4.27 Afternoon Audit

Apr 27, 2020

The Afternoon Audit
Monday | 4.27.2020

Today in the Market

U.S. Equities Rise As Investors Weigh-in on Societal Reopening

Catch Up Quick

The Congressional Budget Office estimated Friday that the U.S. budget deficit will be roughly $3.7 trillion for fiscal year 2020, with public debt projected at 101% of GDP
Hubei province, the hub of China's coronavirus outbreak, saw its GDP contract by 39.2% year over year in the first quarter
Unemployment reaches 26 million in five weeks
In a Goldman Sachs survey, of 1,790 participants in the firm’s 10,000 small business program, 64% say their cash reserves will last less than three months

Short Interest Rises to Highest Levels Since 2016

Short Selling Overview

Short sellers make money by selling borrowed stocks that they don’t own, in hopes of buying it back at a later time for a lower price
Let's say you sell a watch for $100 and the price drops to $40 and you buy it back for $40, making $60 as the price declined

Why this Matters

Large numbers of short sellers in the market indicates many people think the market will drop
However keep in mind how the shorting process works
They must re-buy the positions they sold short at some point, otherwise they are essentially borrowing something without returning it; this is illegal

The Bottom Line

Many shorts in the market imply mandatory buying, which will drive price action higher

Narrow Market Breadth as a Bear Indicator

Market Breadth Overview

Market breadth measures the number of stocks contributing to upside gains or downside losses
- For instance, on the upside, a high market breadth would imply that many stocks are pushing markets higher
- Low breadth implies that a few, typically large, stocks are pushing things up.

Why this Matters

As U.S stocks have recovered greatly from the March lows, the breadth of this rally has been low as very few large caps are greatly outperforming and driving indices higher
Chief Equity Strategist, David Kostin, of Goldman Sachs points out that while the S&P trades just 17% below it’s all time high, the median S&P company trades almost 30% below its all time high.

The Bottom Line

Narrow breadth implies greater risk
In times of low / narrow breadth, a majority of companies fail to generate enough earnings to justify their valuation that it likely riding the wave of upside induced by the few companies, such as Amazon, who are fundamentally doing well
The few true winners driving markets higher can be viewed a as small portfolios lacking diversity, shedding light the increased risk
Historically, narrow breadth rallies like this lead to large drawdowns

Afternoon Audit