Tightly wound bear market looking for a catalyst

The market is looking for a catalyst, and the biggest uncertainty right now is fiscal stimulus passage and the help that it can offer the economy.

As we illustrated with some of the charts in our Market Outlook on Friday and now with the chart below, the market is wound so tight with extreme short-term sentiment that it’s just waiting for any good news to alleviate some of that pressure. That tightness in your chest from staring into the abyss is what it feels like when bear markets want to bounce and just need a catalyst to do so. It seems likely that stimulus bill passage could serve as one. It’s an uncertainty, among many right now, that could quickly be removed.

Senate passage of stimulus (or non-passage) by Monday has the promise to create a market reaction like what the TARP vote meant to markets back in October 2008, to the upside or down. Because it’s not a bailout of banks, there is less likely to be any political grandstanding. With a Democratically led House on board and with Republicans leading the Senate and presidency, the odds of making this thing as political as it was when Obama tried to pass his stimulus package in 2009 seem lower as well. Having stocks sell off the way that they did on Friday after the announcement of Ronin Capital’s failure should also serve as a good nudge to the politicians. It’s also an election year…

While our cautious stance on the stock market hasn’t given way to pound the table bullishness, maybe the single most important factor for determining how deep this crisis goes and how far the bear market overshoots is federal stimulus. When government issues a decree to close your small business to fight a global pandemic, the least government can do is backstop the small business and its employees to keep it from failing. Passage is the first step. Whether the stimulus is big enough is another question.

Currently estimated to be $1.6 trillion, we wish it were larger. This is the time to go big – debt or deficits should not be a concern. With the dollar rallying to new highs and Treasury yields near 1%, global confidence in the US dollar abounds.

Chart – Value Line Median Appreciation Potential hits key level

Value Line’s Median Appreciation Potential was release for the week and it’s at 120%, the highest level since 2009! This is an exceptional reading, and while previous bear markets have taken this reading even higher, buying small and mid-cap stocks when this indicator has hit this level in the past has been rewarded with very good returns when looking out over the next 2-3 years.