| TAOST Wrap Week Ended Friday 28 February 2020 |
| Just think... "The best time to be a short-term trader is when there's incredible volatility. Ask the 'long-term' folks when it's best to be them..."
-- The Trader |
| | Greetings Traders:
This week was one of the worst in market history.
Stocks erased several months of gains as investors fled risk assets in droves because of the spread of COVID-19 outside mainland China. Treasuries benefited the most from the risk-off shift, with the 10-year and 30-year yields both hitting record lows (see below), driving the price of Treasuries significantly higher.
While all key sectors closed the brutal week in the red, energy stocks were particularly weak, as the price of crude oil plummeted to a one-year low, and the outlook for global trade, tourism, and the auto industry deteriorated.
Late on Friday The Lone Banker (Fed Chairman Powell) rode to the rescue saying that the fed stood ready to act as appropriate. Futures markets have gone from virtually no chance of a rate cut at the Fed’s next policy meeting to a 78% likelihood in April and a 58% chance that the Fed cuts rates at least three times this year. The markets are also pricing in one rate cut each by the European Central Bank and Bank of England this year. Now last I checked, on his list of skills, Jerome Powell failed to mention the ability to cure infectious disease. Even so, price spiked into the end of the day mitigating Friday's damages a bit.
If you don't hear it anywhere else, the fed can't do anything to stop the spread of COVID-19... and that includes rate cuts.
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| Select Index, ETF & Stock Results From Friday 28 February |
| | | So Why All The Insanity?
S&P 500 -11.5%, Nasdaq -10.5% DJIA -12%
As you likely know, markets hate one thing above all else and that's uncertainty. It can handle ‘known’ unknowns but has a very difficult time with the ‘unknown’ unknowns. Up until this point, the coronavirus was thought t o be a somewhat controlled issue, with a majority of the cases being concentrated in the Chinese region of Wuhan. The thought was that this would cause some disruption in manufacturing, supply-chain management, etc. but it could be quantified and, more important, managed.
Now with a surge of cases outside of China, the whole thing has moved into ‘unknown’ unknown territory. The virus has now been identified in over 30 countries, with over 85,000 confirmed cases and more than 2,900 deaths. South Korea’s count has risen above 2,300, Italy’s is now over 650 and the only western European countries without confirmed cases are Portugal and Ireland. Sub-Saharan Africa also now has its first case which is particularly worrisome given the poor state of medical care in the region. Moody’s Analytics believes the odds of the outbreak turning into a pandemic has now doubled to 40% (from 20%).
Globalization has interconnected the world in complicated and sometimes unpredictable ways especially when it comes to Chinese consumption and production power. In times like these, the dependency on China’s low cost of manufacturing can really cripple global output in a major way. Officials and economists are warning that an extended Chinese shutdown could cost the world up to $1 trillion (in lost output).
In the U.S., the consumer has held up the economy as business investment turned negative and manufacturing fell into a recession. Now the consumer is at risk as well. Consumer spending accounts for nearly two-thirds of U.S. GDP and the growing outbreak has investors on high alert. Corporate warnings are not helping sentiment either. AB InBev announced it lost $170M in profits during the first two months of 2020 because of the coronavirus, Microsoft joined Apple, HP, PayPal and Mastercard in saying it would miss guidance for the current quarter. And the travel and leisure industry is facing one of its biggest obstacles to business with warnings pretty much across the board from major hotel chains, airlines and booking agents.
Goldman Sachs’ chief U.S. equity strategist David Kostin warned on Thursday that he now expects U.S. companies to “generate NO earnings growth in 2020” and that “a more severe pandemic could lead to a more prolonged disruption and a U.S. recession.” Bank of America cut its global growth forecast to 2.8% (from 3.2%), the lowest reading since 2009 and Credit Suisse lowered its global growth projection to 2.2% - below the 2.5% growth rate the IMF set as the threshold for global recession.
