"It doesn't make any sense"

A quick fact check:

• The coronavirus is negatively impacting demand and supply chains (see Apple)
• It has brought the world's second largest economy (with total debt to GDP >300%) to a virtual standstill
• The world's third largest economy just printed -6.3% GDP, BEFORE the coronavirus
• The fourth largest economy printed 0.4% GDP and 45.3 manufacturing PMI, again BEFORE coronavirus
• Shipping rates are collapsing in evidence of slowing global trade
• The 30y bond yield is < 2% and the 10y/3mth yield curve is inverted (again)
• And...US stocks are at all-time highs

"It just doesn't make any sense!"

That's been my reaction to these facts. And it seems to be the consensus reaction across the market.

But what does it really mean when somebody says "It doesn't make any sense that stocks keep rallying." "It doesn't make sense that stocks are at all time highs"?

If everybody agrees that it doesn't make any sense...what does that tell you?

Remember that humans will always try to rationalize their behavior.

So when somebody says that stocks trading at all-time highs doesn't make any sense, it almost certainly means they are not positioned for the rally. They are underweight, underexposed, or sitting on cash that has yet been deployed in equities. They are talking their book. They want stock prices to fall. I have been quietly praying for a pullback for the past month myself!

If an investor had all the equity exposure they wanted, equities trading at all-time highs would make sense to them. They would have great counterarguments to the points I have raised above. Indeed they would need them in order to rationalize their behavior.

When the majority of people think that a move in the market doesn’t make sense, that move is likely to continue for a while longer. The market will always try its best to frustrate the majority. Pullbacks rarely happen when everybody wants and expects one.

The current market environment reminds me a little bit of 1999. We are nowhere near as bubbly (yet!) The key similarity is that news flow doesn’t matter so much right now, it’s all about money flow.

Supply and demand is driving stock prices, not earnings.

Cheap money, share buybacks, shrinking share float, don’t fight the Fed.

Governments and central banks globally are doing what they can to keep stocks propped up.

And if you're the CIO of a mutual fund, you have to buy Apple and Microsoft and Google and Amazon today...or risk under-performing an ETF. Coronavirus be damned.

I know this party can’t go on forever, but I don’t want to leave the part too early either.

This is why I stay long the market, but remain hedged. I don’t know how much higher this market can go - possibly a lot - and I don't want to fight the trend. But I don’t want to wake up one morning to a disaster either.

The major stock market indices do look stretched to the upside. Technicals and internals both argue for a pullback. This is why I have hedges in place. But the uptrend is strong and every dip is smothered with buying, which is why I remain long.