Coronavirus Correction Nearly Reversed
It’s clear markets are looking past the coronavirus. S&P 500 rallied 1.5% on Tuesday which put it back near striking distance of the record high it hit last month. And S&P 500 is only down 0.96% from its recent peak. As expected, the virus wasn’t a lasting negative catalyst.
Airlines rallied again on Tuesday as the JETS index rose 2.84%. It’s up 3.55% in the past 2 days. Shanghai Composite was up 1.34% on Tuesday and looks to be rallying on Wednesday as well. Bad news is the coronavirus is still claiming peoples’ lives. It has killed 490 people and there are now 24,343 confirmed cases in China. However, it seems like the situation is slowly getting better as the virus’ growth rate has slowed.
It will be interesting to see how bad Chinese economic data is in January and February. Early results look terrible. From January 10th to February 4th passenger flights in China fell 12.1% yearly. On February 4th alone, the decline was 63.8%. On Monday, there were 1.6 million passenger railway trips was which was down 86.1%.
Worst of the economic effects will likely be felt in February as the government and people try to limit the spread of the virus. Markets have stopped falling because they see a scenario later this year where economic activity goes back to normal.
Tuesday Was A Strong Day
Tuesday was a great day for stocks. Markets are less worried about the coronavirus. And possibly because the botched Iowa caucus makes it more likely that Trump will win the presidency. Markets can look past Bernie winning the primary if they see Trump winning the general.
Nasdaq was up 2.1% as it was led higher by Tesla. I’ll review that more next. Tesla has rallied so much this year that it’s market cap is large enough to have a big impact on the Nasdaq. It might enter the S&P 500 later this year if it becomes consistently profitable.
Russell 2000 was up 1.5%. From peak to trough this year, the small cap index fell 5.35%. That’s because of the big decline in long bond yields. VIX fell 1.92 to 16.05. It has come close to normalizing after the minor correction in the end of January and the beginning of February. As you can see from the chart below, the up volume percentage was 84.6% which is the highest percentage since October 2019 when the market was exiting its 18 month range.
Tesla Is Hyperbolic
Every sector rose except utilities which fell 1.03% because long yields increased. 10 year yield rose 7 basis points to 1.6%. Obviously, that’s still very low. Best sectors were tech and industrials which rose 2.6% and 1.84%. Healthcare rose 1.7% and the IHF health insurance index rose 1.88%. Partial results of the Iowa caucus came out an hour after the market closed.
Biggest mover of large cap stocks was once again Tesla as the stock has gone hyperbolic. I have never seen anything like this in my life as I wasn’t following markets in the late 1990s. The chart below shows the stock price at 3:14 PM. At that point it had a relative strength index of 97, not that technicals matter at this point. The stock closed up 13.73%.
It actually fell sharply near the close. It fell 8.7% from 3:50 PM to 3:55 PM, yet still had a very strong day. The stock is up 112.05% year to date. On Monday, Panasonic posted its first profit in its battery business with Tesla. This is good fundamental news, but this hyperbolic rally still isn’t justified.
Terrible Iowa Caucus For The Democrats
A problem with the app used to count votes delayed the results of the Iowa caucus. To make matters worse, the DNC only released 62% of the results at 5PM. Then later on Tuesday night, it released 9% more of the results. Since Iowa doesn’t give out many delegates and the entire point of the election is to generate momentum, the results being delayed made the process largely pointless for campaigns.
There are a few takeaways from the news. Most importantly, this is great for President Trump who is generating momentum in the polls. As you can see from the chart below, his approval rating hit 49% which is the highest of his presidency. His odds of winning have increased. According to PredictIt, his odds of winning increased 3 points to 50%.
This election was a big loss for Biden because he probably didn’t come in the top 3 based on the first 71% of votes. He was in 4th place with 14.7% in the first round of voting and 13.2% after the 2nd round. And he will leave Iowa with 0 delegates. This election was good for Sanders and Buttigieg who are the top 2 in votes and state delegate equivalent (SDE). They both will get 10 delegates.
Buttigieg is now the leading moderate, but he might not stay in the lead if Biden does well in South Carolina. Michael Bloomberg came out of this election looking good because he looks very smart for avoiding Iowa which didn’t go smoothly for the party.
There is a debate on Friday. But I’m more focused on the one on the 19th because Bloomberg will likely be in it. Sanders should do well in the New Hampshire primary on Tuesday. He has an average lead of 7.7 points in the latest polls. If he doesn’t win by at least 5 points, some will claim it to be a disappointment.
Stocks rallied sharply on Tuesday as the fears of the economic impact of the coronavirus have abated. The selloff in the Shanghai Composite might be over. Tesla has gone hyperbolic. I see it having at least a 20% correction within the next few weeks. It might selloff on the news that the Model Y has gone on sale. That would be buying the anticipation and selling the event.
The Iowa caucus was a disaster for the Democrats. That doesn’t mean they can’t win the 2020 election. It just makes it slightly more difficult. It’s highly uncertain who the nominee will be. It could be Biden, Sanders, Buttigieg, or Bloomberg. The field expanded instead of winnowing.
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