Should You Bet Against Druckenmiller & Tepper?
Yesterday two of the greatest investors in history slammed equities and investors should listen. Both Stanley Druckenmiller, former chief strategist for George Soros and David Tepper of Appaloosa Management declared the stock market was not a place to be right now.
“The risk-reward for equity is maybe as bad as I’ve seen it in my career.”
He does not believe the FED’s actions will help the economy.
“It was basically a combination of transfer payments to individuals, basically paying them more not to work than to work. And in addition to that, it was a bunch of payments to zombie companies to keep them alive.”
Tepper said the stock market is “maybe the second most overvalued.” The most overvalued market, according to him, was the Dot-com bubble of 1999. He also said,
“The market’s pretty high and the Fed’s put a lot of money in here. The market is by anybody’s standard pretty full. There’s a lot of liquidity there and the Fed’s still there. It’s too hard to say the market can’t go up or something like that, but it’s not a very good risk-reward market.”
Risk-reward is what stands out to TPA, since that is a calculation we do every day. Both Druckenmiller and Tepper are saying the possible return from here does not outweigh the risk from here. TPA believes that clients should listen.
TPA’s current buy to sell recommendation ratio is 37% to 63%.
Looking at the benchmark S&P 500, TPA sees 4 critical levels to watch.
S&P 500 Levels:
- 2950 – Is where the S&P 500 fell below 2020’s uptrend line mid-March (Chart 1). Chart 2 shows that the market rallied just shy of 35% from the intraday low on 3/23, but cannot seem to move above the 2950 level. This is the “proving level.” The point that needs to be surpassed to show that the huge oversold rally since the third week in March has staying power.
- 2800 – Chart 3 shows that, if the market fails at 2950, the next level down for support is around 2800.
- 2720 – After 2800, the next level of support is 2720, which matches up well with the lows of March and June 2019.
- 2500 – The next test will be S&P500 2500. TPA spoke about the 2500 level intraday on 3/12 and in the World Snapshot on 3/13. Chart 4 shows that 2500 was the level of support for the long term, 11-year uptrend from the financial recession lows on 3/9/09. A break of 2500 in March initiated a cascade that brought the market down briefly below 2200. 2500 could hold, but the fact that it has been breached once, means that it is now a less trusted long term support level.
S&P 500 Index
S&P 500 Index – 2019-2020
S&P 500 Index – 2008-2020