The key economic releases leaned bullish yet again, and even though we had a few negative surprises, the overall picture does not yet reflect the impact of the outbreak. The housing market was very strong in January, with the Case-Shiller Housing Price Index, new home sales, and pending home sales all beating expectations even before this month’s decline in mortgage rates. The manufacturing sector continues to send conflicting signals because while durable goods orders were higher-than-expected, the Richmond Manufacturing Index missed the consensus estimate by a mile. The CB Consumer Confidence number was slightly lower-than-expected as well, and analysts fear that the coronavirus-related worries might have a negative impact on the consumer economy in coming months.
The technical picture deteriorated due to this week’s rout, and especially the relatively weak Dow is in trouble after losing over 3,000 points in a matter of days and entering correction territory together with the other benchmarks. The S&P 500, the Nasdaq, and the Dow are now all well below their 50-day moving averages and apart from the relatively strong tech benchmark, their 200-day moving averages as well. Small-caps also fell sharply together with the broader market, following two encouraging weeks, and the Russell 2000 closed well below both of its moving averages. The Volatility Index (VIX) almost tripled this week, to nearly 50, reaching the levels of the "volatility apocalypse" in February 2018, and the "fear gauge" closed the week near its highs on Friday.
Short interest spiked higher for the second week in a row, and yet again, the industries most-exposed to the outbreak registered the most significant increase in shorting/hedging activity, with the most-shorted issues performing in-line with the broader market.
The first week of March is still expected to be all about the coronavirus epidemic on Wall Street, and wild swings will likely remain the norm due to the high level of economic uncertainty. We will still have a slew of crucial economic releases coming out, starting with the ISM manufacturing PMI on Monday. The ADP payrolls number will be out on Wednesday, together with the ISM non-manufacturing PMI, while the week will end with OPEC’s meeting and the government jobs report on Thursday and Friday, respectively.
Stay tuned...
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| | The S&P500 suffered a pretty significant drop and fell right back into what amounts to support.
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| | CNN Investor Sentiment [Fear & Greed Index] When you reach this kind of extreme this quickly, expect a significant snap back at some point. |
| | Fear & Greed Over Time Just another way of looking at the Fear & Greed information. |
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| | | - The first known death in the U.S. from the coronavirus was reported in Kirkland, Washington, near Seattle. The director of the CDC said there was not evidence that the person had traveled or had contact with someone known to have the virus, adding to the growing signs that the virus might be spreading in the U.S. CDC officials said they now expect a wider spread of the coronavirus in the U.S. and are preparing for a potential pandemic, though they remain unsure about how severe the threat could be.
- Moody's, the credit ratings agency, lowered its estimate for 2020 auto sales worldwide, citing coronavirus.
- Senators Bernie Sanders (D-VT) and Chris Van Hollen (D-MD) today introduced legislation that would tax non-qualified stock options at vesting, rather than at exercise, for employees making at least $130,000 per year. We're sure this will go exactly nowhere, though Silicon Valley is unsurprisingly upset by the idea that employees should pay tax on shares that might never be worth anything. And this is why Democrats will struggle to retake the White House.
- The U.S. signed a deal with the Taliban on Saturday that laid out a timetable for the final withdrawal of troops from Afghanistan, setting the stage to end America’s longest war. And laying the groundwork for the next stage of the Taliban. A really stupid idea.
- 45 has secured a $3 billion sale of military equipment to India, in an apparent effort to counter China's weight in the region. 45 also said the U.S. and India were making "tremendous progress" on a trade deal, and indicated that he is pressuring Indian Prime Minister Narendra Modi to follow the U.S. in banning Huawei from its 5G networks. 45 also said coronavirus is a hoax.
- U.S. new-home sales in January rose to the highest level in more than a decade, the latest dose of positive news for the housing market and broader economy. Newly built single-family home sales reached an annual pace of 778,000 at the start of the year, the highest level since July 2007
- The U.S. Air Force, SpaceX and the newly created U.S. Space Force are teaming up for a "massive" live fire exercise in April that will conduct war games to practice intercepting an enemy missile and a drone. The test will also include submarines, battleships, and space-based weapons. While SpaceX has worked with the military before, sending up the top-secret Zuma spacecraft in 2018, its eventual Starlink constellation of more than 40,000 satellites (a division the company is thinking of taking public) is being viewed as a strategic asset.
