Wasted effort? Not exactly. Mr. Market gave investors what they needed to see on Monday. A significantly higher move supported by higher trading volume, where that volume had increased at that day's higher prices. My take-away, as I told you, was that real managers were starting to reallocate real resources. Could I call the current correction over? Perhaps I could. So I thought. Then Tuesday happened. Tuesday roared out of the gate, but it did feel different. I don't think any trader I know felt confident on Tuesday morning, even with the large cap indices up multiple percentage points. There was some volatility, even with the market higher, and not much to read into the swings in volume at that time.
You all know what happened. Over the final four hours of the session, there was a persistent erosion across equity prices. Then "they" sold the indices into the red just before the close. All in all, few of us really lost anything other than paper gains on Tuesday, but the feeling was fairly awful. Sort of like the feeling one gets the first time they realize that someone they thought they liked had taken advantage of them. Equity index futures remained volatile, if at least non-committal, all night long as foreign equity markets have mostly weakened over night. (Japan was an exception.)
So... What Did Happen?
It's all too easy to place blame when a rally fails, or appears to fail. By the way, even with Tuesday's large give-back, we don't really have such failure, though the elevated volume does imply that there is certainly no confirmation of a supported recovery just yet, either.
Some blame oil. Easy target. Doubts crept into that market on Tuesday that Saudi Arabia, Russia, the U.S., and anyone else reliant upon fossil fuels to drive revenue will agree on anything. The Energy Information Administration then projected huge downside from here for Q2 crude prices. The Energy Select Sector SPDR ETF (XLE) did close at the day's lows, but also still managed to close 2% higher than it did on Monday... so yes, weaker commodity prices for oil do in fact cause algorithmic selling pressure disproportionate in impact to the sector's actual size in the marketplace, but there is indeed a flaw in this thinking. It took me literally hours of pulling up chart after chart to reverse engineer Tuesday's selloff.
That in itself forces me to doubt my own cognitive ability just a bit because the answer was so obvious as to be self-evident to even the most amateur of market watchers. Check this out. Over the past month, three sectors have revealed themselves as market leaders. The SPDR Technology ETF (XLK) , and SPDR Health Care ETF (XLV) are in a virtual tie for market leadership over that time at -6%. The SPDR Consumer Staples ETF (XLP) is close behind at -7%. Stretch performance backward to "year to date" and the same three sectors still lead, just at -9% and -10%. This is where it gets fun. The other eight sector SPDRs are all really still well below both their 50 day and 200 day SMA's Not even close.
Now, every rally relies upon leadership. We always hear about how narrow any rally is, especially from skeptics. Two of our three leading sector SPDRs actually pierced their own 200 day SMAs on Tuesday, only to fail that test... Technology and Health Care. See the charts:
If this was not enough, the Staples approached that fund's 50 day SMA (close enough to call it a test) just after suffering a "death cross" in late March and the result was this...
I must ask. Did the broader market fail because sector leadership failed? Or... did technically forced profit taking in sectors where there has been the greatest upward momentum over the past two weeks exacerbate a market ripe for a little weakness after oil softened? Either way, I think it at least understandable that there would be such an algorithmic reaction given the technical backdrop.
We all have seen some slowing across some key metrics for some of the planet's Covid-19 hotspots. Do we dare dream? We have seen pauses or what look like temporary plateaus in various curves before. Spain just posted some pretty tough looking daily numbers after there had been some hope that the nation had been reaching an apex. We really don't know so much, it is very difficult to place proper value upon risk assets in a world where fundamental analysis may have little value, unless it does. Know what I mean?
Equities have historically been forward looking. That's why traders, when discussing PE ratios, are almost always discussing next 12 months' expectations. Sure trailing PE ratios exist, but when you hear that something trades at a "15 times" multiple, that's not what "they" are talking about. Trailing earnings are however quite useful in evaluating management's performance and discovering trend. The world has changed, probably at least semi-permanently. Now, we value equities at a time where there is neither a plethora of useful historical data, nor will there be a lot of forward guidance made by corporate leaders who really just do not know.
