The S&P 500 Bounce: A Fickle Friend to the Bulls? (w/ Raoul Pal & Peter Brandt)
RAOUL PAL: Peter, let's start at the very top level. We've seen some tremendous price action, let's start with equities for the time being as a place to start. What do you think is playing out here? Because the market is trying to grapple with, is this a shorter term thing, or is this potentially a larger thing? I've made my opinion quite clear that I think it's possibly something larger. When you look at the top down picture, what do you think of this in terms of these charts? PETER BRANDT: You're the guy that really understands global macro stuff and fundamentals. I'm not. I look at charts and draw funny little lines and try to make sense of it and think in terms of possibilities, and that's how I'm viewing this, in terms of possibilities that obviously can modify or change or more for the time, but I traded markets for a living since 1974 and I've never really seen anything quite like we've had the last two months. It's unprecedented. I was in the market, some people tease me that they say, how does this compare with the Great Depression market? Because a lot of the older guys are in here. I missed that one by 12 years. This is absolutely crazy. I guess I subscribe to the theory where there's smoke, there's fire, or there's definitely something hot going on. Of course, we all know that it's tough to fade the Fed, you don't want to fight the Fed and the Fed is not only throwing the kitchen sink, they're throwing everything in the kitchen, including a broken toaster at this thing and I'm just surprised that we've seen the rally that we've seen and so I see that type of decline that we had coming off the highs this year as really the possible beginning of a pretty serious decline. It's all pretty much gun to script since this market has rolled over, including this rally that we had. We got overdone on the downside. Taking the S&P back to 2180 or so was a little bit too much for the first big leg down but you look at the volume that has come in here. In my mind, huge slugs of volume is either starting volume or stopping volume, and so we could say all of this huge slug of volume is really just demand coming in off the bottom. It's really difficult for me when I look at circumstances possible 20%, 30% unemployment in the US, lowest retail sales in history, still the threat of a global virus, health virus to think, I go, hey, for the few stocks that I still own, if somebody wants to come in and pay me an all-time high price for them, they can have them. I'm viewing this thing, Raoul, as really the first big leg down and what could potentially be a more significant bear market that this rally that we've had in the S&P is up into this 2800 level, it may be all it is. Last Friday, I wrote a fairly long letter to the people who follow me for the Factor Research Service, and I explained to them why last Friday, I sold every last share of stock that I owned. I managed to ride through some shares all the way down, rode them all the way back and I explained in the letter, I'm getting out of everything. I don't want to own any stock here and I was lucky last Friday, we've taken out last Friday's low or high, but we've now sold off. As a technician, I'm viewing the S&P has a possible massive head and shoulders top that we put in the left shoulder in 2018. That's where the high came in, we dropped down into that December 2018 low, which is the left shoulder low, then we've rallied into the high early this year in this big drop that we've had is the right shoulder low, and now we're rallying back toward that left shoulder high. Somewhere between 2800 and 2950, I really anticipate that you're going to see a right shoulder high, roll over and then really begin the bear move that's yet to come. RAOUL PAL: In assessment, because you reached out to me on Friday and said hey, listen, this is what I'm thinking, and I was like, was it Friday? Whatever day you reached out, I'm like hadn't even really looked at that because I was so intensely looking at the chart in a different way and I looked at it, that makes total sense. It could be an even bigger top pattern than I really had in my head. I thought-- and I was also eyeing this 50% retracement thinking this is an area that you could possibly stop. Now, it actually has stopped around that, maybe it does, maybe it doesn't, maybe it goes up further, but it's really interesting to me and I just don't think people are prepared for that outcome. Now, again, as we've always said, [?] the chart that play out that way, but it just looks interesting. I think there's a really good chance that you're right on this. PETER BRANDT: To strip out dividends, the break that we had in 2008, the S&Ps was down right around 54%, 55%. You apply that to the S&Ps today and say certainly, we can create just as negative global macro scenario today as we could back during the mortgage crisis, that takes the S&Ps back into the area of 1700. Even if we have a 50% correction in the S&Ps from this year's high, all of a sudden, we're looking down in the area of 1700, but we go to 1700, we complete the head and shoulders top and we then potentially go a lot further. RAOUL PAL: What would be the measuring objective of that head and shoulders top you think roughly? PETER BRANDT: Well, I'm going to pump this out because I think to look at it, we can't really do it arithmetically. I think we have to probably look at it, Raoul, on a log chart basis. If we look at it on a log chart basis, it can get pretty ugly. We could be looking at prices potential down in the area of 1300, 1400 on the S&Ps.