Another Wild Ride
Friday was the grand finale of the week and it didn’t disappoint. It was arguably the wildest ride of this correction. There were moments where it looked like stocks bottomed and moments where it looked like we were headed for new lows. It was one of the craziest days we’ve seen in stocks since the financial crisis. S&P 500 ended down 0.82%. At the trough at 10:05 AM it was down 4.1%. From that bottom to 11:45 AM, stocks rallied 3.33%. That’s a fantastic return for a month let alone less than 2 hours.
Craziest part of the day was the last half hour as it usually is. Traders realized that they didn’t want to go into the weekend without owning stocks, so they bought them heavily. Stocks even rallied after hours. In just 15 minutes the S&P 500 rallied 2.61%. The world’s largest companies traded like penny stocks. It’s tough to say why stocks rallied. There are a few possibilities.
One possibility is that investors figured the correction would end on a Monday because they rarely end on Fridays. Another possibility is traders wanted to buy ahead of a potential rate cut on the weekend which likely won’t will happen. A third potential option is traders expected good news on the coronavirus. Finally, some might think Joe Biden will get some momentum from his expected victory in South Carolina.
S&P 500 is down 12.03% since its peak last week. That’s near the average correction seen each year. This is only a big deal because of how quickly stocks fell. Suddenly the seemingly ample amount of liquidity vanished. It’s very difficult to price in a global pandemic.
However, we have the chart below which shows how stocks reacted to the Spanish Flu which killed 50 million people worldwide and 675,000 Americans from 1918 to 1919. 500 million people got the flu. That’s the worst case scenario for the coronavirus.
As the chart shows, stocks only fell 10.91% because of the Spanish flu. There was a 40% decline in shipyard activity in NYC. It killed 195,000 Americans in October 1918 alone. Coronavirus has killed 0 Americans and 2,924 people worldwide. This makes it look like stocks are overreacting since a terrible flu caused a smaller correction.
However, keep in mind that WWI ended in November 1918. This is the problem with only having 1 example to compare the coronavirus to. I don’t think a 12% decline is an overreaction because stocks were expensive beforehand. We were due for a 10% correction anyway.
Long Bond Has Gotten Out Of Hand
Neither gold, utilities, nor consumer staples benefit from a true flight to safety trade. The dollar wasn’t even the beneficiary of this trade in this correction, not that it fell much. Also, the dollar index is down less than 2% since February 20th and is up 1.66% year to date. True beneficiary is the long bond.
Buying in treasuries has gotten beyond absurd. Adecline in yields has been greater than we even thought was possible. 10 year yield and the 30 year yield are at record lows and the whole curve is below the Fed funds rate. Traders are pricing in 3+ rate cuts this year even though the Fed hasn’t guided for any yet.
As you can see from the chart below, the TLT which is a long bond ETF is the most overbought since 1998 which is when Long Term Capital Management nearly collapsed. This provides good context because many traders have gotten used to record low yields. Decline in yields is part of a trend, but the decline has recently picked up steam.
On Friday, the 10 year yield fell 10.8 basis points to 1.156%. Each new record low might be the last. There will likely be a major selloff in bonds in the next few weeks or even the next few days. Current low or one in the near future could be something we look back on a few years from now as an intermediate term bottom. 30 year yield has been making new lows for longer than the 10 year yield. It fell 12.2 basis points to 1.679%.
Review Of Friday’s Action
Nasdaq actually increased as certain pockets of the market showed signs of life. For instance, Royal Caribbean Cruises rose 4.42% during the day and 2.45% after hours. Fact that the most beaten down names caught a bid shows you that the selling pressure in the near term is likely nearly finished. At certain points this week, we actually saw the safety stocks get crushed as there was a liquidity issue. Russell 2000 fell 1.43% and the VIX was up 0.96 to 40.11. It’s way too high. It’s likely near its peak.
S&P 500 is now down 8.56% year to date. If stocks simply break out even this year, there would be solid returns in the next 10 months. NN fear and greed index fell 3 points to 10 which is extreme fear. Only 3 sectors rose. They were technology, communication services, and energy.
Most of the beaten down names did well. Energy is an example as it rose 1.25%. Exxon Mobile rose 3.19%. Worst sector was the utilities which fell 3.32%. That’s even though treasuries have rallied. That sector was up way too much.
Coronavirus is spreading outside of China rapidly. In France there were 19 new cases which brought the total to 57. There were 594 new cases in South Korea. In total, there have been 85,207 cases and 2,924 deaths. It’s all about the number of new cases outside of China.
On February 27th, the number of new cases increased from 3,333 to 4,289. On February 28th, the number increased to 5,358. That’s by far the most new cases in a day outside of China. 6.99% of cases were outside of China. This will rise above 10% next week. Good news is the death rate continued to drop as it is now at 6.9%.
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