Can it hold? Better yet... can it build from here? That's what you want to know. Domestic equity indices roared on Monday. How significant was the move? Dead cat bounce? Long-time readers know darned well that I don't believe in the term, and I tend to throw out comments made by pundits using that term. Everything happens for a reason. If you don't know why, then say "I don't know." There were two reasons for the short-term bottom experienced for both equity markets as well as what debt markets yield. The first of these, and the primary cause... hopes for some kind of coordinated response to the global threat imposed by the coronavirus across the community of governments and central bankers facing severe economic slowdown. The second would be political, and that was the withdrawal from the race for the Democratic nomination for president by two candidates (Buttigieg & Klobuchar) with actual followings, ahead of "Super Tuesday" to support the establishment candidate (Biden). The establishment candidate is seen by market participants as an economic moderate, thus not disruptive.
Several sources note that the 1,294 point northerly move made by the Dow Jones Industrial Average was indeed the largest one day increase in history, but that the 5.1% spike was not among the largest single day moves ever. Still, in percentage terms, this move did amount to the largest since March of 2009. Sort of makes this move the largest since high-speed algorithms took dominant control over price discovery away from humans. Maybe. The actual switch-over in how prices are determined came earlier than that, but there was still a significantly high level human contribution for quite a while. This makes, in my opinion, Monday's moves... rather meaningful.
You Got Guts, Kid...
... and some will tell you that guts are enough. But, are they? The S&P 500 picked up 4.6%, the tech heavy Nasdaq Composite a cool 4.5%, but the even tech heavier Nasdaq 100 spiked 4.9%, performing nearly in line with the DJIA. Sector leadership was drawn from an extremely diverse cross-section of equity groupings. Defensive type groups finished in first, third, fifth and sixth... Utilities, REITs, Staples, and Healthcare. However, Information Technology finished in second for the day, with Financials in fourth as some investors finally sold Treasuries with longer maturities later in the day. As for the tech space, it may be noteworthy that while the entire sector performed well, divvied up by industry groups, software outperformed the broader marketplace, while semiconductors did not.
That said, trading volume has been quirky. Monday's volume was by any measure ... simply enormous. That said, Monday's volume fell far short of Friday's tally. We like to see increased volume on a reversal day. Further complicating this thought, the entire market shifted late Friday afternoon, leaving the Nasdaq Composite with a microscopic gain on the day. If one backdates the reversal to maybe 90 minutes prior to Friday's closing bell, does this change the whole view of this reversal, technically? I mean that was when Jerome Powell started reciting poetry. I would still like to see a day where the broad indices perform well on volume that grows from the day prior, but is that because I am too experienced? As I started to allude to up top, are things different now? Do algorithms view trading days as complete entities the way human traders might have? Sure makes the game interesting, doesn't it?
The view from above? Winners beat losers at 11 Wall Street by nearly 5 to 1, and by a rough 3 to 1 at Times Square. Quite decisive, though as mentioned, on trading volume that declined by a ballpark 23% in aggregate. The VIX has come back in, but remains elevated. The CBOE Total Put/Call Ratio has not yet come in.
The slope of the yield curve has improved significantly in recent days, as investors have purchased the short end. That said, the 3 month/10 year inversion has not yet reversed. Readers will note the response of the S&P 500 to this very recent flattening.
An actual positive reading for that spread would, in my opinion, work wonders. As that all-important spread closed at -3 bps on Monday, and bangs around at -5 bps through the overnight, a battleground is set. Do not be surprised if on Tuesday, equity markets continue to respond to this spread in particular.
Another key point to be focused upon was the stabilization of the U.S. Dollar Index on Monday. This could mean that foreign investors have stopped pulling investment (for now) from U.S. markets, thus allowing demand for currency conversion to ebb somewhat.
Super Duper Tuesday
You may have missed French Finance Minister Bruno Le Maire on Monday. According to Reuters, Le Maire told France 2 TV that "There will be a concerted action. Yesterday, I spoke with the G7 president, the U.S. Treasury Secretary Steven Mnuchin, and this week we will have a meeting by phone of the G7 ministers to coordinate out responses."
News now breaks that a conference call will begin around 7 am ET (so, before you read this) to be led by the Treasury Secretary, and Federal Reserve Chair Jerome Powell, that will include both finance ministers and central bankers from across the G-7 community in order to discuss global response to the economic impacts of the Covid-19 outbreak.
Two items to consider? One, while the ECB holds a scheduled policy meeting next week, and ECB president Christine Lagarde has been hesitant in making public observation regarding the impacts of Covid-19, the ECB was forced to postpone a meeting on Monday with the European Commission on capital markets scheduled for Tuesday in Frankfurt as several participants cancelled travel plans. Secondly, later on Tuesday, U.S. Treasury Secretary Mnuchin is set to testify before the House Ways and Means Committee on President Trump's proposed 2021 budget. I would guess that testimony may still be evolving.
TINA? From high school? No. TINA? There is no alternative? Ahh... Basically what we witnessed pretty much from the great financial crisis until 2017. When interest rates plumb to nearly non-existent levels, investors are forced to seek yield elsewhere, really anywhere else. Thus multiple expansion is forced upon equities in terms of valuation whether or not the corporate performance is really there.
In other words, the stock markets and bond markets are forced into an unholy correlation. Oh, yeah... TINA. I hear TINA's been asking for you. Say hi for me.
Demand & Resupply
I was in my local Costco (COST) location on Saturday. The place was crowded, but not as crazy as what I see on the internet. The employees were wearing gloves and handing out wipes to anyone that would take them. Supplies were notably depleted, but at that point, not down to zero. At my local grocery store, I did notice a lack of available canned food. I loaded up on pasta and dry cereal in response. I think I still have a few MREs around here somewhere.
Shares of Costco roared 10% on Monday, bringing the stock all the way back to levels not seen since... last Wednesday, still well below the highs of... late February. So, it was that the populace panicked. They bought what they know they need. They bought what they think they might need. Then they bought everything else. Along with Costco, Walmart (WMT) screamed 7.9% higher, Target (TGT) ran 5.9% ahead of earnings, and Kroger (KR) had quite the day (+5.5%) as well. (Both Costco & Kroger report later this week.) Really can't wait to hear what these firms say in their calls. Not about this sudden surge in sales, but more importantly in regards to being able to resupply those shelves.
Economics (All Times Eastern)
All Day - Total Vehicle Sales (Weekly): Last 16.8M annualized.
08:55 - Redbook (Weekly): Last 5.4% y/y.
16:30 - API Oil Inventories (Weekly): Last +1.3M.
The Fed (All Times Eastern)
14:50 - Speaker: Cleveland Fed Pres. Loretta Mester.
18:30 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (KSS) (1.88), TGT (1.65)