they had decreased 86% though). The bind market is being left to fend for itself, but it's still broken. Without the Fed in the game, bonds aren't being bought by their normal market participants. If #1were the case, the bears are in trouble. If #2 is the case, the bulls are in trouble. I guess we will find out soon enough which it really is.
Juho Peltola
Juho Peltola May 02, 2020 8:01AM ET
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If it never goes down, it can never go truly up. New comppany after summer is my oman.
Sidney Glover
Sidney Glover May 02, 2020 8:01AM ET
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google has an excellent translator for most languages. however; there is no logic checker
Benoit Avril
Benoit Avril May 02, 2020 6:58AM ET
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I don't get it, you're not happy because you "only" get $83 billion a week????
Ronald Warren
Ronald Warren May 02, 2020 6:58AM ET
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83 billion is not enough to offset selling.
Peter Canellis
Peter Canellis May 02, 2020 6:58AM ET
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Of course. If u habe 200 billion im sellikg 83 bill is not going to support it.
Ali Al Samarraie
Ali Al Samarraie May 02, 2020 5:43AM ET
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excellent explantion
나 무
나 무 May 02, 2020 3:55AM ET
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Wall street was deceiving the world. Why didn't you inform us of this kind of information early in March or April? Wall street and FED was collaborating to deceive the honest people to save only themselves.
Don Getty
Don Getty May 02, 2020 3:55AM ET
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they've been doing bear articles for weeks - if this is the first you've noticed - well thats on you! Anyone with a brain saw the writing on the wall back when China locked down a city of 2.5 mil with troops!
Rehoboam IO
Rehoboam May 02, 2020 3:55AM ET
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Too bad China didn't inform the world about human to human transmission of the Wuhan Virus last year when they knew about it.
Guy Shmuel
Guy Shmuel May 02, 2020 12:17AM ET
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Market going to brake down
Justin McNaughton
Justin McNaughton May 02, 2020 12:17AM ET
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or break
Guy Shmuel
Guy Shmuel May 02, 2020 12:17AM ET
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yesmisspelled
Kevin Tortoise
Kevin Tortoise May 02, 2020 12:01AM ET
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Sorry Chris but your analysis and charts don't pass the sniff test. I almost stopped reading when you brought up the Buffet ratio and claimed that trader rely on it. The Buffet ratio has no value for timing trades nor intermediate investments. It can help illustrate how the market is overvalued but stocks can remain overvalued for years.
Robert DZ the patterns
Robert DZ the patterns May 02, 2020 12:01AM ET
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Very true
Irshat Mukhametov
Irshat Mukhametov May 02, 2020 12:01AM ET
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also market capitalisation appears biased toward large cap tech stocks that actually was leading recent recovery. Look at the other stocks, they are still near the bottom
Gilbert Schwob
Gilbert Schwob May 02, 2020 12:01AM ET
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Am afraid your subjectivity is just a wish to hide reality, Covid-19 is only the triggeras, since now practically 4 years we can see the gap between wealthiers (2%) and the others 98% enlarging. Such a situatio had always initiated very serious  crisis as civil wars, wars, pandemics. Would you need examples?
David Trevisan
David Trevisan May 02, 2020 12:01AM ET
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Will Pats make the playoffs sans TB 12? And when might the NFL play it's next games? TB to TB. Now ( or might I say then) Pat's fans will have two games to watch
CG Beckham
CG Beckham May 01, 2020 11:57PM ET
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Let's see if this research team is correct! Either way, good opportunities for long term investing
Lakshmi Venkatesh
Lakshmi Venkatesh May 01, 2020 10:32PM ET
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So you guy say that bottom is still not yet over, and may find in July or August. So investing makes sense only after August, bang so many articles, so many technicals....
nayaw aitas
nayaw aitas May 01, 2020 8:40PM ET
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Where can we get this Fed stimulus numbers on daily basis?
Gas Hog
Gas Hog May 01, 2020 6:39PM ET
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We need to know this data when it happens not 5 days afterwords. No knowing this information in a timely manner puts small investors at a big disadvantage
Jan Arnoldus
Jan Arnoldus May 01, 2020 6:39PM ET
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It is not 5 days after the fact. Author is saying between now and July/Aug we should see further corrections.
Loan Pham
Loan Pham May 01, 2020 6:39PM ET
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it is a best guess from author. No one know this for sure.
RJ Hurd
RJ Hurd May 01, 2020 6:39PM ET
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Then don't invest.
Kevin Tortoise
Kevin Tortoise May 01, 2020 6:39PM ET
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Don't blame others for your lack of research
Irvin Mermelstein
Irvin Mermelstein May 01, 2020 5:02PM ET
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Excellent piece. I haven't seen the Fed's activity and it's impact described better.
Bozi OI
Bozi OI May 01, 2020 4:10PM ET
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great article!
Michael LaBarbera
Michael LaBarbera May 01, 2020 4:00PM ET
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Is there a website that tells us how much stimulus is being put into the market on a daily or weekly basis?
Show previous replies (2)
Michael LaBarbera
Michael LaBarbera May 01, 2020 4:00PM ET
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We get it after the fact. People who are in charge of this essentially have insider information. Thank you, I'll take a look.
Toho Tama Simanjuntak
Toho Tama Simanjuntak May 01, 2020 4:00PM ET
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Joel Shipley its been deleted or not existed anymore.
Joel Shipley
Joel Shipley May 01, 2020 4:00PM ET
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Toho Tama Simanjuntak  Its still there https://www.newyorkfed.org/medialibrary/media/markets/treasury-securities-schedule-past/HTPC_0427_0501_2020.pdf
Joel Shipley
Joel Shipley May 01, 2020 4:00PM ET
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Another link here https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details
Michael LaBarbera
Michael LaBarbera May 01, 2020 4:00PM ET
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Joel Shipley  Thank you, Joel.  It is not insider information after all.
Robert DZ the patterns
Robert DZ the patterns May 01, 2020 3:56PM ET
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Thank you Chris Vermeulen for this greatly informative article. If you could please be able to provide us regularly on Fed liquidity pumping, that would be great.
 
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