“Time is your friend; impulse is your enemy.” – John Bogle
Sometimes it’s good to look back, revisit what has just occurred, and possibly learn something from the events. On February 29th, the mindset that was being put in place by the frantic media when discussing the global health crisis:
“We are on the verge of a deadly global pandemic”.
From there the perceived worst-case scenarios were enough to get the “FEAR” snowball rolling down the hill. The very next week the screams were so loud, I dug up a quote from Bill Gates to share with everyone:
“Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not. Bad news smashes your face against an amplifier, while good news just plays quietly in the background.”
More observations- March 6th:
“My concern isn’t with what I foresee as potential global economic impacts. For sure there will be many. My concern lies with the uncoupling from reality that the never-ending fear rhetoric is adding to the storm.”
“Right now the consensus view is extremely negative, producing FEAR that can have a destructive impact on the economy. Ironically, we have the possibility of that occurring without the virus causing any REAL serious health problems for populations all around the globe.”
As the situation was evolving, I was hoping my worst fears would be avoided. That is not the case. It can now be said that this crisis can be much bigger than a financial crisis because the social distancing mandates are both a supply and demand shock we have not seen before.
I heard a comment this morning that was simple and to the point.
“We have never seen anything like this in our lifetimes.”
The stock market agreed and began sending everyone a message. The table below confirms that. Of the 21 cases where the S&P gapped down in history, SEVEN have taken place in the last TWO WEEKS. Astonishing panic.
No sense in debating what is going on, that statistic says it all. The obvious conclusion that everyone came up with, avoid equities at all costs. The wholesale liquidation that we have seen tells us that is what is taking place. The movements are fast and furious. Trying to call a bottom is as foolish as calling a top, and we saw how that worked out for the “top callers” for over six-plus years.
Now that we have seen a 30% decline in stocks, the guessing and speculating on declines of 40% to 50% will begin. Despite the mania over the virus and the obsession with every new case and death reported, let’s not lose sight of reality. As I have mentioned before each individual’s situation is different. Making blanket statements on how to approach this event will be the norm now. For the most part, they will be wrong.
We do know that history tells us that great wealth is achieved when some can take advantage of situations just like these. Believe it or not there remains a contingent that falls into that category today. They should be looking long and hard at slowly buying in at these low levels as they build a portfolio that they can look forward to when they eventually retire. That is how an individual builds wealth over time.
We respect the price action on the way down just as we respected the upward price action for the many years during the Bull market. So what I just described may not be for anyone that does not have a long-term time horizon. An investor’s plan based on their situation still applies. This decline in severity and speed hasn’t allowed the best of the market analysts to catch their breath. Like the quote says “We have never seen anything like this in our lifetimes.”
For the remainder of investors with varying backgrounds, there is simply no reason to go back on “offense” too early. In essence that is calling the bottom. At some point, we will get a relatively strong bounce that could last for a while. Then perhaps stabilization. We may have seen an intermediate low put in this week, then again we may be headed much lower.
The last comment is to be taken for what it is, undecided, wishy-washy and can change on a dime. In my view, very understandable given what we all know. If anyone wants to take a stand that the S&P is headed to a 50% decline or that we have already seen the bottom, I wish them good fortunes. You won’t find that here; it is simply too early to tell.
Adding to the confusion, any financial market forecast cannot be based on fundamentals. Right now it’s human emotion and that emotional response produced panic lows. Going against that emotion can be very costly now.
When we do eventually get any rebound rally, if your situation calls for it, that will be the time to decide what adjustment is necessary. Navigating this BEAR market will be crucial now. There is a time to use the FEAR of others to your advantage. Depending on your risk tolerance, it will be time to take a look at profiting from the BEAR market. For those that have already profited, congratulations.
The trading week opened and the streak of no back-to-back gains since February 12th remains in place. After absorbing the negative stories and listening to all of the “closings” that were being announced over the weekend, the only thing being bought was toilet paper. Stocks were back on sale at the outset and stayed that way until the close. The U.S. equity market gapped down by the most in history. The Dow 30 then finished the day down 13%, the S&P 12%. The third day in a row the S&P 500 has moved 9% or more. We are witnessing moves that occur in a year take place in a day. The S&P closed at 2,386, slightly above the December 2018 low of 2,350.
The VIX closed at a record, surpassing the 2008 financial crisis highs. The best performing sector was consumer staples, and even that sector fell 7%. Every other sector was down double digits. This is how BEAR markets work. The FEAR stays in place and there is the belief that there will never be a recovery.
