Stock markets are up only on stimulus hopes and short-covering; not on fundamentals
President Donald Trump is obsessed with the stock market and is trying desperately to prop it up with a barrage of tweets.
“Covid Relief Negotiations are moving along. Go Big!,” he tweeted last night.
Covid Relief Negotiations are moving along. Go Big!
— Donald J. Trump (@realDonaldTrump) October 9, 2020
STOCK MARKET HIGHS. VOTE!
— Donald J. Trump (@realDonaldTrump) October 5, 2020
He has raised the stimulus offer to $1.8 trillion while the opposition is seeking $2.2 trillion.
BREAKING: Trump is raising his stimulus offer to Pelosi to $1.8 trillion to seal deal, sources say. Up from $1.6 trillion. Dems have sought $2.2 trillion.
— Erik Wasson (@elwasson) October 9, 2020
This had the desired effect and the Dow Jones surged 161 points to end at 28587.
However, informed sources have opined that Trump may be bluffing and a deal on the stimulus may not happen before the elections.
“Republicans aren’t inclined to wrap themselves any tighter to a sinking ship,” it was stated.
New stimulus deal "unlikely in the next three weeks" McConnell saying in event in KY
— Erica Werner (@ericawerner) October 9, 2020
Short-covering is the other factor that is contributing to the surge in the stock market.
We saw a report earlier about how institutional traders have loaded up on huge shorts in anticipation that the markets would crash and are now being forced to aggressively cover their positions, propelling the markets higher (see Nifty Makes History By Surging 1100 points In Just 9 Trading Sessions. Experts Explain What Led To The Super-Surge).
It is obvious that if the markets get a whiff that the stimulus package is not coming and/or if the shorts run out of the system, a correction will be inevitable.
Valuations of stocks are mind-boggling
“Valuation makes absolutely zero difference when you’re in a true, brutal bear market. You just go to prices that you just can’t believe,” Gundlach said.
The same thing applies in euphoric Bull markets. Valuations can surge to unbelievable levels.
He cited the example of Chipotle, the popular restaurant chain whose stock price has surged 300% in the past six months.
“The one that just blows my mind is Chipotle. I just can’t understand why the stock has tripled over the last six months. It just baffles me. Isn’t the price-to-earnings ratio like 150 or something? That’s a lot of tacos,” he said.
If you overstay your welcome, be prepared to take a bloodbath
“You have to have your finger on the exit button,” Gundlach said, meaning that while we should enjoy the party while it lasts, we should keep the trigger on the ‘Sell’ button and bail out at the first sign of trouble.
“It will be a pleasant experience to not be in the car on the first wheel of the roller coaster that’s coming,” he added.
He advised compulsive investors to invest only in “Big Tech” stocks like Amazon, Apple, Microsoft, Google etc.
“If you want to own US stocks, you should own those six knowing that you’re going to take a bloodbath if you overstay your welcome,” he warned.
Markets will crash pretty hard
“I do think that within 18 months it’s going to crack pretty hard. When the next big meltdown happens, I think the US is going to be the worst-performing market,” he warned in an ominous tone.