Markets Are Scared Witless

“California is monitoring 8,400 people who traveled to Asia”, Governor Gavin Newsom said.

I thought the selling in the last two days would be possible if there was a death in the United States after the first potential community transmission of the coronavirus. Instead, the news flow and headlines have had an even greater impact. Yesterday, the market staged a strong rally attempt early in the session, then-Governor Gavin Newsom announced that 8,400 people who recently returned from Asia were being monitored.

It’s a large number. I think it’s great we have a headcount and action is being taken. Soon, the Centers for Disease Control and Prevention (CDC) will distribute better detection kits, which also means we could see an uptick in known infections. 

With headlines like that, hopeful news isn’t resonating, in part because it’s not getting a lot of ink or airtime.

The folks in Nassau County, New York, got the all-clear signal yesterday, and the news wasn’t even a blip. The day before, news of their potential infections erased a 400-point rally in the Dow Jones Industrial Average (DJIA) and even greater moves in the S&P 500 and the NASDAQ.

The selling now is driven by several factors:

• Emotions

The unknown, coupled with a lack of knowledge on things such as mortality rates and the community transmission of the coronavirus, leave people to imagine the worst.

Reports of the nation being unprepared are adding to the sense of doom:

• Mechanical

Selling begets selling by man and machines.

The ugly side of passive investing, which is just an organized herd investing that creates an amazingly profitable positive feedback loop on the way up, but a negative feedback loop on the way down. The lower the stocks go, the more funds they must shed from their portfolios.

Technical levels were shattered, leaving would-be buyers without markers or buy levels.

Oversold Bounce

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It might be hard to imagine, but there will be upside sessions where the Dow rallies between 500 and 1,000 – and the bias is obviously to the downside. One big driver would be a Fed rate cut. Beyond that, we need more days to go by with signs of slowing infections and lower risks.

Positive news on vaccines. There is a global race that probably will see a vaccine out of the United States or Israel, ready for expedited trials within weeks. 

I also think we might see the White House put the brakes on Chinese tariffs to help their ailing economy.  Such a move would make the globalists sitting on hundreds of billions of dollars to buy stock as a sign of appreciation.

Meanwhile, this is a worst-case scenario, aided by the fact the market was not only at an all-time high, but it also has been amid the greatest rally ever. 

There is no doubt this is unnerving, but it’s also about creating investment opportunities. If demand destruction is limited, this could be approaching the greatest entry-level since March 2009. However, it’s about being cool and not forcing the issue.

Watch Ten-Year Yield

The ten-year yield traded down to 1.24%, then rallied to 1.327% before slipping lower. It looks as if equity indices, including the Dow Jones Industrial Average, are taking their cue from the ten-year yield.   With that in mind, stocks present such a superior investment to bonds, sans the heightened state of terror that - at some point - will be a greater investment consideration for deep-pocketed institutions.

Meanwhile, Utilities have surpassed Energy for the first time, even as a greater percentage of the S&P 500. The mighty have truly fallen. There was a time when Energy, especially oil companies were the (evil) face of capitalism. However, these days, they are grappling for relevance amid falling oil prices and the war on fossil fuels. In March 2009, Energy was 14.3% of the S&P; and now, it’s just a tad above 3%. 

Yes, You Have Our Attention Now!

Earlier in the week, I wrote that the 1,000-point sell-off in the Dow seemed too orderly for many old-school market watchers, not measuring up to traditional capitulation - 2,000 points later, we can say people are afraid. 

• Certainly, the market breadth reflects abject fear
• 6.9 billion down volume on the NYSE and 3.7 billion on the NASDAQ Composite.

Last night

The economic data from South Korea and Japan mostly came in better than expected, as the coronavirus infections continue to fade in China.

South Korea

• January Industrial Production: -1.3% against a consensus of -1.7%

Japan

• January Industrial Production: +0.8% against a consensus of +0.2%
• Retail Sales: +0.6% against a consensus of -0.1%

China Coronavirus Update

• +327 additional infections (318 in China’s Hubei)
• +44 deaths (+41 in China’s Hubei)
• Known total infections hit 78,824, resulting in 2,788 deaths

Portfolio Approach

The model portfolio has a cash level of 15%. Of course, I wish we had more, but everyone should have some dry powder and be prepared to act. Nonetheless, it has been smart not to force the issue, even as favorite long-term ideas come in.

Today’s Session

The equity futures spent all morning trying to cut losses, then word came that Fed officials Bullard and Kaplan are still resisting any rate cut action to combat the coronavirus.  Meanwhile, more good economy data goes begging, but keep it in mind, as we are oversold and soon will be taking action.  

More details on that on the afternoon note.