Turnaround Tuesday did produce a tepid bounce after testing the December 2018 lows at the beginning of the session. The brief St. Patrick’s Day rally saw the S&P gain 6% with the Dow 30 adding 5%. That was the 7th straight trading day where the S&P 500 experienced a one-day move of more than 4%. That’s NEVER happened before, and the streak continued with the S&P 500 falling 5% on Wednesday. During this period of volatility, the average daily move in the S&P has been 4.9%
Some positive commentary, Apple (NASDAQ:AAPL) and Starbucks (NASDAQ:SBUX) resumed operations in China, and Japan has ended its State of Emergency, which may have helped the major indices find some stabilization. An explanation of the disproportionate number of deaths in Italy may have slowed down the “we are all going to die” drumbeat.
For the first time in eight trading sessions, the S&P did not move 4+%. The Dow 30 gained less than one percent and the S&P tacked on less than one half of one percent. Shallow rallies, strong selloffs are now the norm. As with every Friday since February 21st, the session was overwhelmed by selling. The S&P fell -4.3%, the Dow 30 -4.5%. Blame it on whatever you wish, however, the conversations centering around millions of virus cases and millions of deaths made the rounds again as more State lockdowns were announced.
For the week the S&P lost 15% on the day. It is now 31% off the highs set on February 12th and closed at the lowest level since the selling began.
Common sense never goes out of style, it will be required to navigate this BEAR market, just like it was needed in dealing with the previous BULL market. Either way, using common sense is the only way to cope with the present situation.
Global equity markets entered Friday lying on the canvas with a rapidly spinning ceiling over their head and left Friday with one hand stretched back and the early strains of ten count ringing in their ears.
With record drops around the world this week, virtually everything except for Chinese equities remains extremely oversold after trading around 3 standard deviations below its 50-day moving average.
Remarkably, Shenzhen’s high-growth index (which is often likened to the Nasdaq) is only just below its 50-day moving average, and just 7.55% from 52-week highs.
Outside of indices tracking onshore stocks in China, the average global market is more than 26% from 52-week highs. On the plus side: stocks have gotten a bit cheaper with the average index now carrying a 16x trailing P/E multiple, yields are higher with the average dividend yield of nearly 4%, and volatility has exploded.
A global rout.
Bob Doll from Nuveen echoes sentiment on the health scare that matches my thoughts on the topic since Day One.
“In our view, the fear and countermeasures surrounding COVID-19 are more serious economic issues than the virus itself. The reactions of governments and individuals are likely to push the world into a recession.”
It matters little what anyone thinks, the damage has been done. The Bear market is here and it’s time to deal with it.
Empire State manufacturing index dropped a record -34.4 points to -21.5 in March, much lower than expected, but that’s likely to be the case for most data points for some time. It’s the lowest since the -33.7 from March 2009 and compares to the record low of -34.3 from February 2009. This more than unwinds the 10.4 point cumulative gains from December to 12.9 in February.
Philly Fed index plunged a record 49.4 points to -12.7 after jumping 19.7 points to 36.7 in February and 14.6 points to 17.0 in January. It ties the lowest since July 2012. Over the last decade, the index has ranged from -19.5 (August 2011) to 39.7 (February 2017). The index was at 14.9 last March. All of the current components declined, it was just a matter of degree.
Industrial production rose 0.6% in February amid strength in autos and utilities, following declines of -0.5% in January (was -0.3%) and -0.4% in December. Capacity utilization rose to 77.0% after falling to 76.6% previously (was 76.8%). Manufacturing edged up 0.1% last month after slipping -0.2% in January (was -0.1%).
Retail sales undershot estimates with February declines for -0.5% for the headline and -0.4% for the ex-auto measure after modest and partly offsetting prior revisions for both measures that failed to make up for the February sales undershoot. Downside February surprises were spread across the major components.
JOLTS reported a 411k bounce in January to 6,963k, stronger than expected, following a -241k decline to 6,552k in December. The rate jumped back to 4.4% after falling to 4.1% previously. Hirings declined -103k to 5,824k following a 70k rise to 5,927k. The rate dipped to 3.8% from 3.9%. Quitters were up 4k to 3,532k in January after a flat December reading of 3,528k. The rate was steady at 2.3%. The bounce in January is not a surprise given the strength in the nonfarm payroll report, and the surge in February jobs suggests a decent JOLTS report too, but the data won’t have much positive impact in the COVID-19 depressed environment.
