The market has digested a lot of good news
Editor’s note: This article comes from the WeChat public account ” beast Finance “(ID: mengshoucaijing) , author: beast Finance.
We expect the S & P 500 index to fall 15% in the next 3 months.
The reopening of the US economy has triggered more social interactions and increased the spread of new coronaviruses.
By June, there may be a surge in new coronavirus cases, which may lead to a retrogression in the US economic reopening process.
This risk includes a decline in earnings expectations and a shift in investor sentiment.
On May 4, 2020, we published news that the S & P 500 index fell by 15%. The S & P 500 index (NYSEARCA: SPY) fell to 2,831 points. On Friday, May 15, 2020, the S & P 500 index closed at 2,864 points. Later on May 15, we bought a put option on the S & P 500 index with an exercise price of $ 240, which will expire on June 30, 2020.
This is what we think of the S & P 500 Index:
1. Good news has been digested
Since March 23, 2020, the market has digested a lot of good news and is at a low level. There are good news in three areas: medical news, $ 2 trillion in fiscal stimulus, and the Federal Reserve ’s quantitative easing.
In the past two weeks, there has been more and more good news in the medical field. The curves representing new coronavirus cases and deaths are flattening and falling. There are also more announcements about potential vaccines.
However, the S & P 500 index has not moved higher because of this added information.
2. Risk of reopening
The isolation caused by the new coronavirus is being lifted. People from all over the country go out more and more. Economic activity increased slightly on a very low basis.
Reopening the economy brings many risks. There are reports that a barber in New York continues to work illegally and has been tested positive for coronavirus. We expect that as people return to workplaces, bars, restaurants, barber shops and other public places, cases of new coronaviruses like this will surge.
This may cause the process of reopening the market to go backwards, which will have a negative impact on the S & P 500 index.
3. Expected earnings decline
The earnings expectation of the S & P 500 index is still declining.
The market has digested most of the factors behind the decline in earnings expectations. Our concern is that we have not found the bottom, and the number is still falling like a knife.
The current earnings forecast assumes a V-shaped recovery. The 2019 earnings will be $ 165, which will drop to $ 128 in 2020 and will rebound to $ 166 in 2021.
When investors expect to change from a V-shaped recovery to a U-shaped, L-shaped or Nike-shaped recovery, the S & P 500 index will face resistance. In the coming weeks, when the forecast for 2021 falls below 2019 levels, market sentiment may change.
4. End of Payroll Protection Program (PPP)
PPP is the lifeblood of many American companies, and many employees have jobs. PPP will end at the end of June.
The US Congress is studying the extension of the PPP: Manchin, Romney, Leahy, Gardner, and Wyden bills to extend the PPP loan term from 8 weeks to 16 weeks.
We already have a historic level of unemployment. The end of purchasing power parity is a catalyst for more unemployment. Purchasing power parity may be extended beyond June, but the end date is not far away. A weak economy cannot create enough employment opportunities, so that the unemployment rateReduced to near pre-crisis levels.
5. Investor locks in earnings
In the past few months, investors have experienced ups and downs. It rebounded sharply from the low of March 23, 2020, but the rally has slowed in the past few weeks.
We heard anecdotes from some investors who passed the market volatility safely. Some funds are now sold to lock in gains (or, in fact, lock in limited losses).
We do n’t know how common this is. However, we expect some investors to leave the market to wait and see as the market rebounds from the March low.
6. Risk of instability
The top five companies in the S & P 500 index are Microsoft, Apple, Amazon, Facebook, and Alphabet.
Since this year, the stock prices of these five companies have all risen, outperforming the S & P 500’s 11% decline this year. These five companies have recovered very well in the economy isolated by the epidemic. Amazon is even increasing its market share.
The S & P 500’s gains since the March low have been concentrated in large stocks, especially technology stocks.
The risk given here is that a super heavy market tends to collapse.
We bought put options on the S & P 500 with a strike price of US $ 240 and an expiration date of June 30, 2020, as a verification of our judgment. The reasons are as follows:
1. If our judgment on the risk of reopening is correct, then it will be staged in the coming weeks. New cases appeared about 2 weeks after infection. The increased social contact and the 2-week incubation period in the next few days will lead to a peak in June. The deadline is June 30, 2020, which gives us enough time to complete the work.
2. If S & P 50The 0 index starts to fall and investors will look forward to testing at the low of 2,192 or 219 on March 30, 2020. The S & P 500 index may not return to a low before these put options expire, or it may not return to a low. Therefore, we chose $ 240, which is a bit lower, but well below the current price. The level of $ 240 is 16% lower than the closing price on March 15, 2020.
3. The VIX index dropped from its March high, and the S & P 500 index staged a reassuring rebound. Relative to historical levels, the volatility index is still at a high level. If the S & P 500 index starts to fall, the VIX index may climb again. This is beneficial to put option holders.
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