Economics

Terrible Breadth Isn’t A Bad Sign

illiquidity

Stocks Rally Off Beaten Down Levels

S&P 500 had its 7th straight day of a 4% or greater move which is the longest streak in history. Previous record was 6 days in 1929. The market hasn’t been up on back to back days for 23 sessions which is the longest streak since the fall of 2018 which had a streak of 28 days. 

Italy announced a 90 day ban on short selling. Small caps were down in the morning, yet ended up 6.66%. It was a wild day filled with big news and massive swings in asset prices. Gold miners ETF GDX is up 34% in the past 2 days which is the largest 2 day increase since November 2018. 

It’s no surprise that markets are moving quickly because they are illiquid. The chart below shows the U.S. illiquidity ratio is near the peak during the financial crisis. That’s despite the Fed’s efforts to keep markets running smoothly.

For a while, we’ve been looking for trading to calm down and there to be modest losses until we find a bottom, but that hasn’t happened yet. This streak of 4% or greater moves will end this week. One of the biggest negatives being held over the market is whether there will be more government shutdowns where people are told to shelter in place. 

In the long run, this will be good for people as we wait for a treatment to be released and a vaccine. The former could come as early as a few months and the latter should come in 12-18 months. 

Not Amazing Breadth

The rally on Tuesday followed this bear market’s trough (so far). While the S&P 500 rose 6% and the Russell 2000 rose 6.66%, the market’s breadth wasn’t great. Under 400 S&P 500 stocks being up is bad when the index rises 6%. The chart below shows how this was one of the largest 1 day gains on one of the worst breadth readings for such a great up day. 

Signals listed below are days where the market was up more than 4% and fewer than 70% of NYSE issues were up. There have only been 5 other instances of this occurring since 1962, but the results are surprisingly positive. In the following month, the median return is 5% with all examples showing gains.

President Trump Is Looking For $1 Trillion

Fiscal stimulus is being debated in the Senate. The White House stated the package could include $500 to $550 billion in direct payments or tax cuts to consumers. Lately, we’ve been hearing about a check being sent out. Potentially, $250 billion of this money could go towards direct payments. There will also be $200 billion to $300 billion in small business assistance and $50 billion to $100 billion in airline industry relief. 

If the money is tight because so many industries are looking for some, we could see equity holders wiped out in these bailouts. We’ve seen a big political backlash towards helping the airlines because they bought back so much stock in the past few years. I’m not here to pass judgement, but I think that criticism limits the possibility of shareholders benefitting from government assistance. 

Coronavirus Update

COVID-19 is going to cause many restaurants to go out of business in the next few weeks if government help doesn’t come soon. According to OpenTable, yearly bookings were down 56% on March 16th after falling 48% on the 15th. The situation has become dire since March 9th. These firms can’t hemorrhage cash much longer. If they know that results won’t get better in the next month, it’s smart to close. 

One of the best practices to help limit the spread of COVID-19 is a lot of testing. The testing in America got off to a terrible start earlier this month, but has since picked up speed. There have now been 58,590 tests with 5,985 positives and 50,659 negatives. This isn’t enough, but the ramp will continue. 

It’s possible that as testing becomes more common, the economy can slowly go back to normal. A base case scenario is the entire economy is shuttered for 8 weeks. We are in week one of that. The entire shuttering isn’t complete, but it’s close. 

Best news on this situation is that the number of new cases in Italy is stabilizing. Number of new cases on the 17th rose from 3,233 to 3,526, but that’s still lower than the peak of 3,590 on the 15th. There were 349 new deaths which is down 4 from the day before and below the peak of 368. 

Unfortunately, it looks like Italy is ground zero for the coronavirus as 2,503 people have died. It’s on pace to surpass the number of deaths in China, which is 3,237, by the end of the week. 

The situation in America got dramatically worse on the 17th, yet stocks rose because the worst case scenario is being priced in. That doesn’t mean this is the absolute bottom, but we are close. COVID-19 is likely going to increase rapidly in America for the next 2 weeks as testing increases. 

On the 17th, the number of new cases rose from 983 to 1,748. There is at least one case in every state now. Number of new deaths rose from 18 to 23. New York is in the worst shape as it has 1,708 cases and there have been 16 deaths. There are 1,012 cases in Washington with 55 deaths. 

Conclusion

A recession has been priced in. This is an acute shock to the system. Best case scenario is the treatment being tested is successful and starts being given to patients in the next few months. Base case is the number of new cases is limited, but some social distancing is needed until the vaccine comes in 12-18 months. 

Worst case is the number of small businesses that are failing piles up to the point that even a cure and a fiscal stimulus doesn’t help save the economy from a deep recession. Reality is giving everyone $1,000 and small businesses free lines of credit won’t be enough for many firms.

The post Terrible Breadth Isn’t A Bad Sign appeared first on Theo Trade.

Source: First Rebuttal

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