Initial jobless claims surged 70k to 281k in the week ended March 14 after falling -6k to 211k in the March 7 week. The gain left claims at the highest level since September 2017. The jump in claims brought the 4-week moving average to 232k after edging up to 215k. The tip of the iceberg with the virus looming in the background.
NAHB housing market index fell 2 points to 72 in March following the 1 point decline to 74 in February. It was at 62 a year ago. The present single-family index dropped to 79 from 81 (was 80). The future sales declined to 75 from 79. The index of prospective buyer traffic slid to 56 from 57. The report noted that half of the data were collected before March 4, and the COVID-19 and a stock market crash will be more reflected in the April numbers.
The U.S. housing starts report documents a robust trajectory for the U.S. housing sector into the COVID-19 downturn, as the February figures beat estimates across the board. Housing starts fell by just -1.5% to a still-solid 1.59 million pace in February, after 32k in upward revisions that left a January boost to a 13-year high of 1.62 M after a 1.6 M December pace. Building permits fell -5.5% to a still-robust 1.46 million rate, from a 13-year high pace of 1.55 M in January. Starts under construction rose by a robust 1.4%, while housing completions slipped -0.2%.
After the Austrian central bank governor said in an interview that there was nothing more the ECB could do, the bank sent a press release rebutting the claim before announcing an emergency stimulus package. The European Central Bank says it will launch The Pandemic Asset Purchase Program, an extraordinary bond purchase program worth €750 billion to help insulate the region’s economy from the likely coronavirus-led recession.
Similar to what we are seeing here in the U.S., countries around the world will continue to do what they can to try and stabilize the shock.
The following information on the earnings picture brings to light the issue that the stock market is grappling with now. There is no clarity. We will now see why we have to keep an open mind and RESPECT what has occurred in this decline.
Historically, recession-related declines in corporate profits have averaged between -15% and -20% (not including the financial crisis). In this environment, some are estimating an aggregate S&P EPS of $139. This represents a roughly -15% decline from the $164.60 cycle peak (4Q’19).
Assuming this $139 estimate represents trough earnings power, the market is currently trading at ~17x forward trough EPS. If we saw the index trade down to 15x on the trough $139, you could then conclude price moving in line. That would constitute a significant negative -40% move for equities, equating to S&P 2,000-2,100, and be in line with the declines evidenced during the Great Financial Crisis when the market moved to intrinsic value.
It’s scary, BUT that also aligns with many WORST case technical scenarios as well. We must keep an OPEN mind that this is a REAL possibility.
Unprecedented is a word that has been tossed around when talking about the recent stock market activity. Right now the spread between the yield on the S&P has NEVER been this high.
The Political Scene
Confronting twin health and economic crises, President Donald Trump announced Wednesday he will invoke emergency powers to marshal critical medical supplies against a coronavirus pandemic threatening to overwhelm hospitals and other treatment centers. The Senate acted on the economic front, approving legislation to guarantee sick leave to workers sickened by the disease.
Trump described himself as a “wartime president” as virus cases surged and the markets fell, and he took a series of extraordinary steps to steady a battered nation, its day-to-day life fundamentally altered.
Most immediately, Trump said he would employ the Defense Production Act as needed, giving the government more power to steer production by private companies and try to overcome shortages in masks, ventilators and other supplies.
Trump also said he will expand the nation’s testing capacity and deploy a Navy hospital ship to New York City, which is rapidly becoming an epicenter of the pandemic, and another such ship to the West Coast.
The Housing and Urban Development Department will suspend foreclosures and evictions through April. A growing number of Americans face losing jobs and missing rent and mortgage payments.
Stimulus packages have been delivered already, and we will undoubtedly see many more packages passed before we see the end of this event.
Florida, Illinois, and Arizona decisively chose former Vice President Joe Biden over Senator Bernie Sanders in the third consecutive “Super Tuesday” for the Biden campaign. The delegate calculations continue, but Biden’s delegate lead has expanded, making the path forward for the Sanders campaign increasingly uncertain.
However, the more important near-term story for these campaigns is the continued spread of Covid-19, which caused the governor of Ohio to postpone its scheduled primary, a trend we can expect to ramp up considerably in the coming days and weeks. As these cancelations rack up, the Sanders campaign and Democrats could be faced with challenging logistics on how to finalize the process of selecting their nominee. The clearest path forward would be for Sanders to drop out of the race, making Biden the presumptive nominee. Alternatively, the Sanders campaign could hold out hope that the political winds change when voting resumes.
