Stocks Look To Be In A Holding Pattern

Stocks Seem To Be Stabilizing

It looks like stocks are stabilizing right above the low of late March as investors wait to see when the number of cases in America peaks. It’s a reasonable stance because the market expects the data to get worse before it gets better in a couple weeks. Stocks can’t react to economic data because we already know it’s bad. They can’t react to new highs in new cases in America and continued stabilization in Italy because that’s expected.

If we continue to see new highs in the number of new cases in America 2-3 weeks from now, stocks will plummet. They also will plummet if after Italy reopens, the situation gets worse again. Italy won’t reopen for at least another 4 weeks, so that’s not a near term catalyst. If there is a huge breakthrough cure, stocks will obviously rally. But that seems unlikely until at least the late summer. Our hope is any risk of COVID-19 coming back this fall is eliminated by a new drug.

Stocks Flip Flop

To be clear, even though the market did have a nice size sized rally and the close looked normal, Thursday wasn’t a normal day. It was less volatile than March, but it would have been one of the most volatile days of last fall or the first 6 weeks of this year. 

S&P 500 went from down slightly in the morning to up sizably. There was a 3% rally in 45 minutes. It fell 2.5% from there to the early afternoon. Then it rallied 2.35% in the last 100 minutes to close up 2.28%. About half of April 1st’s losses were wiped away. 

This is important because it signals the market is in a holding pattern rather than getting ready to retest the trough. We won't likely see a retest. However, if the shutdown lasts another 2 months because the situation is out of hand, stocks will easily fall below the trough. The chart below shows the size of the recent bear market rally in the end of March in the MSCI All World index. 

As you can see, it was only 3 days making it one of the shortest ever. However, the 16% gain was the 5th largest ever. Only the bear market rally in October 2008 is comparable in size and length as it was slightly longer and a few percentage points larger. To be clear, the fact that stocks aren’t crashing now is a good sign because the market has been extremely overbought in the near term.

Review Of Thursday’s Action

The market was up solidly on Thursday. Nasdaq was up 1.72% and the Russell was up 1.29%. There was extreme selling pressure in a few groups. Firms impacted by COVID-19 directly fell hard as Live Nation fell 12.68% and Norwegian Cruise line fell 12.04%. Oddly, the cloud stocks were sold hard. HubSpot fell 6.56% and ServiceNow fell 5.15%. Big news of the day was Luckin Coffee, the Chinese competitor to Starbucks, stock fell 75.57% on accounting fraud reports. Personally, I’d ignore this one at all costs.

Oil rose hugely because China instructed government agencies to buy oil for its strategic reserves. And also because President Trump said Russia and Saudi Arabia would cut production 10 to 15 million barrels per day. This caused Brent futures to rise 21% to $29.94 after they were just near their cycle low. 

WTI rose 24.7% to $25.32. Chevron stock rose 11.03% on the news. Energy sector was the best performer as it was up 9.08%. Every sector was up, but the rest were up much more modestly.

Shopify Suspends Guidance

Shopify stock fell 9.97% after suspending its full year guidance. This is a $40.43 billion company that is extremely expensive. Most companies will likely suspend their guidance because no one knows what Q2 and Q3 will look like. This firm won’t report until mid-May. Other stocks that suspend guidance this month won't likely decline as much because most stocks aren’t expensive as this one.

Q1 2020 would have been a great quarter for earnings if it wasn’t for coronavirus. As you can see from the chart below, the first 20 firms to report Q1 results (there quarters ended in February) had 5.07% sales growth which is the highest since Q1 2019. It’s double Q4’s growth rate. Firms that have their quarters end in March will crash this average growth rate shortly. Earnings season starts in less than 2 weeks.

COVID-19 Update

Currently, the worst part of America is the tristate area as NYC and New Jersey are doing poorly. Within the next 1-2 weeks, the worries will shift to new hotspots as NYC was shut down on March 20th and it takes about 2 weeks to stabilize the number of new cases per day. 

Louisiana, Michigan, Connecticut, Indiana, Georgia, and Illinois are all potential hot zones. Most of the news continues to be bad in America. Only good thing is the odds of there being 1 million plus cases of coronavirus by April 15th have fallen to 34%. 

Fact that anyone still thinks there will be over a million in less than 2 weeks is a sign of extreme uncertainty. Especialy since there have only been 245,373 cases so far. There would need to be 58,000 cases per day to get there. That's unlikely since the highest was April 2nd which had 29,874.

Number of new deaths in France was beyond sad as it spiked from 509 to 1,355. Good news is the number of active cases fell slightly. We're looking for the number of active cases to fall in Italy within 1 week. Growth in total cases in America is slowing, but the number of new cases per day keeps increasing. It looks out of control. There were 26,473 new ones on Wednesday. 

We're looking for a peak in America by the end of the month. NYC data keeps getting updated, which means the latest data might go higher. As of Thursday evening, the peak in new cases was March 25th, the peak in new hospitalizations was March 27th, and the peak in daily deaths was March 31st

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1 Comment

  • Kevin Morgan

    April 4, 2020

    The unwillingness of so many red states to take proper action will cost the US a lot; this virus WILL get to those states and they will have major outbreaks. San Francisco went into lock down VERY early, and we have a very low infection rate as a result, unlike NY. So it matters a lot, and the red state governors are acting criminally in their "political correctness". I won't even start on the criminality of the current administration. It's a clown show, ineptitude and hubris of vast proportions, costing tends of thousands of lives.

    As for a vaccine maybe available in the Fall, probably not, and even if yes, will be be "available" and broadly deployed? Sure, NBA players and political "leaders" and the wealthy will get it. Will the immigrant field workers who are so vital to our food supply get it? The janitors and the super market workers? No. It will be rationed and it will be expensive and it will be largely of/by/for the wealthy, for a long time. If it even shows up in the Fall.

    A tsunami is coming. SPX at 666 (2009 low) could even be in play before this over. If the market doesn't get to 1900 by late summer I'll pass out. That will bring the 1300 area into play, and if that goes, 666 is next. A major depression is defined by vast unemployment, and projections are for over 30%, 5% more than the HEIGHT of the great depression. How stocks do through that? Oh right, -86%.

    For those nimble, this is the greatest trading market of recent history. I don't feel "good" about it, but we trade what we are dealt, and the short side here is hugely +EV. Tally ho!!!