THE WEEKLY TOP 10
Table of Contents:
1) A recession will mean another credit crisis…even if its smaller than the last one.
2) Victory lap! Also, if you read our work regularly, we hope you will support us.
3) We were right about the “Fed put”. (It was not “in the money.”)
4) More “lock-downs” will have a major impact on the consumer.
5) A look at the chart on the S&P 500 Index. (Its very oversold near-term.)
5a) However, the SPX is not oversold on an intermediate-term basis.
6) More downside potential for crude, BUT start nibbling on energy equities.
7) Another good call on gold. $1,550 should provide nice support.
8) The Russell 2000 is very oversold as well (but it better not break Friday’s low).
9) Believe it or not, the airline stocks are poised for a short-term bounce.
10) Bernie’s impact on the market last week was minimal.
11) Washington leadership needs to step to the plate by Monday morning.
12) Summary of our current stance.
1) We believe that a recession…whether it is caused by the coronavirus or something else…could definitely cause another credit crisis….even if it’s not as bad as the one a decade ago. Very simply, the massive levels of corporate & individual debt that exist today will create more stress in the credit markets during a recession than most people realize right now…..We’re not calling for a recession or a credit problem. We’re merely pointing out this potential.
2) In the long version of this point, we basically call-out those who do not support our work. We also take a well deserved victory lap for our incredibly accurate calls on the market(s) recently…which including saying that the correction we were looking for probably wouldn’t start until after the February options expiration. Then we try to convince the dozens of people who read our work on a regular basis…but don’t support it…into supporting our work in the future.
3) One of the key reasons why we were correct when so many other were wrong about a possible correction recently…was our stance on the Fed. Far too many pundits thought that the Fed would step to the plate and protect the stock market after even a tiny decline. We took the exact opposite stance….We merely followed the history of the past decade…which told us the Fed doesn’t “commit” until the markets fall in a significant way.
4) We’d like to be a big more specific about the comments we made in point #1. We’re saying that if the coronavirus spreads in a significant way, it will lead to an important increase in the number of “lock-downs” around the world. If closed schools, closed restaurants, closed amusement parks, cancelled events, cancelled vacations, etc. are something that stays with us for an extended period, it’s going to result in a slow-down in hiring (and even layoffs). That will, in turn, lead the consumer to pull-in their horns…which would be VERY negative for economic growth.
5) Ok, let’s look at the chart of the S&P 500. In the “long version,” we highlight that the SPX broke below its first important support levels last week (including its 200 DMA), but it has become extremely oversold on a short-term basis. We also said the market showed many signs of capitulation late in the week, so it’s getting ripe for a strong bounce soon. However, in today’s mechanized trading world, the market could still fall further…and a 1987-style crash is not out of the question….We then went-on to list the key support/resistance levels to be watching next week….Finally, we explain why once the market does bounce, the “next decline” will be vitally important as to how the next 4-5 months will playout in the stock market.
5a) As we mentioned above, the S&P has become very oversold based on it daily RSI chart. However, it has not become oversold on its weekly RSI chart, so a near-term bounce…even a strong one…will be no guarantee that we’ll avoid another lower-low before the year is over. If the market does roll-back over at any time over the coming weeks and months, the most important support level for the S&P will be its 200 week MA.
6) Crude oil has taken another leg lower, like we thought it would. It could/should have to test its 2018 lows before it bottoms, but we do think that investors should start nibbling on the washed-out energy stocks down here. The XLE and XOP are incredibly oversold on both a short-term and intermediate-term basis, so they are poised for a period of outperformance. It’s too early to get aggressive on the buyside of these names, but nibbling away on your favorite ones should be a good strategy right now.
-7) Our calls on gold have worked out very well once again recently. After remaining bullish on gold for some time, we said (last weekend) that several key indicators were telling us it would take a breather over the near-term…even though we thought the stock market see a correction…..Now that the extreme levels on these indicators have been worked-off some-what, we believe the $1,550 level will provide great support for the yellow metal.
8) The Russell 2000 has become very oversold on a near-term basis. We believe it will bounce very soon (along with the above-mentioned S&P 500). However, if the Russell breaks below its lows from Friday (which came at a level that has provided excellent support over the last year) at any time in the coming weeks and months, it’s going to be very bearish for this small-cap index on a technical basis.
