Fear Is Here: It’s Time To Start Buying
S&P 500 fell 3.03% on Tuesday as fear over the coronavirus spreading globally gripped Wall Street. There is also some fear Bernie will be president. This decline is also about the stock market being overvalued. That situation has gotten better as prices have come down. The market is down 4.74% from the peak. It’s worth buying stocks right here.
Market is down 4 days in a row and 3.17% in 2020. More stocks fall, the more I bullish many will be. CNN fear and greed index fell 7 points to 22 which is extreme fear. This was the first back to back 3% decline in the S&P 500 since August 2015. It’s the 2nd since March 2009. Just 7% of NYSE stocks are over their 20 day moving average.
As you can see from the chart below, the combined NYSE and Nasdaq breadth is the worst since at least 1997 based on the number of issues. On a percentage basis, the only worse periods were in 2008 and 2018. This correction is similar to the one in the winter of 2018. It's possible that stocks fall further, which is why some recommend to start buying rather than going all in.
It’s amazing that just a few days ago there were charts showing retail investors were going all in. Now we have the reverse as we have retail investors looking up how to short stocks. The chart below shows in February, the Google search traffic on how to short was the highest ever. It was 5% higher than 2 years ago and 15% higher than in May 2016.
It goes without saying that you shouldn’t be shorting stocks just because the market is down. Goal is to short high and buy low. These retail investors shouldn’t be shorting at all if they don’t understand the risk involved.
Retail investors going long the market doesn’t mean you should sell. Retail traders are also investing more. Mostly because trading fees have gone down and because they have excess disposable income. You don't have to sell just because they are long.
Record Low 10 Year Yield
VIX was up 2.82 to 27.85. Betting on higher volatility isn't a good idea even though volatility clusters. There are plenty of reasons to expect the VIX to slide in the near term as this selloff is overdone. Nasdaq fell 2.77% and the Russell 2000 fell 3.45% as investors feared the coronavirus impacting the American economy. You can’t hide out in domestically oriented firms if this virus become prevalent in America.
Once again, every sector fell. This is likely the last day in a row we will see all sectors down. Once again, energy was down hugely as the sector fell 4.34%. Exxon Mobile stock fell 3.83% as the stock has a 6.42% dividend yield. That’s a nice yield with treasury yields at a record low. Materials fell 4.3% and industrials fell 4.03%.
Even though the decline in stocks is generating the most headlines, the biggest news on Tuesday is the 10 year yield hitting a record low. Low on the day was 1.315%. Current 10 year yield is 1.361%. 2 year yield is now at 1.208% which means the curve isn’t inverted yet. The market expects between 2 and 3 cuts this year. That’s even though the Fed hasn’t guided for any cuts yet.
Unless this flight to safety trade continues, most don’t see the Fed cutting rates at its March 18th meeting. Lately, we’ve been seeing the stock market declines causing an increase in the number of cuts expected. Then when stocks rise, we see the expected number of cuts stay where they are.
It would be interesting to see the Fed get back near the zero bound without any inkling of a recession coming. Inflation isn’t an issue yet, so there is certainly room to cut. However, I thought the Fed was focused on seeing what its cuts last year did to the economy. Why cut before they fully impact the economy?
Update On The Coronavirus
Coronavirus is winding down in China, but picking up in other countries. Chinese economy is still reeling. So if this virus hurts the other countries it is in by as much, we could be on the verge of a global recession. I hope that the virus doesn’t spread as quickly as it did in China. And other countries won’t be shutting down the way China did. Italy stated it won’t close its border.
As of February 25th, there were 406 new cases and 52 new deaths. All but 5 cases where in Hubei and all the deaths were there. Total number of cases is 78,064 and the total number of deaths is 2,715. Number of new cases per day keeps falling. However, as you can see from the chart below, road congestion hasn’t recovered. It will be a long road to recovery in March and April.
There were 169 new cases in South Korea which brought the total to 1,146. And there was one new death which brought the total to 10. Also, there have been 15 deaths in Iran and there are 95 cases. Obviously, this situation is tragic on a human level, but in terms of stocks, we need to see more cases if the stock market’s correction is going to continue.
Biden Is In 2nd
Joe Biden is now the 2nd most likely person to be the Dem nominee. Bernie’s odds have fallen to 59% and Biden’s odds are at 17%. It’s clear Biden will do well in the South. It’s still highly unlikely for him to get the most delegates. According to PredictIt, he is the favorite in 8 southern states.
Outside of Iowa, Bernie is expected to win the others. Because of Bernie’s rise, the IHF healthcare insurance ETF fell 4.29%. It fell 9.55% in 2 days. Biden will win South Carolina on Saturday. However, if Bernie does well on Super Tuesday, healthcare stocks have further to fall.
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