The Fed cuts the federal funds rate target range by 100 basis points to 0%-0.25%, as the “effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the central bank said.
Also, the central bank promises over the next few months to lift its holdings of Treasury paper by $500B and holdings of MBS by $200B. Also, all principal payments from existing holdings will be reinvested.
Fed says it “will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy,” and “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”
Voting against this evening’s move was Cleveland Fed boss Loretta Mester, who only wanted to trim rates by 50 basis points.
The 10-year Treasury bottomed at 0.40% over the worldwide fear that is present. The 10-year note yield rallied off those lows and closed the week at 0.92%.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
Source: U.S. Dept. Of The Treasury
The 2-10 spread was 30 basis points at the start of 2020; it stands at 55 basis points today.
The Weekly inventory report shows commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.0 million barrels from the previous week. At 453.7 million barrels, U.S. crude oil inventories are about 3% below the five-year average for this time of year. Total motor gasoline inventories decreased by 6.2 million barrels last week and are near the five year average for this time of year.
The fear of a global recession as the world economies came to a halt saw WTI sell off hard once again. The price settled at $23.80 on Friday and that was with a 23% one day gain on Thursday. The $20.37 price for WTI on a settlement basis Thursday was the lowest since February of 2002 and is lower than barrels of WTI traded for in the mid-1980s. The back-to-back weekly losses now total $17.47 and equate to a 42% drop in two weeks.
Charts like the one below showing crude oil’s daily changes can be found across just about every different asset class these days. On Thursday, WTI had its largest one-day daily gain on record, rising by 23.8%. That move followed the second and third largest one-day declines for crude oil on record from 3/9/20 (-24.6%) and 3/18/20 (-24.4%), respectively. Not sure what you want to call it, but it’s far from rational market behavior.
Crude oil now sits roughly around $22.00. As shown below, that is similar to levels that crude oil traded 18 years ago, in late 2001/early 2002.
Domestic production remains at record levels of 13.1 million barrels/day and imports remain at multi-week highs albeit they are also at five-year lows. Exports, on the other hand, totaled 4.38 mm bbl/day which is the second-largest print on record. As for products, gasoline continues to follow seasonal patterns with inventories experiencing one of the largest draws of the past five years.
The Technical Picture
The S&P closed at 2,409 today and this swift BEAR market has taken the index down 28% off the highs set five weeks ago. It’s hard for me to believe I am typing those statistics, yet here we are.
A potential undercut low was established during the week at 2,280. I realize we keep moving the goalposts (unfortunately lower), but that is what occurs in a BEAR market that is searching for an intermediate bottom. For now, that is yet another new line in the sand that investors can use to gauge the scene.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long-Term view, the view from 30,000 feet, is the only way to make successful decisions.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
The speed of the decline has left many scratching their head and saying they have never witnessed anything like this. While it won’t make a difference, it may give us insight into what has occurred and what may be occurring now to try and keep the situation in perspective.
The collapse in crude oil prices is eerily reminiscent of what occurred in 2015/2016. Back then the Saudi’s Sovereign Wealth Funds were liquidating their U.S. stock holdings to keep their cash flow in order. They are accustomed to a lavish lifestyle and with crude oil at $20-$24 a barrel that is in jeopardy.
This time around it may not only be the Saudis but the Russians as well who are liquidating U.S. stock exposure. In essence, while they caused the issue with their price war, it appears they have a game plan to keep themselves solvent.
There is another dynamic at play. Risk Parity Hedge Funds. Risk Parity is an approach to investment portfolio management that focuses on allocation of risk, usually defined as volatility, rather than allocation of capital. Risk Parity funds are classified by using main volatility targets. Funds with a volatility target of 20% or greater are classified as Volatility Target: 20%.
It sounds confusing because it is. Bottom line these hedge funds got caught on the wrong side of the market and are forced to unwind these positions. Many of these funds operate with an abundance of leverage. When things go against their “bets”, the leverage is equivalent to a bomb exploding and the resulting damage is stock prices crater.
Don’t get me wrong, these two examples aren’t the entire cause of this BEAR market, the business actions caused by the virus took care of that, BUT they have exacerbated this situation to an extreme. I do expect to see some of this wild volatility diminish as these funds finally unwind their holdings.