9) Believe it or not, we think the airline stocks are attractive for short-termtraders. The XAL airline index is SEVERLY oversold on both its daily and weekly RSI charts. There’s no question that this is an idea that is only for those with a very high risk tolerance…and any long positions should have tight stops. However, if the broad market bounces, this group should have a strong short-term bounce as well.
10) As for our weekly political note, we don’t believe Bernie Sander’s rise had much of an impact on the markets last week (as much as his detractors tried to spin things that way). If you look at the way the market reacted to every piece of new-news on the coronavirus, it becomes obvious that this issue was the main culprit……We think the race it down to Bernie and Mayor Bloomberg. If the Mayor wants to win, he HAS to portray himself as a Washington outsider, not just the most competent person in the field…..Finally, we have to ask, “Where have you gone, Bob Scheifer?”
11) Even though we thought Kevin Warsh was shameful in his comments about the existing members of the Fed last week, we do agree that the Fed and other leaders in Washington (from the White House, Congress & Treasury) have to come up with some proposals/plans by Monday morning…in order to give confidence to the market place. In today’s world of mechanized trading, a 1987-style crash is not out of the question.
12) Summary of our current stance……A few weeks ago, we said that it was simple common sense to think the stock market would see a correction after the coronavirus became an issue. The stock market was overbought, over-loved and over-valued…so it had finally become very vulnerable. Therefore, we said, investors should raise some cash and get more defensive. This call…which went against the consensus at the time…has worked out very well…….….Now, we believe the stock market is ripe for a strong short-term bounce, but we’re going to need help from leaders from the White House, Congress and the Fed…or a 1987-style crash is not out of the question. Whether the bounce is a lasting one is an entirely different question. If the coronavirus leads to “lock-downs” in a lot more areas around the world, it’s going to raise the odds of a recession greatly…and if we get a recession, the massive levels of debt in the world will create a lot more stress in the credit markets than most people realize right now………..Therefore, investors need to stay calm…but “staying calm” does not mean “do nothing.” Investors must prepare in advance for the worst case scenario…just in case.
1) There is no question that the coronavirus is a human tragedy…given the loss of life. However, since I am a market strategist, I feel that it’s important to focus on the economic impact this healthcare crisis might have going forward. It is our opinion that, on a longer term basis, the real issue is whether the “lock-downs” we have seen in certain parts of the world become much more prevalent in many other parts of the world. If that does indeed take place, it will raise the odds to a very high level that a global recession will take place before long. However, the most important aspect of this scenario is that a recession will have a MAJOR impact on companies (and people)…who have become LOADED up with debt in recent years.
What we’re saying is that a recession…whether it is caused by the coronavirus or something else…could definitely cause another credit crisis. It could very well be a credit crisis that is nowhere near as big as the one 11 years ago. However, even a smaller credit problem will create some serious pain around the world. Therefore, all investors should be spending at least a little time strategizing about how they’ll respond to some pronounced stress in the credit markets. If they don’t, they’ll be making a big mistake in our opinion.
No, we are not saying this is our base-case scenario (at all). There are MANY reasons to think that we can avoid a recession. However, we strongly believe that not enough people are focusing on the impact a recession will have on those who are carrying a large debt load. (The key words in that last sentence were, “will have”….as using the words “might have” would not be accurate enough. The next recession…whenever it comes…IS going to clobber many of those who are carrying large levels of leverage.)
The numbers are staggering. The world’s total debt load moved above $250 trillion…or 322% of global GDP by the end of Q3 2019 (the highest on record according to the Institute of Int’l Finance). Here in the U.S., American corporations have almost $10 trillion in debt…which is about 47% of the overall economy. On top of this, the U.S. total consumer debt has moved above $4 trillion dollars for the first time…and their credit card debt has risen to almost $1 trillion according to the Federal Reserve.
If (repeat, IF) a recession develops in the next year, it’s going to cause companies and individuals to deleverage in any meaningful way. That kind of response could/should lead to a decline in overall investment, a rise in unemployment, higher lending standards by banks and it could/should have a negative impact on consumer spending. Given that the consumer has been the one thing that has been holding up the U.S. economy over the past year or so…when we saw a substantial slowing in the manufacturing sector…this would not be good for domestic growth (or global growth) going forward. That, in turn, would lead to a rise in corporate defaults…which would create a considerable rise of stress in the credit markets.
