Volatility with a Capital "V:" Head-Spinning Week Ends With Stocks, Yields Plunging

The last minutes of trading Friday seemed to offer some hope after a brutal week. While it’s still the worst week since 2008, the Nasdaq managed a slight gain Friday as buying interest showed up.

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5 min read
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Key Takeaways

  • More pain for investors as stocks finish the week with more sharp losses, but Nasdaq up

  • Stay tuned this weekend as China data looms and virus spread monitored

  • Fed says it’s ready to take action, but investors appear unimpressed

(Friday Market Close) If you didn’t have whiplash going into Friday’s session, you almost definitely do now.

The brutal sell-off that made this the worst week since 2008 ended with some green shoots clawing through the rubble as things turned around sharply in the last half hour of the day. The Nasdaq (COMP) actually posted a positive close. It was the first time all week any of the major indices closed higher, even if it was only fractional.

The SPX climbed solidly back above 2900 and finished nearly 100 points above its session low, though still down for the day. The Dow Jones Industrial Average ($DJI), which had been down 1,000 points more than once during the session, clawed back to a less than 400-point decline by the end of the session. The way this week went, it feels like a moral victory.

Two things happened Friday afternoon. First, the Fed said it’s ready to do what it has to in order to address the crisis. Second, you had a situation where people didn’t necessarily want to take a big risk going into the weekend and a lot of people who had shorted the market needed to cover. Once they started, they couldn’t stop.

Some of the recent market “darlings” caught a bid at the end of the day. These included Microsoft (MSFT), Disney (DIS), some of the microchip stocks, Alphabet (GOOGL), and Tesla (TSLA). All of these came back pretty good.

This isn’t to say that stocks can’t fall further. It also doesn’t suggest that anyone should jump in and just scoop things up without thinking. Only that this brutal week has in some sense gotten things back closer to fair market value from levels a few weeks ago that looked overbought to many analysts.

Anyone who does decide to venture back, whether it’s to buy or sell, should consider making trades only in small increments. This volatility doesn’t look like it’s going to slow down anytime soon, and the gyrations this week that helped carry the Cboe Volatility Index (VIX) approaching 50 at its early highs Friday from lows of 14 earlier this month could continue.

VIX, along with bonds and gold, is among the “three horsemen of risk,” and two of the three (VIX) and bonds, have been racing all week. Gold has been up and down, and even had a brief selloff Friday. It’s likely to be extremely volatile next week with VIX still above 40 and bonds finishing strong. Some of the comeback late Friday might have reflected gold selling off, but gold has had a great run.

More All-Time Lows for Yields

Getting back to fixed income, the 10-year Treasury yield continues to wilt, falling to new record lows below 1.14% Friday. If the bond market doesn’t eventually break, it’s hard to see much chance for a recovery rally anytime in the near term. For that to happen, more people would likely need to stop putting their money in so called “safe haven” assets and start putting more into stocks. That’s not really happening, with 94% of stock volume early Friday being on the sell-side of the ledger.

The problem is, every time anything has shown life lately, sellers came back in to hammer it down. That kind of action day after day can leave a bruise on investor psychology that takes a while to heal. If your hand was burned when you grabbed the pot handle, you’re less likely to approach it again.

Between Dec. 24, 2018 and last week, the S&P 500 Index (SPX) rolled up gains of 44%. Those gains took 60 weeks to accumulate. Now, poof! In one week, nearly 50% of them are gone. The market is back to levels last seen five months ago in early October, and every major technical support level got shredded.

That said, it was interesting to see the SPX unable to dig much more of a hole after briefly slipping below 2873, which marks the 50% retracement level of the 14-month rally. Still, it’s hard to put much faith into any technical level holding ground, the way things have gone lately. Next week could get better, but nothing is stopping things from getting worse, either. 

Weekend Isn’t a Respite

People are probably looking forward to the weekend for a little rest from the constant jackhammering of falling stock prices. However, it’s not going to be one of those weekends where you necessarily can put your feet up and forget about the markets. There’s a lot that could happen between now and Monday’s opening bell.

Though it has a chance of ruining your Sunday dinner the way things have been going, this is one Sunday night where maybe it’s worth a little indigestion to watch how things start playing out both in U.S. futures and in Asian markets. At least it won’t interrupt anyone’s football game.

In addition, China is scheduled to report its PMI numbers, which might offer a real glimpse as to how the virus has impacted industrial production and supply chains. If consensus estimates are correct—a drop to 45 from the current 50—China's manufacturing sector contracted at the fastest pace since the 2008–09 crisis. All of this could play into Sunday night’s trading. 

Just because it’s the weekend doesn’t mean people won’t hear rumors about the virus, so be careful. At times like these, it’s important for investors to sort the wheat from the chaff and make sure they only move ahead with factual information. Check where it’s coming from, and do your homework before making any trades based on the news.