However, the damage is done, and this could very well be the reason we have seen what would be typical Bear market declines (30%) that play out over months take place in 21 trading days.
Individual Stocks and Sectors
After overtaking the category of General Merchandise in September 2018, nonstore retailers have been picking up share at a steady pace ever since. Through February, the current spread in share of 1.3 percentage points is not far from the record seen last September. Again, though, with physical stores all over the country simply closing for an indefinite period in recent days, online is going to become the only option for consumers whether they can leave their homes or not.
This trend will only accelerate now. The chart screams reasons for owning “Amazon” (AMZN). It is an excellent way to play this trend.
The other stock I believe is a MUST own is Alibaba (NYSE:BABA). Whether you believe the virus data in China or not, Alibaba has little debt and it may be operating in an economy that is in much better shape than the U.S. JD.com (NASDAQ:JD) also fits that bill.
As mentioned earlier, Apple and Starbucks have reopened their stores in China. So unless you believe there are signs at the doors declaring we have a huge sale going on today, please step over the dead bodies as you view the items for sale, it appears China is slowly rebounding. The CEO of Qualcomm (NASDAQ:QCOM) stated demand from China has returned to normal this past week.
Another area to research now, companies with little to no debt. Once the smoke clears, they will weather the storm better than most.
It’s simple, everyone is in a state of Panic. The medical community has been forecasting; “We are on the verge of a deadly global pandemic”. Experts say 70% of the population will be infected in the world, and that it is “almost inevitable” and no place will be spared. Political leaders from presidents to local officials have issued bans and mandate social distancing as the new norm. The Fed is in a state of panic lowering rates back down to zero over what it sees as potential effects on the economy that is caused by the panic. Central banks around the world joined the panic parade as they instituted stimulus packages of their own.
It is now apparent the entire country is in this death spiral of FEAR. Corona testing is increasing and cases are following suit. When we apply this sentiment to the stock market, there should be no surprise that prices have dropped in a frenzy of selling that is unprecedented in terms of time and magnitude.
The shutdowns and lockdowns we are seeing now are based on how the CDC has approached the situation. Right, wrong, or indifferent their recommendations are based on their belief there will be millions of infections and deaths worldwide. The U.S. population finds itself sheltered in place, economic activity has come to a halt. I’ve shared my concerns about economic effects being far worse than the effect of the virus on the population. It doesn’t matter what I think.
The damage is done. Now we deal with the cards that have been dealt.
However, the bad news may NOT be behind us. I do have a concern going forward. Without a major medical breakthrough being announced, the CDC will be loath to back off its assessment, even if the numbers of cases and deaths are nowhere near the projections that declare its assessment being incorrect.
Translation, it will drag its feet on this issue, and if anyone is waiting for it to give what would be considered an “ALL CLEAR”, I wish them good fortune. I hope I am absurdly incorrect in that assessment. If not, the damage assessments will only increase at an alarming rate.
That same view is prompting some interesting discussions.
Then again maybe there is a light at the end of the tunnel, some just can’t see it.
Remember in the last BULL market, the TOP callers got killed, literally destroyed. Therefore take a lesson from the walking dead now and do not try and be the one that says the BOTTOM is here. We don’t know that yet. It’s about gathering evidence now on when a potential bottom is in place.
In a BEAR market, there will be all sorts of chaotic, mind-boggling, panic-driven stories every day for what could be weeks on end. We do know that with all of the unknowns that will require some sort of speculation, folks will start extrapolating and they will always lean to the negative. That is how the human mind works. The charlatans who have been going around for the better part of the bear market citing all of the reasons why the market was going to crash never mentioned a virus or a crude oil war. They incorrectly cited everything else, but will make sure they let us know they “called it”. Wrong for years and now claiming they “Knew it”, the height of absurdity.
The last thing investors need now is to listen to someone or some financial firm that has been wrong for years. They need to rely on common sense.
Now don’t get me wrong, anyone new to the Bearish mode should certainly share their concerns and we should ALL listen to their thought process. The landscape has changed and they should be heard. On the other hand, the charlatans, snake oil salesmen that have been talking doom since the first days of the BULL market need to be avoided like the virus itself, they are hazardous to your health.
Stay safe and Healthy
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
A new trend has emerged this time we find ourselves thrust into a BEAR market in 21 trading days.
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am short VIX using ETF’s since March 18th.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.