We hear so many pundits still say that the coronavirus will only impact the economy for 1 or 2 quarters, but they really have NO idea how long it will take. (Maybe they’re right, but they haven’t got a clue whether they will be correct or not.) If this healthcare crisis lasts for a longer period of time…and moves into the summer months…and thus raises the odds of a recession…it’s not going to be “made-up” in future quarters. The ensuing damage that will be inflicted in the credit markets if (repeat, IF) a recession becomes probable…will keep that (“make-up”) scenario from playing out.
We’re not trying to scare people with this first bullet point. We’re merely stating that the potential exists for the coronavirus to have a more of a negative impact on the economy (and the markets) than many/most pundits are saying right now. COMPARING THE CORORNAVIRUS TO THE SARS OR H1N1 BREAKOUTS IS SILLY. THOSE TWO BREAKOUTS CAME AFTER HUGE LEVELS OF LEVERAGE HAD ALREADY BEEN WRUNG OUT OF THE SYSTEM (IN 2003 & 2009). THIS VIRUS IS COMING AT A TIME WHEN LEVERAGE IS AT RECORD LEVELS…BOTH HERE IN THE U.S….AND AROUND THE GLOBE!
This is why plans for both fiscal and monetary stimulus NEED to be constructed immediately. We’ll have more on this last thought in later points. For now, we’ll just reiterate that the REAL potential problem that could arise from from any further pronounced increase in the “lock-downs” caused by the coronavirus will show up in the credit markets. THIS is what investors should be focusing on…because it’s a bigger issue than most people are contemplating right now.
Finally, we feel it’s important to reiterate once again that we are not calling for a recession or a bear market right now. It’s way too early to do that. (With this in mind, we hope you’ll read the comments we made in point #11 below.) However, we DO believe it’s important to highlight that it’s a real possibility that the coronavirus will cause some consequential problems gong forward.
2) We don’t mean to dislocate our shoulders while patting ourselves on the back, but we have to take a victory lap for the stance we took on the markets after the coronavirus first became public. Actually, we were already cautious, but we definitely doubled-down on that stance after this healthcare issue raised it’s ugly head.
When most pundits were saying it would be a non-event, we said it would cause a stock market correction. We said investors should ignore the perma-bulls who tried to compare the coronavirus with SARS & H1N1 breakouts…because their “starting points” were completely different. We also said the given the impact of today’s momentum-driven algos, a usual 7%-10% pull-back could/should turn into a 10%-15% correction. On top of this, we said that the safe haven assets would rally…and we urged investors to raise some cash (especially in the high flying names…because they would get hit the hardest) so that they would be able to take advantage of a situation where the baby is thrown-out with the bathwater. We even said that South Korea should be a good indicator for whether the coronavirus would become a bigger issue for the markets or not. Finally, earlier in February, we said that the stock market could rally a bit further (due to the “dealer gamma” issue), but that it would become very vulnerable after the February 21st options expiration.
Again, we apologize for the victory lap. However, we will not be sending our work out for free for much longer. Therefore, if you want to continue to get this kind of insights...and accurate calls on the markets, on ETFs and on individual stocks that we have become known for, we hope you will subscribe to "The Maley Report" (TheMaleyReport.com) by clicking here. The rest of this year is going to continue to be VERY volatile and if you want to maximize your profits during these volatile times, your going to have to look beyond the fundamentals. This is what we do, so come along with us...and profits while others continue to struggle.
3) Another one of the key reasons why we were correct when so many other were wrong about a possible correction is our stance on the Fed.Far too many pundits thought that the Fed would step to the plate and protect the stock market after even a tiny decline. We took the exact opposite stance. In fact, we said (based on the Fed Minutes and from the public comments from FOMC members) that the Fed had become very worried about the excessive level of asset prices in January…and therefore they would actually like to see some air come out of the stock market (and other assets). This turned out to be quite prescient.
