– By Fred Dunlap –
Good evening, Everyone. I wanted to come back to you quickly, given today’s market events.
Following last week’s market collapse, stock prices ripped higher today with the Dow gaining 1294 points, a 5.09% gain. The point gain was the most ever in one trading session, adding to the string of records set last week.
But today’s record wasn’t as ignominious as the record declines of last week. It was a positive record and a relief to anyone who was anxious about losing 13% last week. When combining the late Friday 700-point rally with today’s achievement, the Dow has recovered 2000 of the points lost in the recent correction.
Is this a sign of a sustainable recovery? Or is it misleading, giving short-term hope to investors, only to break their hearts in the not too distant future?
In the 6.5 hours of trading today, the Dow rose 5.09%, the Nasdaq rose 4.49% and the S&P lifted 4.60%. All in one day…
The S&P closed at 3090, which is 235 points (8.2%) higher than where it was at 3pm on Friday. Nearly half of the losses have been recovered.
I offered in yesterday’s Newsletter (A Bit Less Murky) that last week’s downward slide might have been overdone–that a loss/cost of $4 trillion might have been a bit expensive for the limited current evidence of Coronavirus cases in the US.
In yesterday’s Newsletter we talked about the role of machine trading driving rapid price action, which contributed to the size of last week’s losses. We should give credit where credit is due–the machines were a BIG contributor to today’s gains, especially in the last 60 minutes of trading.
But it’s the way the market traded in the afternoon that causes me to pause. Not to get too wonky, but the breadth of gains today wasn’t nearly as unanimous as it historically has been on days with such strong gains. There are relatively few times that US equities go up 3+% in one trading day. But when that happens, the “up volume” usually represents 90+% of trades. Today, with a 5+% gain, “up volume” was closer to 75% of total trades. Which means that the complement of trades were selling. This signals a “less unanimous” group of investors out there, with a fairly material percentage of them NOT trusting that this recovery will last.
Why did stocks go up today?
Yes, we were oversold from last week’s carnage. Check that box.
The bounce we got today is called a Reflex Rally–think of it as a ball that bounces after being dropped from some height. Will that bounce lead to higher valuations or will it return to the floor? We’ll discuss that in a minute…
But some other stock purchasing motivations were in play today:
Central Bank easing – Surveys this morning indicated that 100% of investors polled were convinced that the Federal Reserve would drop the Fed Funds rate by 75 basis points (bps) on or before their March 18th meeting. That’s equivalent to the three rate cuts they made in all of 2019.
Subterranean Treasury Yields – the US 10-year Treasury yielded less than 1.1% today, making stock dividends that much more attractive.
Emergency G-7 Conference Call – At 7am Eastern tomorrow, the G-7 will meet to coordinate what their actions and messaging will be. Investors read that as “easier monetary policies are coming.” The G-7 includes leaders from Canada, France, Germany, Italy, Japan, United Kingdom and the United States.
Will Central Banks Accommodate the Markets?
Investors sure think they will. Investors expect 75 bps from the Fed and there’s probably a palpable level of anticipation that the G-7 meeting will result in broader global easing as well.
But many Central Bank leaders have already pledged their verbal support to markets. Just this past week they said:
- Bank of Japan (Haruhiko Kurdoa): “We will strive to provide ample liquidity.”
- European Central Bank (Christine Lagarde): “We stand ready to take appropriate and targeted measures.”
- IMF/World Bank (Kristalina Georgieva): “We will use our available instruments to the fullest extent possible.”
- Federal Reserve (Jay Powell): “We will act as appropriate to support the economy.”
That’s an impressive group of dignitaries. And they sure sound helpful. But the questions are: 1. When will they provide the help? and 2. In what way?
I think there’s a fairly large gap between what the markets expect vs. what the Central Bankers will prudently bring forward at this time. Central Bank rates are already very low–the Central Banks therefore don’t have the luxury to spend their remaining bullets (rate cuts) indiscriminately.
