Awe Inspiring Decline (Could Be Time To Buy)
It may sound crazy, but when everything that can go wrong is going wrong and when it seems like there is no light at the end of the tunnel, being optimistic is the best bet. As you can see from the chart below, the S&P 500 had its 3rd worst day ever on Monday. It was a true Black Monday as the market fell 11.98%. This was the 4th worst Dow percentage drop ever as it fell 12.93%.
December 1914, October 1929, and October 1987 were worse. This is only the 2nd time in history that the Dow changed 9% or more 3 straight days. Another time was October 1929. This is also the first time since the Great Depression that the market has had 6 straight 4% moves. Markets are acting like a Depression is coming in terms of the speed of the decline. Total decline is near that of an average bear market.
This decline makes many more bullish on stocks. There are 3 potential catalysts for higher stocks: lower new COVID-19 cases, lower stock prices, and a fiscal stimulus. We could hit a triple as all 3 might come through over the next few weeks. Let’s look at how oversold the market is, some of the negative prognostications, and the latest on the coronavirus. When you have a market almost fully pricing in a recession, the risk is priced in. Upside is being missed now.
Stocks Crater, Becoming Stupid Oversold
VIX rose 24.86 to 82.69 which is higher than any close during the financial crisis. Peak in November 2008 was 80.86. Although the VIX didn’t exist in 1987, there were calculations to show what it would have traded at in the past. It would have gone above 150 in 1987. This situation is like if stocks crashed like they did in 1987 during 9-11. That’s how bad it has been.
We will have a short, terrible recession, but a ‘V shaped’ recovery. According to Pantheon Macro, there will be a 20% decline in discretionary spending in in Q2 which is enough to subtract 8 points off GDP growth alone. This is what I mean by investors expecting a depression. Negativity is out of control.
CNN fear and greed index fell 2 points to 3 which is extreme fear. It will be interesting to see how high the percentage of bears spikes in the AAII sentiment survey which is released on Thursday. For a more up to date reading of sentiment, look no further than the percentage of stocks that are above their 50 and 200 day moving averages.
Only 1.8% of S&P 500 stocks are above their 50 day moving average. That percentage troughed at 6.2% in the Q4 2018 bear market. It troughed at 0.6% in October 2008. Many investors only follow this indicator at extreme moments like now.
As you can see from the chart below, only 4.21% of S&P 500 stocks are above their 200 day moving average. If you bought stocks when this percentage hit 25, you would have lost a lot of money recently. However, this only makes now an even better time to buy. If you’re curious, the percentage of Nasdaq stocks below their 200 day moving average is 7.01% which is very close to the 2008 bottom of 5.23%.
Industries That Have Been Crushed
XHB home builder index fell 15.5% on Monday. Its worse decline during the housing crisis was 12%. This situation will be much easier to recover from than the 2000s. Housing market was flying before this negative catalyst. Rates are still low enough to entice buyers. There will be pent up demand in the 2nd half of the year and into 2021.
Testing for a vaccine for COVD-19 started on humans. It’s estimated a vaccine will take 12-18 months to be developed. Worst case scenario is it takes until the summer of 2021 to get this under control.
The chart below lists some other industries that have been hit hard. Restaurants and leisure is down 41%. Bookings are down over 30%. Many cities have made it illegal to dine in; you must take out or get delivery. Airlines are down 55%. They want a $50 billion bailout. Personally, I don’t think the equity holders will get the benefit of the doubt in such a bailout. Finally, hotel resorts & cruise lines are down 55%. Cruise lines might also get a bailout.
Latest On COVID-19
On a rate of change basis, growth in new COVID-19 cases in Italy is near zero. On March 14, 15th, and 16th, the numbers of new cases were 3,497; 3,590; and 3,233. The quarantines have been effective which is important because the Italian hospital system is already past its brink.
There were 349 deaths on the 16th which was down from 368 the day before. Latter was the highest ever. Deaths should decelerate as the number of new cases flatlines or even falls.
Italy is like America a couple weeks in the future, which means America is in for terrible results in the near term, but an improved situation in the next few weeks. There were 983 new cases on the 16th which was up from 737 the day before. As the number of tests increases, the number of new cases will increase. Testing is finally starting to get going after a long delay. There will be drive thru testing centers set up in the next week.
Number of deaths spiked from 11 to 18. There is little doubt the number of deaths will increase in the next 2 weeks. But it’s possible it peaks at a lower rate than Italy because America is a younger country. Let’s hold out hope that the warm weather limits the speed at which COVID-19 spreads. Being 2 weeks behind Italy means we are 2 weeks closer to warm weather. First day of spring is on Thursday.
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