Another Big Down Day
S&P 500 fell 3.39% on Thursday as volatility continued to wreak havoc on Wall Street. VIX rose to 7.63 points 39.62 as it is closing it on its high last week. Now, the market will likely test its correction low in the next couple days. But if you have a time horizon of more than 1 year, this is a great time to buy stocks. It seems like whenever the number of cases outside of China increases, stocks fall and when cases fall, stocks rise.
With the market falling sharply, it’s only up 2.09% from its correction low. Once the S&P 500 makes a new low, there will be panic. That’s a great time to buy the stocks on your watchlist that you’d like if they fell more. Personally, Mastercard, Facebook, and Chevron are on my watchlist.
S&P 500 is now down 6.4% year to date. It’s tough to make predictions for the year end because if the coronavirus comes back this fall, all bets are off. The market could easily be down 10% this year. My best guess is there will be a 3% gain which is close to a 10% rally in the next 10 months.
2nd Biggest Swings Since 2008
CNN fear and greed index fell 6 points to 9 which is extreme fear. That’s a new low for this correction. This is a great buy signal. But we could see it fall a couple more points before bottoming. AAII investor sentiment survey showed the percentage of bulls rose 8.3% to 38.7% which is 0.7% above average. Percentage of bears rose 0.5% to 39.6% which is 8.1% above average. What an odd situation!
Volatility has caused more people to be bullish and bearish. Everyone has an opinion. These big moves aren’t causing people to be cautious. Percentage of neutral investors fell 8.8 points to 21.6% which is 9.9% below average. On the other hand, the NAAIM Exposure index had the largest 2 week decline since 2008. The index undercut its December 2018 lows and is now the lowest since January 2016.
As you can see from the chart below, the 10 day average daily move is near 3%. Average daily move has only been this high once since this expansion started.
Review Of Thursday’s Selloff
Nasdaq fell 3.1% and the Russell 2000 fell 3.42%. As you can see from the chart below, China has been outperforming by such a large margin in the past few weeks that it went from 8% of the world’s stock market to 10%. It is up 19% year to date.
That’s because people feel the worst is over in China. It’s tough to say because while the number of cases in China is barely rising, they might start increasing again if the Chinese economy fully reopens. Personally, I’d rather own the American market now.
Every single sector fell on Thursday. Worst 2 sectors were the financials and the industrials which fell 4.88% and 4.96%. Banks obviously fell because yields have been falling. Best sector was the utilities which only fell 1.63%. Utilities are outperforming because of falling rates.
As you can see from the chart below, the St. Louis Financial conditions index had its biggest weekly spike since the financial crisis. It’s the highest since October 2019 which is another way to say it is still very low. This indicates a recession isn’t close. Many investors think the stock market would need to fall 20% in total for it to suggest worry.
With the added financial stress comes the expectation of more rate cuts. Fed will likely cut the Fed funds rate to 0% this year. There is currently a 100% chance the Fed cuts rates 50 basis points on March 18th. There is a 21.7% chance the Fed cuts rates 75 basis points.
If the stock market hits a new correction low, the odds of a 75 basis point cut will get near 50%. I can’t believe I’m writing this but the 10 year yield could fall to negative next week if it continues on its latest pace. It fell 10 basis points on Thursday evening to just 81 basis points.
Obviously, this is a record low. The curve is mildly inverted only because the Fed funds rate is too high. When the Fed cuts rates 50 basis points on March 18th, it won’t be inverted. It will just be very flat.
Number of new cases outside of China jumped. They were up from 2,157 to 2,956. I strongly believe the number of cases is being undercounted in America because of the limited number of testing supplies. There are currently 226 total cases in America and 13 deaths. There are likely thousands of people that have the virus, but just aren’t being tested for it. Countries outside of China now represent 18.16% of the cases. This number will get above 20% this week.
There are 98,424 cases globally. That will hit above 100,000 on March 6th which will generate scary headlines which will cause consumers to go out less. March retail sales report is likely going to be hit hard. University of Michigan consumer sentiment survey may fall sharply.
Over 50% of respondents will mention the virus as it is all over the news. The pie chart below shows the shares of private sector employment by industry. About 25% of it is social consumption which will be hurt badly by the virus. 10% is related to the supply chain and 18.9% is related to education and health services. It’s doubtful that education and healthcare will see job losses.
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