Nice Rally On Wednesday
The stock market recovered from its recent declines on Wednesday as the S&P 500 was up 2.29%. It was led higher by Chipotle which reported great results. Its stock was up 12.15%. Shockingly, Snap turned the entire tech sector higher. It's possible almost no one knew it had that much power! Even after its 36.74% gain on Wednesday, it only has a market cap of $24.16 billion. It principally helped the other social media stocks as
Pintrest was up 14.17%, Facebook was up 6.72%, and Twitter was up 10.45%. However, those weren’t the only big winners. Intel stock was up 6.64% ahead of its earnings report. Investors always get worried when a stock prices in a great report because if it misses, it can crash. Even if it beats, it likely won’t rally much.
Near Declines Coming?
It’s very possible that we are in a holding pattern for the market over the next several weeks. It’s almost impossible for the market to replicate its recent run. Personally, I don’t see what will power it much higher in the near term. Stocks hurt the most by COVID-19, such as the retailers and travel stocks, haven’t recovered much. And the tech stocks that benefit from the shutdowns have rallied too much.
We don’t see the retail and travel stocks recovering soon. And we don’t see the expensive tech stocks increasing much more. Specifically, Shopify is up 80.93% since April 2nd which now makes it the 2nd biggest company in Canada. That stock is a massive bubble. Netflix was down 2.86% after it reported an amazing boost in subscribers. Good numbers are already priced in.
That’s why the market will probably stabilize over the next few weeks. As you can see from the table below, the 22.5% rally in the S&P 500 is the 2nd best performance over any 20 day period ever. It's best was the rally at the start of the bull market in 2009 when it increased 23.5%. Average performance the top 11 twenty-day periods for the S&P 500 have experienced in the following month is a loss of 0.2%. The market rallied 50% of the time.
Results are much better in the following periods (3 months, 6 months, and 1 year). Usually, the market likes to process the situation following a big rally. Stocks now are pricing in the worst of the virus being over and a potential rebound in the economy. Many have been saying for a couple weeks that we can’t see new highs until the U.S. economy actually reopens. Therefore, we can expect to see little upside in the next month.
Review Of Wednesday’s Rally
We have just exited a period of extreme volatility. S&P 500 has had 25 days where it has gone up or down 3% this year. That’s the 2nd most since 1950 and we’re not even halfway done with the year. It's doubtful that we even get to 50. Volatility is now mostly gone. 56% of the days this year have had a 1% move or greater.
That percentage will likely fall this summer and fall. In support of this thesis, VIX fell 3.43 to 41.98. Investors have been predicting it will go below 40. It looks like we will be right in the next few days.
Russell 2000 was up 1.39% and the Nasdaq was up 2.81%. Again, the tech sector did really well. It was the best sector on the day as it increased 3.87%. 2nd best was energy which increased 3.58%. Halliburton stock was up 10.32%. Brent oil was up over 5% on Wednesday.
As you can see from the chart below, oil inventories were up 63.28 million barrels in the past 4 weeks which is by far the most ever. Once the economy comes back on line, it will take many months to get through all the surplus in oil. Eventually, sometime in 2021 or 2022, there will be a shortage in oil because of all the bankruptcies and cuts to production.
As for now, the oil tankers are the best way to play this glut. Scorpio Tankers stock was up another 5.71% on Wednesday as it is up 69.31% since April 3rd.
COVID-19 Update
Narrative on COVID-19 has changed dramatically which scares me because the data isn’t that great. We are past the peak in America, but the situation isn’t good enough to let up just yet. There were 29,973 new cases on April 22nd which was the most since April 17th.
Number of new cases has barely dropped since the peak on April 4th. On April 21st, there were 2,804 deaths which is the most ever in a day.
There were 936 new cases in Georgia. Personally, I don’t see how the state can reopen in this scenario. President Trump criticized Georgia’s plan, saying it's "just too soon" for places like "spas and beauty salons and tattoo parlors and barber shops" to open. He went on to say, "I love them, but they can wait a little bit longer. Just a little bit, not much."
Even though the governor of Georgia is allied with President Trump, he stuck with is plan saying, "I think one of these things that has gotten out of control on the national level is people think we are throwing the keys back to these businesses and that's it's going to be business as usual and it's not."
Reopening the economy is not a silver bullet. Frankly, many places in this state probably won’t open even if they are allowed to. AMC and Cinemark have already said they won’t open until late June. Other small firms probably won’t open until they see demand coming back.
Regardless of whether states reopen, we won’t see business as usual at least for another few months.When New York finally reopens in May or June, there will likely be a burst in activity because the state has taken a lot of precautions.
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