Mike Santoli's market notes: Forced to chase, bankrupt Hertz jumps, VIX signaling caution?

Published Mon, Jun 8 20203:02 PM EDTUpdated Tue, Jun 9 20207:11 AM EDT

Upside inertia continues to carry this market. No new drivers, just continuation of the recent dynamics: Lack of any news to slow reopening momentum, investors feeling forced to increase bets on a recovery through still-depressed cyclical stocks, technical momentum as the index clears resistance and a sense that these forces can last a while before any adverse impact from infection acceleration or a "lower ceiling" on a post-reopening economy. All of this has the laggard cyclicals leading again, in particular the clutch of deeply hurt travel/retail names that the speculative crowd has decided are winning lottery tickets on Americans unleashed. This remains a market in which every orphan stock is taken in. But is it with a foster family or a permanent home? Cruise lines up another 11%, Gap ahead by another 8%, SL Green Realty as an office play. Bankrupt Hertz and distressed Party City (which is offering to swap 20% of its equity and new debt to bondholders to avert bankruptcy) are seeing their single-digit-dollar stocks surge. Fun while it lasts, painful when it stops. The tape has the feel of performance-driven pros topping up their allocations to stocks, here and abroad. Systematic, trend-following hedge funds are being forced to increase market exposure from low levels, are essentially programmed to chase a market higher once it starts rolling. Less-systematic, formerly skeptical veteran traders such as Stan Druckenmiller have been forced by the rally's sheer breadth and persistence to grant it the benefit of the doubt . And, indeed, history says when the market has such a furious rise with rare extremes in which the vast majority of stocks get overbought – as we saw recently with this one – the forward returns over subsequent months have tended to be decidedly above average. Against all these clearly favorable and self-reinforcing trends are the accumulating signs that this rally in the short term is getting a bit stretched and over-believed. We've discussed the ground-scraping put/call ratios (at a 16-year low as small traders binge on cheap upside bets); Nasdaq volumes surge; Citi's Panic-Euphoria at cautionary highs of Euphoria; CNN Fear-Greed Index back in Greed and a quick pickup in insider selling. These signals of overheating don't mean the market quits going up right away, but often the subsequent gains are reversed in part or in full before very long. If nothing else, a slowing/flattening of the advance and maybe some sideways chop should not come as a surprise. Valuation is not particular helpful when a quick shock has dropped near-term profitability, but the Fed and fiscal support and governors reopening states for business are firming up the longer-term outlook. No one can argue the market is outright cheap, but with high-grade corporate-bond yields under 2.5%, who would expect stocks to be cheap? Today's advance is again powerfully broad, with nearly 90% upside volume on the NYSE. Banks up another 2.6%. This is allowing the indexes to absorb the softening of mega-cap growth stocks. In 2013 and 2017, I referred to this kind of action as the "immaculate rotation," and it took hold most pronouncedly in slow summer trading. Could such a phase possibly await this market now? VIX rebuilding some premium post-weekend. Nothing alarming but its inability to drain down from the mid-20s represents a bit of hesitancy among hedgers to sound an all-clear. VIX futures are juiced around the election, so maybe as that draws closer it will keep VIX higher than observable market conditions might suggest?

Upside inertia continues to carry this market. No new drivers, just continuation of the recent dynamics: Lack of any news to slow reopening momentum, investors feeling forced to increase bets on a recovery through still-depressed cyclical stocks, technical momentum as the index clears resistance and a sense that these forces can last a while before any adverse impact from infection acceleration or a "lower ceiling" on a post-reopening economy.
All of this has the laggard cyclicals leading again, in particular the clutch of deeply hurt travel/retail names that the speculative crowd has decided are winning lottery tickets on Americans unleashed. This remains a market in which every orphan stock is taken in. But is it with a foster family or a permanent home? Cruise lines up another 11%, Gap ahead by another 8%, SL Green Realty as an office play. Bankrupt Hertz and distressed Party City (which is offering to swap 20% of its equity and new debt to bondholders to avert bankruptcy) are seeing their single-digit-dollar stocks surge. Fun while it lasts, painful when it stops.