FAST FIVE: "Insanely Stupid" To Chase Stocks As Economy Plunges?

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Tyler Durden Sun, 08/02/2020 – 11:35 Authored by Lance Roberts via RealInvestmentAdvice.com, Stocks Hug The Bullish Trend As discussed previously in “The Cobra Effect,” we noted the market remained confined to its consolidation channel.

There are several reasons for this: When the financial media discusses the dollar's demise, such is usually a good contrarian signal.  The dollar has recently had a negative correlation to stocks, bonds, gold, commodities, etc.

Whenever there is extreme negative positioning in the dollar, forward returns are negative across every time frame.  The vital thing to note here is that opportunity generally exists as points of extremes. When stocks, gold, and bonds are stretched beyond normal bounds (200-dma), reversions tend to occur.

The resulting 2.7% economic deficit will remain one of the deepest in history.

All those issues have been factored into the market and “rationalized” by investors using earnings 3-years into the future.  While that is also insanely stupid, investors will get away with it until some exogenous, unexpected event catches the market off-guard. When it happens, like it did in March, it will take investors by surprise and the damage will be just as consequential.  There are a tremendous number of things that can go wrong in the months ahead.

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