Fastest 30% Decline Ever

Another Selloff

Even though this has been a painful selloff, Monday’s decline was the first back to back selloff in a while. The market had alternated between red and green days for 7 days. It’s now down 33.9% from peak to trough, making this the 5th worst bear market since 1946. 

As you can see from the chart below, this has been the quickest 30% loss ever as stocks declined that amount in just 22 days.

A most insane stat you will see on this bear market is that because it has occurred in 1 month, the current annualized losses (as of March 20th) are 99.1%. Previous worst is 96% which was the 2.2-month bear market in 1929. It took 18 months for the S&P 500 to fall 32% in 2000. 

That’s commonly called the tech bust, but it looks like a slow-moving train wreck compared to this decline. That’s because it took awhile to unwind all the speculative tech investing. This situation was different. COVID-19 went from being not a big deal, to a disaster in Europe and America in just a few weeks.  

The stock market fell 2.93% on Monday as the market didn’t like the Senate’s failed attempts at passing a stimulus and ignored the Fed’s plans to buy corporate bonds (for now). Pelosi's plan, which probably won’t be the final bill, calls for $1,500 checks for individuals, $3,000 for joint filers, an extra $1,500 per kid, and a maximum of $7,500 per family. The stimulus will fade after the $75,000 annual income threshold. 

It’s obvious there will be a bill passed because both sides want one and it’s needed. This isn’t like the games played with the debt ceiling. American people needed the money yesterday. A bill will be passed this month.

Details Of This Terrible Decline

The stock market fell on back to back days on Friday and Monday, setting up a potential big rally on Tuesday (based on the futures market). Nasdaq outperformed on Monday as it fell just 0.27%. It was up during some of the day. Tech sector has done well during this correction. Online products can be used without human contact. 

Obviously, ad spending will be down which will hurt Snap, Twitter, Facebook, and Alphabet among others. However, this decline hasn’t been bad for firms like Zoom, Amazon, and Netflix. Zoom is actually up 52% in the past month. Personally, I would never touch this stock because this is a parabolic move. People aren’t going to be teleconferencing as much when the shutdown ends in a few weeks/months.

Russell 2000 fell 1.13% which isn’t terrible. It can’t fall much further as it is almost as cheap as it was in the fall of 2008. Many are now very bullish on small caps. Monday had a huge variation in sector performance. Energy, the financials, and utilities were clobbered as they fell 6.65%, 6.11%, and 5.33%. Con Ed stock fell an awe inspiring 9.97%. 

Utilities were overvalued before this decline. That has quickly ended as now Con Ed looks reasonable as it has a 4.68% dividend yield in a low rate environment. The stock fell 29.12% in 2 days. Its down 27.53% since February 20th. It’s at the same price it was at in January 2016.

On the other hand, the consumer discretionary sector was up 0.35% and the tech sector was only down 0.98%. As you can see from the chart below, the semiconductor sector has fallen much less than the S&P 500 during this bear market. You wouldn’t expect this to occur. But recognize that semis are cyclical stocks and this isn’t a real cycle. 

It’s an exogenous temporary factor that will cause a ‘V shaped’ recession/recovery. Semis are also impacted by China which has been outperforming because it has already dealt with COVID-19.

VIX was down 4.45 to 61.59. It has been falling a lot in the past few trading sessions since it can’t stay near its record high unless stocks move wildly. Those wild swings are unsustainable. Peak of the VIX doesn’t mean we are near a bottom. But we’re certainly closer to one than when the VIX was at its peak. 

CNN fear and greed index fell from 8 to 5 which is extreme fear. It’s amazing how different the sentiment is now compared to January. Back then, extreme greed readings were very common. As you can see from the chart below, the percentage of S&P 500 stocks above their 200 day moving average has been below 10% 4 times since 1990. These were times to buy stocks.

Market breadth has been horrible. As you can see from the chart below, last week’s new highs minus new lows (-80%) was the 3rd lowest in history after the 1930s and the 2008 bottom. Stocks are overstretched to the downside.

COVID-19 Update

This situation in America looks a bit worse than it is because of the increased testing in the past few days. If you test more people, you will get more positives. It’s basic math. It’s great to see more testing as it will help us get this under control. In a few weeks people who have tested negative or have recovered from COVID-19 will be able to go back to work. 

As the chart below shows, on March 23rd there were 65,840 tests which is up from 45,627. Rate of positives only increased 0.3% to 14.3%. There have been 294,056 tests so far. Run rate is quite good now. We will reach 1 million tests in 6 days at this rate, which is impressive compared to where we were 1 week ago.

On Monday, news was good out of Italy, not bad from America, and terrible from Spain. As expected, the number of new cases is falling in Italy because of the measures taken starting about 2-3 weeks ago. In Italy the number of new cases fell the 2nd straight time to 4,789 which is down from 5,560. 

The chart below shows the big decline in Lombardy which is the hardest hit area in Italy. There were 10,168 new cases in America which is only up from 9,359. We expect a peak in 2 weeks, so anytime its growth slows, it’s a positive. Spain was the problem area as there were 6,368 new cases which was up from 3,272.

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  • Rod

    March 24, 2020

    Thanks for the report, very informative!!

  • Leslie

    March 24, 2020

    Coronavirus does not discriminate so we will loose many different segments of our population. Qualified and unqualified labor shortages will be rampant. The virus will spread mainly from social contact from people that have no idea they are carriers. We will further spread this virus because we continue to use reusable bags to go shopping instead of single use plastic bags. Public transport, cash and grocery baskets can carry the virus for 72 hours. Like it or not we will have to test everyone and then retest where there are flareups. I believe we are in for an unsettled 18 month period. The economy will continue to be a yoyo during these next 18 months giving us an opportunity to profit from credit and debit spreads. As Don so often says, place lots of trades but keep them small and allocate, allocate, allocate. I find it ironic that this virus excites me about trading. Good luck to everyone. Leslie

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