Rate Cut(s): What a Difference a Week Makes

It’s no longer a matter of if, only a matter of when the Fed will start cutting rates, if you take the futures market’s word. This marks a major shift in expectations compared to a week ago. Back then, the futures market had priced in about a 90% chance that the Fed would hold the line on the Fed funds rate target at its March 18 meeting. 

Now, there's much less chance of that. As of Friday afternoon, odds of a rate cut by the end of the next Fed meeting March 18 stood at 100%, with about a 50% chance of a 25- or 50-basis-point cut, according to CME Group futures. 

Fed Chairman Jerome Powell said Friday afternoon that the Fed is prepared to cut rates if needed. The question is how the Fed will determine that “need.” The market initially cut losses after Powell’s words but, consistent with other comments from officials this week, the markets quickly resumed the downward path. 

Goldman Sachs (GS) said it sees three rate cuts from March through June to combat the negative economic impact from the coronavirus, CNBC reported. “The committee will probably be reluctant to disappoint market expectations for substantial rate cuts for fear of tightening financial conditions further,” CNBC quoted Jan Hatzius, Goldman’s chief U.S. economist, as saying.

Would a Rate Cut Matter?

Still, a lot of people continue to debate if rate cuts will change anything beyond maybe market psychology. After all, if people are scared to travel, a rate cut isn’t going to make them buy a plane ticket. If companies have their supply chains frozen by the virus, a rate cut won’t necessarily encourage them to expand those supply chains. 

Also, some economists worry that a Fed cut would risk giving investors a false sense of security that could cause them to bid up markets before the full extent of the virus impact becomes clear. As an investor, you might want to consider a cautious approach, perhaps waiting until earnings season starts in April to get a better sense of the crisis impact on companies’ Q1 results and how much they’re going to shave their forecasts. 

The other worry about rate cuts is that the Fed is starting from a low base, where the Fed funds rate sits between 1.5% and 1.75% after three cuts last year. As bad as things seem, the economy hasn’t entered a recession yet as far as anyone knows, and the Fed probably was hoping to hold rates at current levels for longer until the economy really needed a boost. 

CHART OF THE DAY: NDX BOUNCES OFF SUPPORT. The Nasdaq-100 (NDX–candlestick) seems to be holding its 200-day moving average (200 MA–blue line) relatively well. Today’s low was just below 8134, which is just around its 200 MA level. NDX bounced off this support level and ended up closing in positive territory at the close. Data source: NASDAQ. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

More Green Shoots? Yesterday we discussed some “green shoots” that seemed to be emerging. Then the market got crunched again. Still, a few more signs of optimism occurred Friday, including what we mentioned above about the COMP actually climbing briefly above the flat line. One thing that was interesting was some cruise line stocks rising. Royal Caribbean Cruises (RCL) rose 3% in a sign that maybe some investors are starting to think travel and leisure stocks have possibly gotten down to more attractive levels. They’ve taken a beating ever since the virus news hit back in January. Another positive sign is more technical: About 98% of SPX stocks are now below their 50-day moving average. In December 2018 at the lows, the percentage was around 98.5%, so it’s possible that could be a signal of the market finally looking oversold.

Yes; The Fed Can Cut Rates Between Meetings: One more reminder about rate cuts: The Fed can change its policy anytime; it doesn't need to wait until its March meeting—still three weeks away. It's been a while since the Fed last made a so-called "intra-meeting" policy change—Jan. 2008 to be exact—the front end of what turned out to be a global financial crisis. Later that year the Fed again cut rates in between its regularly scheduled meetings, during an emergency meeting. That cut was made in coordination with similar cuts from other central banks. 

Why the history lesson? It’s a reminder to be vigilant after this crazy week. Already a couple Fed governors, such as St. Louis Fed president James Bullard, have laid out scenarios under which they would consider rate cuts sooner rather than later. This isn’t to say we’re headed for a rate cut before March 18, only that it wouldn’t be without precedent.

Take a Guess: On the subject of earnings, what Marriott (MAR) did yesterday might be a script some other companies decide to follow. It seemed to work well for MAR, whose shares climbed afterward. The company said basically it can’t predict the impact of coronavirus, and offered Wall Street analysts to fill in their own estimates for that metric. That put things in analysts’ hands, and it appeared to work. It’s also refreshing to see MAR and other companies simply admitting what we already know: It’s way too early to predict how the virus might hurt anyone’s financial outlook. Companies can only try to do their best to play through. That’s why it might be tough to figure out where the market will bottom. As we’ve noted, if you don’t know the “E” in price-to-earnings, it’s hard to figure out the “P.” That said, valuations have come down this week to levels that some analysts say are closer to “fair value,” so that might be one reason some buying interest appeared to re-emerge Friday.

Good Trading,

JJ

@TDAJJKinahan

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

  • More pain for investors as stocks finish the week with more sharp losses, but Nasdaq up

  • Stay tuned this weekend as China data looms and virus spread monitored

  • Fed says it’s ready to take action, but investors appear unimpressed

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