authored by

John Kierans
August 2020

 Will the rally end and if so what will be the signal?  What will be the canary in the coal mine?

When Will the Stock Market Rally End?

The main global bourses have been in a consistent rally since March of this year.  The Bloomberg chart below suggest that a new high may even be possible before the end of this quarter or month!  

The question is why is the market rallying? And most importantly, what happens next?  Will the rally end and if so what will be the signal?  What will be the canary in the coal mine?

In order to predict the stock market we need to understand the basic mechanics of government.

Government in most wealthly nations can be described as a system of redistribution of resources.  A system of give and take.  As government grows, and it has grown enormously in the last 50 years, the system of giving and taking grows with it.  

The size of governments has exploded in the last 5 months.  Massive social and corporate welfare schemes have been rolled out in order to keep the level of national income steady and to bolster stock and bond markets.  Direct payments to households has had the unintended consquence of causing capital to pool in domestic deposit and current accounts.  With less opportunity to spend households are saving.  Check out the chart below.

The United States is experiencing a similar trend towards saving.  This growth in savings has coincided with a massive leap in online stock trading by retail investors. The numbers are staggering.  In the U.S. alone as many as 10 million new accounts were opened this year.  A relative newbie in this sector Robinhood opened 3 million new accounts alone.  This is a global phenomenon.

Governments attempts to maintain national income and simultaneously curb spending opportunities has created savings, some of which are being used to buy stocks.

End of Covid-19 Hysteria = End of Stock Market Rally?

Obviously Covid 19 is no more serious or deadly than the common flu.  What matters is government reaction to Covid 19.  Governments via their central banks buy publicly listed stocks directly (Japan, Switzerland) and bonds.  Governments are also funding retail stock accounts.  What happens if and when the hysteria ends?  As the economy stutters back to life will the stock market collapse?

As I said in my last commentary, we have been building a leveraged position in the S&P.  Our net premium spend is now zero.  While I would like to short the market against our calls (I am a natural bear) my view has evolved to Hysteria = Long and End Hysteria = Short.

There is no doubt in my mind that much of the voting public has an appetite for more Covid-19 hysteria.  They feel the nation is at war and that they are participants in it.  They feel useful and fulfilled.  They are playing their part, making the necessary sacrifices and virtue signalling the bejaysus out of it.  You can make a good guess of a person views on the ‘crisis’ by knowing how their bank account has been affected by it.  This is important.  It is my contention that for most voters the Covid-19 crisis is a financial win.  There is some evidence for this in soaring savings rates.  


As long as the voting public wants it, the government is going to give it to them.  As the hysteria continues the Great O’Neill is inclined to play the S&P from the long side. When the hysteria ends and we attempt to return to economic reality it may be time to sell.

return to commentaries