The ASX 200 recovered a 101 point fall to close up 19 yesterday. An Australian win on a Government bond issue (see below) helped the turnaround. But we will be tested today. That's two days of the US market falling 2% a day. Corrections start fast. Momentum fading. This is the ASX 200 chart – no break down of the trading range yet but we have to start getting a bit more cautious.  

We are closer to selling not buying today. Here's why.

BACK IN A BUBBLE

This from Reuters - All four major asset classes, equities, tech stocks, government bonds and house prices are now in 'bubble' territory, around two standard deviations above their respective means. It is a consequence of the speed and magnitude of the policy response to the crisis. We have seen a colossal amount of fiscal and monetary stimulus. There is a fund manager in the US talking about a bubble in tech stocks as well. Valuations are "nuts" he says.

There is good news and bad news on this front. The good news is that Australia is not in a bubble; the bad news is that the US market is.

• The All Ords shows A$2.6 trillion worth of stocks trading on 14.97x.
• The S&P 500 shows US$24.31 trillion of stocks trading on 21.11x.
• The NASDAQ shows US$14.4 trillion of stocks trading on 26.11x.
• The All Ords fell 38% and is still down 25%.
• The S&P 500 fell 35% and is still down 15%.
• The NASDAQ fell 32% and is still down 8.7%.  

Australia is OK but from these prices, with the current relapse risk, bubble risk and L-Shape risk, there is seemingly more risk of a new equity market sell-off in the US that a comfortable bull market.

This is the S&P 500 chart topping (MACD sell signal overnight) out but no noteworthy downtrend yet. Alert not alarmed.

This is the NASDAQ - topping mout as well (recent RSI sell signal):

ANOTHER RISK – AN L-SHAPED RECOVERY

Powell is warning overnight about a slow long recovery rather than a V-shaped recovery. Overnight Powell has effectively passed the baton to Government saying the FOMC are not going to take interest rates negative and the only thing that will insure against 'deep economic damage' is fiscal support; and that's in the hands of the politicians, which is unlikely to be easy because of the deep political stand-off in Congress.

At the moment the markets are looking through the terrible headlines to the other side. Unemployment in Australia for instance will register 8-10% today – the worst month since 1978. But the market is ploughing on despite the GDP, employment and budget deficit headlines. The US is priced on a V-Shaped recovery. The risk is that it may not happen.

The risk is that we perceive Powell's scenario; deep economic damage and a long slow recovery, not a quick one. If the UK and / or US relapse on the virus, it will come into focus.

ANOTHER RISK - EMERGING MARKET CRISIS

Some countries are going bust. It may seem innocuous that countries like Bali, Maldives, Bulgaria, Rwanda, Lebanon, Argentina, Ecuador, Zambia...there are more, could go bust, but it's not. When emerging markets go bust, it's a little bit like a GFC, and the Asian Crisis; no-one quite knows who they owe money to and where the balance sheet destruction ends up. China, Russia, the US? Which international banks are exposed? You never know until you hear. It's another latent risk ahead of us. An emerging market crisis. But again, from your point of view, it hasn't happened yet, the herd isn't interested or distracted by it; it's not your job to predict it, but it is another thing to keep an eye on, whether the herd spots it and adopts it as a negative driver. It hasn't, but it might.

ANOTHER RISK - RELAPSE

The UK relapse risk is very high. Boris has been criticised in Parliament for leaving out a page about the UK's international comparison on COVID-19 in a document – because the UK compares poorly. The UK is 'back to work'. Public transport is crowded again. When you see pictures of the London Underground you realise that if anyone has the coronavirus, it is coming back. There's no chance you can social distance on London, or New York, public Transport.

And its not just the UK. The relapse risk is high in the US as well. If Australia had their curve, we would not be at Stage 1 let alone Stages 2 and 3. And cases are rising again in China, Iran, South Korea and Germany.

Australia is unlikely to see a relapse. We are one of the best placed to come out of this smoothly - lots of natural advantages - younger population, low-density living, better weather and one of the lowest death per million rates on the globe. But don't relax. If the US and UK tip over, we're going to back into lockdowns in sympathy.

STRATEGY SUMMARY

Getting more cautious.

It's interesting, we are moving from worrying about one risk, the virus risk (a relapse), to worrying about the economic risk (L-shaped recovery) and price risk (US market too expensive for the economic backdrop), let alone an emerging market risk. Depending on which one develops, the stock selection changes. If it's a price risk, beware high PE sentiment stocks. We have already lightened off in that area.

Bullets:

• The US markets are back in a bubble. We're OK, but a correction in the US would still take us down again.
• The new risk, highlighted by Powell overnight – is the risk of an L-shaped recovery. Without significant fiscal support, which is unlikely to come, he is talking of deep economic damage and a long slow recovery. Markets are not priced for that.  
• 'Second Wave' risk - if it's going to happen it'll be soon, soon after the US and UK lift restrictions. We are not through the 'Relapse Zone' yet, we can't relax yet.
• Emerging market risk hasn't appeared yet. But is should/could.
• Our market still going sideways. Waiting for a break one way or another. Today will be interesting.
• No need to change strategy yet but happy we cashed up a bit on some of the tech stocks that started topping out this week.
• We have about 10-15% cash after taking some individual stock profits this week. Not a strategy call, just a few stocks topped out.
• We're enjoying the flexibility of having some cash – it means we can buy something if we so desire. But don't want to at the moment.
• We had a conversation in the morning meeting asking why are we still holding the banks. Zero rates, no margins, no dividends. Surely we can find stocks with better prospects.
• We also had a conversation about how BHP, FMG and RIO couldn't fail but outperform – they are printing cash and their balance sheets are strong whilst a lot of the market is bleeding cash. The charts don't look right to buy but come the moment, we'll look to be overweight iron ore.

Interesting day or two ahead. Two days falling 2% on the trot in the US is a worry. Is this the start of a new sell-off? Or will it blow over, again. We're ready to cash up some more. Getting that feeling. And the light in my Office just went red - its a sign: