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Recession Discounted, or FAAMNG Holding Up the Market?

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Welcome back to Cook's Kitchen! In today's video, I look at the predictable relief rally and how soon it rolls over to test the bear market lows.

I say "predictable" relief rally because we did just that in late March when we were buying the crash lows with leveraged ETFs. Here were all trades initiated and closed since March 1, 2020...

 

We were able to do this because I have a process for evaluating risk/reward and volatility that I call "Scenarios & Probabilities" where I gauge these factors ahead of time. And coming into April, here's how I "mapped" them on March 31...

Let's Map It Anyway

Forecasting the weather 2-3 weeks out is hard enough. The market? Fuggedaboudit.

But still, we can and must make probability-weighted bets of various sizes and durations.

My "Scenarios & Probabilities" Market Map is most useful when volatility and uncertainty are both high and the market is in the middle of a big range.

So here's my market weather for the next 3-4 weeks into the start of earnings season where corporate outlooks will carry a lot of weight...

Scenarios & Probabilities Market Map for April

SPX grinds higher to 2900-50 on falling VIX and fear: 20% chance

SPX trades in violent range btwn 2750 and 2450 until virus peaks: 35% chance

SPX resumes bear status on COVID-19 escalation, testing 2300-2200: 25% chance

SPX discounts full severity of recession with plunge to 2100-2000: 20% chance

This Map implies an 80% chance of the lows holding in April.

It also implies a 60% chance of the primary price action taking place between 2250 and 2750.

And finally, it says I think we test the lows and then some before we get above 2950.

(end of March 31 excerpt from TAZR Trader commentary)

Who's Holding Up the Market? The Famous Names

In the video that accompanies this article, I explain how I use my "S&P Maps."

Then I look at the S&P and Nasdaq charts to explain why I think we test the lows of the flash bear market.

One bullish part of the market equation that still looks strong right now is the force of FAAMNG stocks: Facebook (FB - Free Report) , Apple AAPL, Amazon AMZN, Microsoft MSFT, Netflix NFLX, and Alphabet (GOOGL - Free Report) .

I say that these are as much a "flight to safety" trade for institutional investors as Treasuries, gold and the US dollar.

Large investors can't go to 20% cash, so they run to these cash-flow behemoths who will certainly be able to weather the pandemic shut-down economy.

In the video, I show a chart from Bank of America research which shows what percentage of the S&P 500 these big names have become.

How long they can hold up the stock market with so many economic unknowns is an important question for any investors looking to rebalance as the relief rally grows tired.

Finally, I show a chart of my favorite capitulation indicator and why I think it has a "W" in store for the market in May or June.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios. Click Follow Author above to receive his latest analysis and recommendations.

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