- Privately operated internet platforms are free to censor content, the Ninth U.S. Circuit Court of Appeals ruled unanimously—the most emphatic rejection yet of the argument that YouTube, Twitter, Facebook and other giant platforms are bound by the First Amendment.
- Streaming accounted for 80% of recorded-music sales in 2019, marking the industry's fourth consecutive year of growth, according to a report from the Recording Industry Association of America. In fact, with revenue of $8.8B in 2019, streaming alone was larger than the entire U.S. recorded-music market in 2017.
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| TNX - 10 Year Note Interest Rate |
| As noted above, US interest rates cracked all time lows.
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| | GLD - Gold Trust Gold Shares |
| Gold is behaving rather oddly in light of what's going on in the broader equity market.
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| | | Bitcoin remains contained by the pattern. I'd wait for a break outside the pattern before looking for a trade setup.
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| | JNK - High Yield [Junk] Bond ETF |
| The high yield debt etf failed at resistance again. Longs shouldn't be considered unless price can clear resistance.
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| | BRN - Brent Crude Oil Futures |
| Crude is failing at support of this long running Triangle Pattern.
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| | VIX - S&P 500 Volatility Index |
| | History suggests this level of volatility will provide a good long trade entry. |
| | | Below you'll find stock news and the associated charts. |
| | Lyft has acquired a digital advertising startup, Halo Cars, the company confirmed Friday. Halo Cars allows drivers to make extra money by displaying digital advertising on top of their vehicles, much like a taxi cab. Meanwhile, the stock made new all time lows.
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| | The Walt Disney Co. [DIS] |
| Robert Iger stepped aside as chief executive of Disney. He will, however, retain significant power over the company. DIS dropped like other stocks last week... it's cleanly inside a support zone.
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| | | Nokia finished the session 6.1% higher on Wednesday following reports that the company was exploring strategic options, though sources flagged by Reuters denied there was any truth to the rumors. According to Bloomberg, the firm hired advisers to explore a potential asset sale or combination, and even speculated about the prospect of a merger between it and Ericsson. The support line looks like only a matter of time away.
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| | | Panasonic is withdrawing from Tesla’s New York-based Gigafactory.Tesla said Panasonic’s withdrawal has “no bearing” on Tesla’s current operations at its solar cell production facility. This comes as Tesla ends its exclusive relationship with Panasonic for both electric vehicle batteries and solar cells in the U.S. and globally. Tesla has signed battery deals with CATL, LG Chem, and other providers, as it also looks to produce its batteries in-house.
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| | | Beyond Meat sandwich, which will be topped with cheddar cheese and egg on an artisanal bun, will be available at Starbucks' nearly 1,200 coffee shops across Canada on March 3. Agricultural giant Cargill, one the world's largest privately held companies, is launching plant-based hamburger patties and ground "fake meat" products in April. Competitors like Beyond Meat, Impossible Foods, Tyson Foods and Nestle are watching moves into the sector.
The stock sure doesn't look like it's about to get a big additional outlet.
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| | Twitter, Inc. [TWTR] Activist investor Elliott Management Corp. has taken a sizable stake in Twitter and plans to push for changes, including replacing cofounder and CEO Jack Dorsey, according to Bloomberg. Price looks set to fall further notwithstanding having a fan in the Twitter Gangsta In Chief.
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| | | | | Price broke the rising trendline signaling what might be an end to the run higher. |
| | | With the opening of its first large-format cashier-less grocery store in Seattle this week, Amazon is on its way to further expanding its physical footprint across the U.S.
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| | | Apple has disabled the IOS application of Clearview AI — the facial recognition company that claims to have amassed a database of billions of photos and has worked with thousands of organizations around the world — after BuzzFeed determined the startup had been violating the iPhone maker’s rules around app distribution.
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| | | | Perhaps coronavirus is a boon to the stock. |
| | | Price dropped right to support and bounced. Next week should be interesting.
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| | | Select Economic Announcements: |
| | | As always, make up your own mind and, more important, minimize your risk no matter what you do.
KIS,
The Trader
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