Downhill Run Resumes as Global Weakness Spills into U.S. Despite Calls for Stimulus

Volatility in the stock market continues as coronavirus fears escalate. Action in the futures markets point to broader indices opening lower in spite of additional fiscal stimulus.

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5 min read
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Key Takeaways

  • Ups and downs continue, with markets giving back much of yesterday’s gains
  • Treasury yields gain ground ahead of possible new debt issuance
  • Crude plunges to 17-year lows as market braces for huge supplies, little demand

(Wednesday Market Open) And so, the see-saw ride continues. Today, we’re on the side going down.

Yesterday’s calls for fiscal stimulus were welcome, but don’t necessarily stop all this from playing out and can’t fight a virus. At the end of the day, people seem to be saying that we still have the virus to deal with and it hasn’t hit maximum potential. So fears continue to deepen.

It’s also likely that the fierce selling could be a sign of some investors simply wanting cash. The fact that bonds are down this morning along with stocks might point to that. People aren’t just taking money out of stocks and putting it into bonds. They’re trying to regroup, and saying let’s have as much cash as we can in the short-term. Then maybe they’ll re-assess where they’re at.

Also, you don’t see these kinds of moves with just retail traders doing it. A lot of this is likely hedge funds, too.

After a fast ride up yesterday, everything fell apart overnight in the futures market as the gyrations continued. The market continues to seek—but not find—some sense of equilibrium. At one point, stock index futures “locked” at limit-down.

Until there’s more sign of the crisis easing, investors probably have to stay buckled in and hope for some sort of good news. Yesterday’s fiscal and monetary policy moves seemed to cheer stocks for a while. Overseas governments announced similar moves today. Despite that, markets in Asia got beaten up overnight and the selling seemed to spread into Europe and into U.S. futures trading.

Forgoing Your Fed Fix

This was supposed to be the day the Fed delivered the latest views of the economy and a decision on rates. That didn’t go as planned, with the meeting cancelled and plans already delivered. So if you wanted your Fed press conference fix, hopefully you didn’t miss it on Sunday.

The Fed’s been busy since, and the market seemed to like what it saw Tuesday morning as the central bank announced new strategies to buttress short-term lending. That came as good news to banks and small businesses, both of whom depend on easy access to quick cash.

We go into Wednesday with stocks posting two gains in the last three sessions. Still, major indices aren’t far off recent lows and haven’t posted consecutive days in the green in a month. What would it potentially take for that to happen? Maybe more of the insider buying we’ve seen in recent days, which often signals executive confidence in the long-term health of their companies.

Another thing that would be good to see is some technical indication that the market might be oversold. That could potentially come in the form of higher highs and higher lows instead of what we’ve been seeing, which are lower lows and lower highs.

And on the other side of the aisle, it would look very bearish right now if the SPX again tests and this time breaks below the December 2018 low point at around 2350. That’s definitely a level to keep in mind and seems like it might be reached today if the futures negativity spreads into the daily session.

Corporate World Delivers a Mixed Bag

Good news and bad news from the corporate world helped keep things pretty choppy much of Tuesday before that final upward race to the finish line.

First, it’s great to hear about Amazon (AMZN) planning to hire 100,000 workers. That speaks to the strength not only of one of the country’s biggest companies, but also to a U.S. consumer who hopefully remains positive even if stuck at home. No one else has announced mass hirings like this, but it looks like AMZN has a game plan to prioritize essential products. It wouldn’t be doing this if it didn’t sense consumer demand.

Another nice development was an analyst note saying Apple’s (AAPL) iPhone sales in China haven’t fallen off a ledge in the last few months. It looks like iPhone demand is holding up pretty well in China despite the virus, according to the note. The bad news from AAPL was that it’s closing all U.S. retail stores until further notice.

Also on the negative side of the ledger, Marriott (MAR) and other hotel shares got absolutely hammered Tuesday after the European Union proposed closing borders. Some companies in the industry are completely closing hotels and furloughing workers. Airline shares, especially United (UAL), also didn’t share in what was mostly a positive day on Wall Street.

It seems likely airlines and hotels could get some sort of government bailout package, but will it be enough? That’s the problem—no one knows, because no one knows how long this situation will last.

One thing to potentially look for if you’re following the market as a whole is whether some sectors start to diverge rather than everything selling off at once.

For instance, Utilities and Staples had extremely solid days Tuesday. If they can keep climbing even on days when other sectors more exposed to the virus get slammed, it would potentially be a sign that the market is moving away from this huge wave of selling that’s hit everyone the last month. That’s not to overlook the pain of investors and businesses who got beaten up in sectors like travel and retail, of course.

Banks were a sector that did comparatively well on Tuesday thanks in part to the Fed and administration’s monetary and fiscal stimulus plans. There might have been some buying the dip here, with a few of the major bank stocks trading below where they were back in the financial crisis of 2008.

The 10-year Treasury yield drove up to a finish above 1%, also perhaps helping banks.

Volatility isn’t taking a seat yet, but the Cboe Volatility Index (VIX) did ease Tuesday from Monday’s all-time high close. Now it’s roaring back.

There wasn’t any relief for crude this morning. U.S. oil prices fell below $25 a barrel early Wednesday, a 17-year low. The average U.S. pump price is now $2.23 a gallon, down 20 cents from a month ago, according to Triple-A. However, many retail stocks fell double digits again Tuesday, so evidently investors aren’t convinced lower gas prices will have Americans heading out to shop.