I think they will wait and watch the ramifications of the virus before acting. Might some accuse them of being foolish or negligent? Perhaps, but that’s what I think they will do.
Post the G-7 conference call tomorrow, there will be a public briefing–you might want to be near a TV for that.
And then there is that Technical Problem…
We talked about Technical investing and we discussed Support and Resistance levels. The problem with last week’s precipitous decline is that stock prices violated key Support levels. For reasons we discussed in When Resistance Becomes Support, those Support levels now have become Resistance levels.
The S&P 500 closed today at 3090. The next ceiling above (Resistance level) is 3126, which is the 50% recovery point (retracement) between the recent low (2855) and the all time high (3397). Why does this 50% threshold matter? It’s part of Fibonacci science. Who is Fibonacci? He’s an Italian mathematician who lived in the 12th and 13th Centuries, long before Google was invented. Am I serious? Absolutely–his mathematical concepts are at the heart of many technical trading strategies.
If you want to learn more about Fibonacci, Google him. He sounds like a pretty cool guy!
Coronavirus Update
Each day we get a mix of new information. Today’s news:
- More new confirmed cases reported in the US
- More test kits being released to local medical professionals
- A decreasing number of new cases reported in China
- A lowering of the projected mortality rate (down from 2% to 1.4%, but with the high suspicion that when the US gets a more complete grasp of the real number of contracted cases, that mortality rate might drop to 0.1 or 0.2%, making the Coronavirus equivalent to the severity of a severe year of influenza.
- A growing number of cancellations of travel and events:
- By consumers and corporations
- Hurting companies in industries of Travel and Leisure
What’s on the Horizon?
Now that the market has regained 5% of its value, should we trust today’s positive trading direction and are we headed back higher from here?
Reasons to Believe it:
- New Coronavirus cases are declining in China
- China announced the closure of one of the temporary hospitals built for Coronavirus, because no new cases had been discovered.
- Global Central Bankers have been pretty benevolent over the past couple years–“what’s another 75 bps among friends…?”
- The US economy is still strong and the US and global supply chains might return to normal in a relatively short time.
Reasons to Doubt it:
- We don’t know enough about Coronavirus (see A Bit Less Murky)
- We don’t know the potential that Coronavirus will infect people, cause them to stay out of the public or curb their spending, etc.
- We don’t know how long supply chains will be disrupted.
- Central Banks can’t afford to spend their currency (rate cuts) at this juncture
- The S&P’s 3126 Technical threshold stands right above our closing 3090 level, just one percent higher. With so many unknowns here, it’s unlikely that investors will have the conviction to push prices through that wall.
When reviewing historical trading patterns when such volatile moves have occurred (as we have seen in the last 10 days), it is common to have Relief Rallies. But they usually run out of steam and go back down to “retest the lows.”
Fibonacci would say that there’s a fairly daunting Resistance level about 1% ahead (3126), and that, given the many unknowns, we will likely revisit the 2855 low again, before making a concerted, lasting move to higher levels.
On the Way Out…
A Question from the Cheap Seats: With the true potential of Coronavirus yet to be understood, would a lowering of Fed Funds rates make you more inclined to go to a crowded rock concert next month? Or a packed arena for a big sporting event?
Sure, you might decide to go anyway, but it wouldn’t be because the Fed decided to cut rates, right?
I think rate cuts (at this juncture) would only provide a psychological positive. Sure, they might make dividend-paying stocks even more attractive. But really the value of a rate reduction would serve as validation that the Fed means what it said: “that it will act as appropriate to support the economy.” But I think they already are sincere about that…
More than monetary policy handouts, we need to dedicate maximum resources and energy to rapidly learning the range of this sickness.
Once that’s quantified and addressed, I’ll see you at the game. Save me a seat!
Stay thirsty my friends.
Freddie Deeeeeeeeeee