Pro Perspectives 6/12/20

June 12, 2020

Let's take a look at some key charts as we end the week.
 
First, on the same week that the Nasdaq recovered to new record highs, global stocks, broadly, had a sharp slide.  Where does that leave us?
 
Here's a look at the S&P 500 …

The S&P broke the big this recovery trendline, but still holds in a big support level, the 200-day moving average.
 
Since the administration is a keen follower of the Dow, interestingly, the technicals on the Dow have probably been better indicators to watch on stocks in recent years.  
 
With that, the Dow goes into the weekend, holding this big trendline that represents the recovery. 
As Bernanke once said in a 60 minutes interview at the depths of the financial crisis, QE tends to make stocks go up.  The Fed buys assets (primarily U.S. Treasuries).  The sellers of those treasuries (large institutions) tend to take the proceeds and buy stocks. 
 
This time around, the Fed has again gotten the desired effect.  They’ve promised to buy unlimited Treasuries. Stocks have gone up. 
Higher stock markets promote confidence and wealth — two things that help engineer economic recovery.  
 
Higher stock prices are great, but to have a functioning economy, much less an economic recovery, you have to have a functioning corporate credit market.  With that, early on in this crisis, the Fed stepped into corporate bond market, as a buyer. The mere presence of the Fed opened up private lending to corporates — and the corporate bond markets has been fixed.
This move by the Fed was a key piece in turning markets around.  It was on March 23rd that the Fed said it would buy corporate bonds and corporate bond ETFs.  It marked the bottom for stocks.   And on that day, we looked at this chart in my daily note of the highest volume corporate bond ETF, LQD …

Here's how it looks today …  
On a related note (to corporate credit):  Finally, let's take a look at oil.  
 
After a wild plunge deeply into negative prices, oil traded above $40 this week.  This is good news, but we need higher prices to keep the shale industry afloat –above $50.  Despite the aggressive policy response from the Fed, it looks like 29 companies in the U.S. oil industry, to this point, are already at some stage of default. The rest are in survival mode, slashing spending and production. 
 
They (Fed, Treasury, Congress, White House) won’t/can’t afford to let the dominos fall in the shale industry.  Expect higher oil prices.