Of course, we’re certainly not saying that the Fed was hoping for this healthcare tragedy to take place, but we did believe that they would not step-in quickly to try to keep this healthcare crisis from having a moderate impact on the markets. (Yes, it seems like an huge reaction, but a 12% correction is actually a moderate response.)
We also said that the history of the past 10-11 years supported this stance as well. Since the credit crisis, the Fed has always waited for the stock market to decline much more than 10% before they stepped to the plate to defend the markets/economy. (We’d note that a decline in the stock market of more than 10% usually coincided with an increase in stress in the credit markets, so that played a role as well. Either way…and as we’ve been saying for MANY years…the Fed is at least as much “market dependent” as they are “data dependent”…whether it’s the stock market, the credit market or both.)
The problem was that after the “straight-line” rally in the stock market from late 2018 until this year…it led many/most pundits to believe that the Fed would never let the market decline much at all. Despite the above-mentioned proof, they believed that the “Fed put” was an “at the money” put…instead of one that was well “out-of-the-money”…like it has always been. Therefore, it made common sense in our minds to think that the stock market…which had become VERY overbought, VERY over-loved and quite over-valued…had finally become VERY vulnerable to a correction.
However, most pundits remained very, very complacent…….….We’re glad that we did not…and we hope our analysis helped you make money…or at least save some money…during last week’s stock market rout.
4) We’d like to take a second to go into more detail about one of the issues we raised in point #1…when we warned that IF the coronavirus spread further…and the “lock-downs” that will go with any significant further spread as well…it will have an outsized impact on the economy.
Again, we still have no idea how bad the impact of this coronavirus will be for the global and U.S. economy. As we mentioned above, we don’t want to sound heartless, but the real issue for investors is not how many people will get infected or how many will die….but what kind of “lock-downs” will take place around the globe…and how long those lock-downs will last. Let’s face it, we’ve been hearing for years that we don’t have to worry about the U.S. economy (and thus the U.S. stock market) because the consumer is SO strong. Well if the consumer goes into “lock-down” mode in any meaningful way, it’s not going to be good for consumer spending on many different levels. (Closed schools, closed restaurants, closed amusement parks, cancelled events, cancelled vacations, etc.) As one official from the Peterson Institute said over the weekend, “The cure is almost worse than the disease.”
If schools close…if spring vacation plans get changed/cancelled…if summer plans turn into “staycations”…it’s definitely going to have an impact on the economy and the market. Right now, a decent amount of the concerns surrounding the potential of the consumer “pulling in their horns” is finally being priced into the stock market. However, if it looks like this healthcare crisis is going to last a lot longer than people realized, it won’t matter how much “pent-up” demand gets built-up over the next couple of weeks. At some point, some of that demand will be gone forever.
More importantly, if the coronavirus is still with us as we move through the summer, it’s going to start having an impact on employment. It could lead to an increase in layoffs…and/or it could cause new hiring to slow in a compelling way. All of this would have an important impact on consumer spending…and it would raise the odds greatly that a recession will begin soon. As we focused on in the first bullet point, a recession will be very negative for highly leveraged companies and consumers…and thus it would raise the odds the recent stock market correction will eventually become a bear market.
Finally, we’d highlight that China’s PMI (which was reported on Saturday) fell all the way down to 35.7 in January (from 50.0)…its weakest reading ever! This has led Pimco to say that China’s GDP could contract by 6% in the first quarter!....Yes, this will obviously bounce-back in a significant way once the coronavirus becomes contained, but there’s no guarantee that it will rebound as fast as people have been assuming…especially if the virus is not contained by this summer.
This bullet point is a bit repetitive…and quite similar to point #1…but we wanted to make sure that we didn’t just say that a further spreading of the coronavirus would raise the odds of a recession…without saying WHY we thought it would.
