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Stock Market Risk/Reward

Daniel Laboe

The S&P 500 finally broke through the 2,940 resistance-level that we had bounced off on 2 separate occasions, but it would appear that the third time’s the charm. Now the markets are eying 3,000, and the 2,940 resistance has turned into a support-level, which you can see from charter Fibonacci retracement levels in the TradingView chart below.

The markets have recovered extraordinarily fast from their lows in March, and analysts are racking their brains trying to determine if this speedy recovery is warranted. The fiscal and monetary stimulus has been flooding our economy with money and keeping the equity markets afloat, but is this enough to support depression levels of unemployment?

Tech has been the primary catalyst for the upward drive in equity prices, with the Nasdaq 100 trading only a few percents below its all-time highs. Tech giants like Microsoft (MSFT) and Amazon (AMZN) are getting an unlikely tailwind from this pandemic, with the world’s reliance on technology never being greater.

There has been a growing spread between the Nasdaq 100 (QQQ) and the S&P 500 (SPY), which currently sits at a 15% differentiation since the beginning of 2020, illustrated below.

Tech is undoubtedly going to be the driver of the next decade's stock market, but are investors being too cavalier about the implications of the current health crisis? Unemployment is expected to reach north of 20% by this summer, and many of these "furloughed" workers will not be returning to work as businesses go belly up and reduce their staffing requirements.

It took over 5 years for the 10% peak unemployment from the financial crisis to recover back to pre-crisis levels. It will be years before we reach full employment again, and this will unquestionably hamper demand. The fiscal unemployment stimulus is keeping potential demand alive at least until the election in November, but it can't last forever.

Be Cautious

The risk/reward in the equity markets is atrocious right now from my perspective, and I would be cautious with my stock purchases. I am looking for a pullback in the broader market to the 2650 level, but its timing is unclear. There is still the chance the Fed will 'cancel' the recession with its money-printing machine, but the inflation implications of oversaturating the economy with cash could be significant.

Be patient with your cash and wait for your favorite stocks to drop back down to valuations you are comfortable with.

For more color on the matter, check out my latest video: Technical Analysis Points To Continued Rally, But How Much Further Can We Go?

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