Ruthless Bear Market Continues

New Bear Market Low

Friday felt like an awful day for stocks because we hit a new bear market low. It looked possible that we could have the first back to back gains since early February, but that didn’t work out. It has been 26 days since we’ve had back to back gains which is close to the record of 28. 

With the onslaught of bad news coming out, such as the shutdown of all non-essential services in New York, it doesn’t look like we will see gains next week either. S&P 500 fell 4.34% on Friday and 13% for the week, making this the worst week since 2008.

Only good news is the declines have become significant enough to set up an eventual buying opportunity. As you can see from the chart below, the average bear market decline is 31.4%. Stocks are now down 32.1%. In bear markets with recessions, the average decline is 36%. 

Stock market has likely fully priced in a recession since one time shocks like this usually cause smaller declines. Stocks fell on Friday because the odds of a depression are increasing. If you see the market fall next week, recognize it’s a liquidity event combined with depression fears.

More Downside, But A Slower Pace

VIX fell 5.96 to 66.04. Some say the VIX peaking is good news for stocks. But the VIX peaked 4 months before the great financial crisis’ bear market ended. That’s actually a reasonable set up. Vertical decline in this bear market is over, but there is still some weakness coming. We can expect the total S&P 500 decline to be between 35% and 40%. 

If the decline slows, it buys the market time for better news to come out. Later this month we will likely see improved news out of Italy. It’s debatable if that helps American stocks if New York is ground zero for the virus. We won’t see any good news out of America until April. We might not see any improved economic news until May or June. On the positive side, stocks will bottom weeks before economic data gets better. Just as stocks topped weeks before weakness in economic data showed up.

Details Of Friday’s Intense Session

We know that the stock market had a terrible day in which it hit new lows, but it wasn’t just bad; it was also weird. We’ve been seeing a lot of weird action this week because funds are blowing up. We are seeing incredible liquidity events. Energy sector actually rose 0.96% even though WTI oil fell 8.76% to $23.64. Utilities sector fell an astounding 8.18%. Con Edison fell 9.36%. It fell 21.27% in just 2 days. 

Now it has had no price gain in 4 years, although, you still have nice total returns because of the dividend. Utilities sector as a whole is actually in worse shape as it’s down 32.63% since its peak. It has also had no price gains in 4 years. Many have been saying the sector is too high for a while now, but even I’m surprised at these losses.

Even though the energy sector rose, Exxon Mobile stock crashed 4.96% to a new bear market low. If you bought the stock exactly 22 years ago, you would have no price gain. Of course, the stock pays a nice dividend, but that won’t last. A dividend cut would be good for the stock because everyone knows it will happen and it will free up capital. 

Paying the dividend would destroy the company in a few quarters. Boeing fell 2.76% after suspending its dividend. McDonald’s only fell 0.91% after suspending its buyback program. Consumer staples sector was hammered as funds sold anything they could to raise cash. Procter & Gamble fell an astounding 7.58%. It’s down 19.44% from its record high.

Good Breadth

We’ve seen a lot of volatility in the past 4 weeks. Here’s a crazy stat. Since 1990, there have been 57 trading days where the S&P 500 posted an intraday trading range of more than 5%. We’ve had 8 of those this year and 6 in the past 6 trading sessions. That’s a pace of 2 per year; we’re 4 times that pace with ¼ of the year done. The market had relatively good breadth for a terrible day. 

S&P 500 has lost 4% or more on 48 days since 1962. On the best of those days, 26% of stocks in the NYSE were up. On Friday, 47% were up. That’s because some stocks crashed and many weren’t up that much.

Breadth in the intermediate term couldn’t be worse which is a positive. It means we are near selling exhaustion. As you can see from the chart below, 3.2% of S&P 500 stocks are above their 200 day moving average. It’s very close to the low in October 2008.

Coronavirus Update

This situation with COVID-19 couldn’t be worse for Europe and America. Italy continues to have growth in the number of daily cases and deaths as its stabilization was short lived. A major problem is the healthcare system is overwhelmed. Specifically, there were 5,986 new cases on the 20th which was up from 5,322. The number of daily deaths rose from 427 to 627.

America is facing exponential growth as expected. New York governor said the state has 50% of the hospital beds it needs. It is about to be in the same shape as northern Italy. There were 5,594 new cases in America on the 20th which was up from 4,530. 

It's likely that in 2 weeks America will have the most total cases out of every country. It won’t have the most deaths though. Number of daily deaths fell from 57 to 49. There are now 8,357 active cases in New York. Only good news is testing is going up. As of Friday, there were 150,613 tests. We hope to see over 1 million tests by the end of this coming week.

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