5) Ok, let’s talk about the stock market in a more specific manner. The S&P 500 index obviously broke below its important support level we touched-on last weekend (its 200 DMA of 3047 and its old breakout level of 3025). At its intraday lows from Friday, it had retraced almost exactly 50% of its rally from the late 2018 lows to the recent record highs. It’s RSI chart closed at a very oversold level of 19.16 (after falling below 17 during the day)…which is exactly where it stood at the very bottom of the Q4 2018 decline. Also, volume jumped off the radar screen…with the composite volume rising to almost 7 billion shares. In other words, there were several signs of at least some capitulation earlier in the week, but by the time we got to 3:45 on Friday, the signs of capitulation had become quite prodigious. (God only knows what shenanigans helped the market rally 2.5% in the last 15 minutes.) (1st chart attached below)
Of course, as we write this piece (Saturday afternoon), the news on the coronavirus continues to get worse. It has now spread to 60 countries…South Korea is seeing a rise in new cases (594 on Saturday…its highest daily jump)…Washington State reported its first death…more non-travel related cases are being reported in the U.S….dozens of companies restricting travel for their employees…etc. Therefore, even though the stock market is becoming very oversold on a short-term basis, that doesn’t mean that Friday’s late-day bounce will hold as we move into next week.
Even though we were correct in predicting this correction, we did not expect it to take place over just seven days! However, with so much of today’s trading impacted SO strongly by momentum-based strategies that CTA’s and other hedge funds use…and the algos they use to trade them…it’s certainly possible that the stock market could still fall further. In other words, even though most deep corrections (and even bear markets) have always seen strong/sharp bounces along the way, the “make-up” of today’s market could lead to a further “straight-down” crash before the market bottoms out. (Of course, nobody every talks about how this type of trading helps the market see outsized rallies quite frequently as well, but that’s a discussion for another time.)
However, as much as the markets have changed, we do not believe that they’ve completely changed. We also believe that there’s a good chance that both fiscal and monetary authorities will do what they can to stabilize things by Monday morning…Tuesday by the latest. Therefore, we doubt that the stock market will move directly into bear market territory (if we ever get one)…and will instead see several sharp bounces…EVEN if we do indeed eventually see a bear market in stocks during this decline eventually.
Needless to say, we’ll have a better idea of what is going on in terms of the short-term picture when we send out our “Morning Comment” Monday morning (after the overseas markets open and the domestic futures start trading once again), but we’d still like to highlight the key short-term support/resistance levels to watch as we move into and through next week. On the support side of things, the first level for the S&P 500 index is obviously Friday’s intraday low of 2855. The S&P closed 100 points above that level, so we could see another substantial drop Monday morning…without breaking that key short-term support level……If we get some positive (supportive) news from either the political or monetary authorities over the weekend, the market could rally straight up from here, but if another drop successfully holds that level, it will be very bullish as well (at least on a near-term basis)…….If Friday’s low is broken, the next key level will come-in at 2764. That is the lows from May 2019…and a Fibonacci 61.8% of the entire rally from the late 2018 lows.
In terms of resistance, the first one will be the 200 DMA of 3047. A break above that level should give the market some nice short-term upside momentum. Above that level, we have 3170…which is a 50% retracement of the decline (on a closing basis) and where the 100 DMA for the SPX comes-in. Above that, we have a very important resistance in the 3225 range. That was “old support” (the lows from January 31st) and thus it becomes “new resistance”…but would also represent a Fibonacci 61.8% retracement of the decline.
Again, we would expect a bounce early next week. That initial bounce should be a strong and sharp one…and it should last a couple of weeks. After that, the “next decline” will be vitally important. If it creates a “higher-low” that is followed by a “higher-high,” it’s going to be very bullish. If, however, it breaks below whatever near-term low we make, it’s going to indicate that a bear market is not only possible…but quite probable.
5a) As we mentioned above, the S&P has become very oversold based on it daily RSI chart. However, it has not become oversold on its weekly RSI chart, so a near-term bounce…even a strong one…will be no guarantee that we’ll avoid another lower-low before the year is over. If the market does roll-back over at any time over the coming weeks and months, the most important support level for the S&P will be its 200 week MA.
That moving average has provided ROCK SOLID support during all of the sharp declines we’ve had since the financial crisis a decade ago. It provided UNBELIEVABLY strong support a couple of times in 2011 (during the European crisis)…again in early 2016 (during the oil crash)…and once again in late 2018 (during the Fed-induced deep correction of that year). That level comes-in a 2622 right now. If (repeat, IF) the stock market sees another scary leg lower, the 200 week MA should provided excellent support. Even if it is eventually broken…for whatever reason…it should help the stock market bounce over the near-term……..However, if it is broken in any material fashion, it will signal that we’re looking at the kind of disastrous bear market that is similar to the ones we saw in 2000-2003 and 2007-2009.