Technical Significance?

If the market does eventually turn a corner, the first two days of this week might be a period people end up pointing to. Tuesday’s fierce rally following Monday’s washout wasn’t unprecedented, of course. That’s the same kind of pattern investors saw last Friday following Thursday’s huge selloff.

What did stand out the first two days of this week was the S&P 500 Index (SPX) challenging but not breaking below the December 2018 low of 2350 on Monday, and then turning on the after-burners Tuesday to close above another key technical point (see chart below). The SPX finished just over the level near 2500 that lines up with a bullish monthly trendline stretching all the way back to the 2009 lows.

Also, it was technically constructive to see the Dow Jones Industrial Average ($DJI) rebound so sharply Tuesday after breaking under the psychological 20,000 mark early in the session.

It’s natural for people to hear this sort of chart detail and feel their eyes start to glaze over, because we’ve blown through one technical support level after another. As noted previously here, markets typically overshoot to both the downside and the upside. Chart points sometimes get washed away with everything else, and that could very well happen in coming days, too. No one has a crystal ball.

Having said that, investors did seem pretty happy with what they heard out of Washington on Tuesday both from the Fed and the president. Talk of a possible $1 trillion stimulus and $1,000 checks being mailed out to households can have that impact. They aren’t necessarily a panacea for the economy because no one knows how long this crisis will last or how bad it might get.

However, they do seem to be resonating with investors more than the Fed’s rate cuts. Those appeared to scare people as many wondered just how bad things might be and whether the central bank knew something the rest of us didn’t.

CHART OF THE DAY: SPX HANGING ON. From 2009, the S&P 500 Index (SPX–candlestick) has been moving along an upward sloping trendline (yellow line). The index bounced off the trendline in 2011, 2016, came close to it in 2018, and looks to be testing it now. Whether it bounces off this trendline or breaks below it remains to be seen. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

FAANG CHECK: With today marking one month since the most recent all-time high for the stock market (yep, hard to believe), it seems like a good time to check in on the FAANGs. After all, these five stocks were leaders of the parade higher that really took off in 2017, took a break in 2018, and resumed in 2019. They’re often companies investors look at for possible signals about Wall Street and investor sentiment, and they’re arguably among the most broadly held by mutual funds (perhaps none more than AAPL). So how has the last month treated them? Not well, as you might suspect, but some worse than others.

Perhaps not surprisingly, the two companies most associated with people using their products from the home—AMZN and Netflix (NFLX)—are faring better than the FAANG companies most associated with revenue from advertisers, namely Alphabet (GOOGL) and Facebook (FB). As of late Tuesday, neither AMZN nor NFLX were down as much as 20% from a month earlier. FB, however, was worst of the five at a 30% decline from mid-February. AAPL kind of held in the middle, down more than 20% but doing slightly better than the market as a whole. This could reflect hopes that AAPL has things coming back together in China, where AAPL has so much of its operations. This doesn’t mean AAPL shares are recovered—far from it. They hit new lows for the move yesterday. However, some analysts have been advising investors to buy the dip for large, well-capitalized companies, and AAPL may be getting some help from that.

OPEC’s Social Distancing Just Partly Due to Virus: The Fed isn’t the only canceled meeting this week. Anyone looking forward to an OPEC get together is going to be disappointed, too, as the oil cartel isn’t having its planned meeting today, either. Not that it would have been a very friendly affair if OPEC-cousin Russia were in the same room with Saudi Arabia.

The two countries’ representatives might not be exactly ready to shake hands, virus or no virus, after all the squabbling they’ve done the last two weeks in a fight that’s helped send crude prices to four-year lows. Both countries are gearing up to unleash a flood of crude that analysts say could be the biggest supply infusion in history. Some analysts predict crude could fall below $20 by next month when the fresh supplies start to hit, and that we might see loaded tankers cruising around with nowhere to go, kind of like back in 2008. A daily surplus of up to 10 million barrels a day (about 10% of world use) is one figure being bandied about. This is terrible news for U.S. Energy companies that isn’t likely to be offset by cheaper gas prices. Some analysts are predicting bankruptcies in the U.S. shale patch, which is bad news for workers there and the businesses their wages support.

Supply and Demand: They Work for Bonds Too: Though stocks mounted a comeback yesterday, this morning begins with a fresh search for a bottom. It might be surprising, then, to see the yield on the 10-year Treasury holding firm above 1%—well off the March 9 low below 0.5%. Why is this happening? It's good-'ol supply and demand from Econ 101 class. The precipitous fall in yield was a response to demand for the relative safety of U.S. debt. But with yesterday's calls from the Trump administration for new stimulus measures—likely in excess of $1 trillion according to media reports—the market looks to be anticipating a glut of new Treasury debt issuance. In other words, the outlook of new debt supply has come to meet, and perhaps surpass, the demand. And since bond yields move inversely to bond prices, new supply would tend to push the yield higher.    

Good Trading,
JJ
@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Ups and downs continue, with markets giving back much of yesterday’s gains
  • Treasury yields gain ground ahead of possible new debt issuance
  • Crude plunges to 17-year lows as market braces for huge supplies, little demand

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