6) We’ve been saying recently that crude oil needed to see one more wash-out move…down into the mid-to-low $40s…and then it would provide a great buying opportunity. Well, the black gold has certainly seen another down-leg…and has indeed fallen into the mid-$40s. However, a drop into the low $40s would make it a better opportunity to load-up on the energy stocks and look for a period of outperformance for the group in our opinion. HOWEVER, we DO believe this is a good spot to start dipping one’s toe back into the water for this group.
Looking at the chart on WTI, it’s weekly RSI chart is getting quite oversold, but it has not reached the same extreme that it did in late December of 2018. Therefore, it might have to retest its lows from both 2017 and 2018 (of about $42.50) before it reaches the kind of extreme oversold condition that would make us feel that we can get more aggressive on the buyside in the energy stocks.
That does not mean investors cannot start nibbling at these levels. The last two times the energy stocks became washed-out (in early 2016 and early 2019), it was followed by a 4-5 month period of outperformance in the sector. The energy stocks are incredibly under-owned and everybody hates them. Therefore, this group has become ripe for another multi-month period of outperformance in our opinion.
On top of this, as you can see from their RSI charts, both the XLE energy stock ETF and the XOP oil & gas E&P ETF are VERY oversold on both a short-term and intermediate-term basis (especially the short-term). Therefore, we don’t think investors should wait to start picking away at this group. It’s impossible to pick the exact bottom…and given how badly the group has acted for a very extended period of time…starting to pick-up shares at these levels would be a good idea. Again, one more downdraft in crude oil should provide a better opportunity to get more aggressive, but starting to pick-away at the group at these levels should be a good idea.
We must admit that there is a lot of risk with this call. Not only has the group acted poorly for a long time, but both of these ETFs have just made key “lower-lows”. However, the do seemed washed-out…especially after Friday’s huge decline (which looks like a complete flush for both ETFs). Therefore, traders should use tight stops on these ETFs and the individual stocks…and they should not be aggressive at these levels. However, we believe that “picking away” at these names down here is a good idea…given how washed-out they have become.
7) Last weekend we said that gold had become overbought and over-loved and therefore it had become ripe for at least a “breather”…if not a pull-back. We also said that it should take a “breather” EVEN THOUGH we remained bearish on the stock market. This call was another one that worked out very well…and the movement in this market gives us yet another reason why investors need to look beyond the fundamentals if they want to maximize their returns in today’s markets.
The yellow metal has become extremely overbought…with its daily RSI chart moving up to 80. It had also become over-loved…with a bullish reading in the DSI data moving above 90%. Finally, the COT data showed that gold had become extremely over-owned. In fact, the data showed that the dumb money “specs” had built up their largest long position ever! Therefore, even though the risks to the stock market remained high…and even though the “flight to safety” trade continued to work in the Treasury market, the gold market took it on the chin last week…much like we thought it would.
So what’s our thinking right now? Well, gold is not oversold yet. In fact, even though it fell over $104 from its intraday highs from last week, it’s not close to being oversold. However, it HAS worked off the extremes it had reached last weekend (bullishness has already fallen to 63%). Since a lot of the technical extremes were worked-off in the last week, we think gold will hold-up quite well going forward. In fact, even if the stock market bounces strongly, last week’s decline has already priced a lot of that kind of move into its price. (In other words, if gold can drop significantly even when the stock market is falling out of bed…it can hold-up if stocks bounce-back on a short-term basis.)
We believe the $1,550 level will hold. Remember, that was the “old resistance” level that became “new support” early this year. It held that level VERY nicely on its last decline, so we think it will hold that level again…especially since it looks like it’s going to be a while before the coronavirus issue subsides in a significant way.
8) Believe it or not, the Russell 2000 did not fall as much as the S&P did during this decline. Of course, this is not a big surprise given that it had underperformed the S&P during most of 2019. It tested a very important support level on Friday…and thus it’s something we’re going to be watching very closely over the next few trading days. In other words, Friday’s lows are going to be important for a lot of stock indices…none more than the small-cap Russell.
On Friday, the Russell’s deep drop took it down to its lows from May, August and October of last year. It has become very oversold on a near-term basis (with an RSI below 20), so it is definitely getting ripe for a short-term bounce. However, just like it is with the S&P 500 index, it is not oversold on an intermediate-term basis…and thus if the bounce does not last very long…and rolls back over (creating a “lower-high/lower-low” sequence), it’s going to be very bearish for this key index as well. In fact, unlike the SPX, the Russell is already testing its 200 week MA, so any break below Friday’s lows at any time in the coming weeks or months is going to be quite bearish for this index.
Needless to say, the Russell 2000 index tends to be a good indicator for the domestic economy, so we’ll be watching its action very closely going forward.
9) The airline stocks have become INCREDIBLY oversold. Of course, there’s a good reason for that, so investors should not be looking to back up the truck on this group any time soon. However, for shorter-term traders, there could/should be a good opportunity to makes some good money on the long side in this group before long. In other words, if the broad stock market can finally see a nice bounce, the airline stocks should see a major relief bounce as well.
Again, this is a short-term call for traders. We’re not calling for a long-term low for the group. However, the daily RSI chart on the XAL Airline index has fallen to just 15.67…and its weekly RSI chart has fallen to its most oversold level since 2011!!! Therefore, this group could be setting up for a decent bounce. (This should be especially true for DAL & AAL…whose short interest was pretty high in mid-February…and has almost certainly grown even higher over the past two weeks……Squeeze???)
Don’t bet the farm…and use very tight “stops”…but for those who have a high tolerance for risk…this could group could surprise a lot of people the next time the stock market bounces in a significant way (as crazy as that might sound to people who only follow the fundamentals).
10) We spent most of the time talking about coronavirus. There’s a very simple reason for this, it is (by far) the number one reason for the recent sell-off in the stock market. A lot of people are trying to give Bernie Sander’s rise a lot of blame for the decline. Don’t get us wrong, we think that a Sanders presidency would be very negative for the stock market, but to think his rise would cause more than a 3%-4% decline in the stock market before Super Tuesday is ridiculous. Besides, the catalyst for EVERY big down-leg of last week’s decline was new-news about the coronavirus. Therefore, we believe the “Bernie excuse” is just something being used by those who originally said that the coronavirus was a non-event…or those who are trying to thwart Bernie’s chances to win the Presidency.
We’re not saying that Bernie’s rise has had zero impact, but it seems obvious to us that it’s only playing a minor roll in the decline last week. Of course, now that President Trump is getting some heat on his handling of the coronavirus, the “Bernie factor” could quickly become an important factor in the market place…especially if Bernie wins big on Super Tuesday. However…at least so far…when you look at the way the market reacted last week to every bit of new-news on the virus, it’s pretty obvious that this subject was the main culprit behind last week’s historic decline.
As for the Democratic race, Bernie is in the drivers seat, but he’s a long way from winning enough delegates to insure the nomination on the first ballot. He just kissed good-bye to Florida with his comments about Castro and Israel, so the “electability” issue is still a problem for him. However, even if the national polls meant something…which they don’t…Bernie’s lead over Trump in them wouldn’t mean anything in February. So we don’t believe the Senator had an important impact on the markets last week.
Mayor Bloomberg did better in the debate last week…but that’s not saying much. However, he is still the only alternative to Bernie. If Biden wins South Carolina, he’ll get a boost, but he looks and frequently acts like somebody 10 years older than he actually is. Warren is done…and the others won’t have the money to go on much longer. That leaves the Mayor. Mr. Bloomberg has two opponents left: Bernie and President Trump. Both continue to run as outsiders (and successfully so). If the Mayor wants to beat them, he HAS to run as a “Washington DC outsider”. He CANNOT JUST SAY that he’s somebody who is more competent that President Trump. Of course, it will be impossible for him to run as an “anti-establishment” candidate, but he CAN run as a “Washington outsider”…just like EVERY successful candidate who has won the Presidency over the past 100 years (save one…Bush).
Either way, we’ll obviously have a much better idea of what is going on the day after Super Tuesday (this Tuesday), so we’ll leave it there..……One last comment however. We have to talk about the debate. (BTW, did you notice that Hillary ran an add during the debate. Actually Hulu ran it, but is shows that she still has hope in her own mind that she can pull it off.)......Anyway, CBS must be wondering if they can bring Bob Scheifer out of retirement after Tuesday night’s debacle. That was an embarrassment (and it was another good night for President Trump).
11) In point #1, we went to great lengths to highlight that the coronavirus MIGHT become a much bigger problem for the U.S. (& global) economy and markets. Therefore, we said, it is important that investors of all stripes work on yet another contingency plan…so that they can be prepared in case a recession and bear market becomes inevitable. (In other words, we suggested that investors have a plan in place in case of a correction. Now that we’ve entered correction territory, it’s time to have a “bear market plan” in place…even if you never need to implement it.)
We’d like to add that we believe that it’s essential that the authorities from the U.S. (White House, Congressional leaders, the Fed) come up with something more than they provided on Friday. As we mentioned earlier, there is more bad news out there on the coronavirus, so things could get very ugly once again on Monday. In fact, it’s not out of the question that we could get a 1987 style crash early next week. That might sound crazy, but in today’s markets…which are so highly impacted by momentum based mechanized trading…a significant one-day crash like we saw in 1987 is a real possibility. It probably won’t be a 20% decline…due to the circuit breaks that remain in place…but it could still lead to a MAJOR market disruption.
We DO NOT think this will happen. We believe that the authorities in the Treasury and Fed will be well-prepared by Monday’s opening of the markets. However, they’ll need to provide some plans/proposals that will calm things down before things get out of control. (The big problem is that we thought that there was no way the Giants could beat the Patriots in the Super Bowl. We were wrong both times…so maybe our confidence in Washington DC is way off base this time as well.)
We’ll end this point by highlighting that we’re saying here is very similar to what former FOMC member Kevin Warsh said late last week. We actually hate to admit that we agree with Mr. Warsh…given that many of his comments were really attacks on the existing members of the FOMC…and he seemed more intent on making them look bad (and thus trying to lower confidence in the existing Fed). Much of what he said was irresponsible in our opinion…and only escalated the dangerous situation that had developed late last week.
12) Summary of our current stance……A few weeks ago, we said that it was simple common sense to think the stock market would see a correction after the coronavirus became an issue. The stock market was overbought, over-loved and over-valued…so it had finally become very vulnerable. Therefore, we said, investors should raise some cash and get more defensive. This call…which went against the consensus at the time…has worked out very well.
However, there is no guarantee that the decline is over. Although many people are debating how much of an impact the coronavirus might have on the economy, almost nobody is talking about the problems that will almost certainly arise in the credit markets if this healthcare crisis creates a recession. Too many people are saying that any recession that develops will just be a run of the mill recession because our banks are in much better shape. Okay, we understand that argument, but a recession will still cause some substantial stress in the credit markets because the levels of corporate and individual debt in the U.S. and around the globe are at record highs. Therefore, even if we don’t get a major crisis like the one we experienced a decade ago, it could still be a much more painful one than most people realize right now.
No, we are not predicting a recession (or a bear market). We believe that the Fed & other global central banks will act to try to prevent those from taking place…now that the market has fallen in a significant way. However, we think it’s important to realize that they have not outlawed recessions forever…and thus investors should be making contingency plans…just in case we do indeed fall into a recession.
Near-term, we expect the stock market to bounce soon. Historically, markets don’t crash directly from all-time highs…and we think the authorities will do something to calm the markets in the very near future. The bounce will probably be a sharp one. However, if the coronavirus continues to spread…and if the “lock-downs” we have seen in some parts of the world become much more plentiful, the odds that we’ll fall into recession before long will grow dramatically…no matter what the central banks and governments do to try to prevent it.
We keep hearing a lot of people say, “Don’t panic.” That’s excellent advice. Things RARELY go well when people panic. However, “don’t panic” does not mean “do nothing”!!! Be prepared. Have a plan in place for what you want to do if the situation deteriorates. Those who headed our suggestions and raise cash a few weeks ago are in much better shape today than those who did not……We’ve said it before and we’ll say it again. Those who have a some money on the sidelines…AND a plan in place IN ADVANCE…will be able to keep their heads while others around them are losing theirs. We believe that investors of all stripes should be acting accordingly right now.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.