The GDP of the United States ran to approximately $21.4 trillion in 2019. Now, as both domestic and global economies have been shuttered by necessity, just what is the size of the U.S. economy? $15 trillion annualized? I don't know. Now omit emergency government spending. How do you value equities, or debt securities external to the world of artificially created central bank demand in that environment?
How many firms survive? How many employers rebuild? Or rebuild quickly? How many businesses tap the available government programs and then fold up shop anyway? The world will now be far more protectionist in nature. Who will be willing to rely upon on other nations to supply life and death materials ever again? Firms already struggling will likely have to go to the expense of shortening supply lines, significantly. This will pressure margins, though a silver lining could be that through bringing home supply lines an American middle class that was forgotten in that more globalized business world, might be reestablished. Still, at first... this will skew the shape of the curve upon recovery.
Markets will also have to price in layers of debt at every level that will amount to the unfathomable. How much will debt levels, or the servicing of this debt, slow down the wheels of growth? Remember, markets will likely have to do this with almost no participation on the bid side by the corporations themselves, while dividend payments will also be downsized in aggregate. I am sure that you read what Goldman Sachs (GS) had to say on this matter on Tuesday. If not, look it up.
You may have read the MarketWatch interview with former Cisco (CSCO) CEO John Chambers. Chambers was quite pragmatic in his assessment of our immediate future. He sees the economic crisis created by this pandemic running a potential three to five quarters. He does not see economic improvement until this fall, and he does not see a more full type recovery until next year. In other words, Chambers describes not a "Vee" shaped, nor a "Ewe" shaped recovery, but more of an "El" shaped recovery, perhaps with a gradual lift. In my head, I see the Nike (NKE) logo, as various parts of the economy roll in and out of shut-down based upon both testing and national security needs.
Point is, understand what you and I are up against. Even if God willing... the scourge somehow misses us, normal life will be a "new normal" life. There will be no "light switch" that can be turned on, allowing folks to wonder if this was all a bad dream. The sooner one understands and identifies change, the sooner one adapts. The sooner one adapts, the sooner one overcomes. This, my friends, is the eternal rule. As necessary as is clean water, canned food, and a reliable, but concealable source of heat.
On That Note....
- You may have noticed the news that AT&T (T) was able to pull down a $5.5 billion loan from as many as 12 banks. The question for investors had been whether or not AT&T could maintain the dividend at the annual rate of $2.08 (yielding 6.9%). In the statement, the firm goes as far as mentioning the support of network investments, debt retirement, and dividend payments. Safe for now? I think so. I remain long this name and Verizon (VZ) . If I do go down to just one of these, Verizon will be the survivor.
- Really, I had to love what Daniel Ives of Wedbush Securities had to say about Microsoft (MSFT) on Tuesday. Ives called the firm "the Rock of Gibraltar cloud stock to own" as he reiterated both his "outperform" rating and his $210 price target. Ives specifically mentions Azure and Office 365 as drivers. Just so you know what I am thinking. I had mentioned earlier that I had reduced exposure to Zoom Video (ZM) . Well, I am now out of the name (The last tranche not very gracefully.) The cash created is not being added to an already large cash position. Instead the effort will be to reallocate those funds intelligently into Microsoft as I would think Microsoft Teams to be the primary beneficiary of the issues that Zoom is currently having as that firm grows.
- Investors await news regarding Remdesivir, the Gilead Sciences (GILD) candidate for the treatment of Covid-19. The drug, originally developed to treat Ebola (not so successfully) if you have been following the story, has been in trials in China, and news of potential efficacy has been expected sometime by mid-April. This stock, though volatile, has been a winner for the portfolio (though not a home run) at a time when most stocks were not. That said, this is a trade. I don't know how much any success in these trials can add to the bottom line. The fact is that the stock will move on the news, either way. You pay me $82 and I am out of here. In the meantime, I panic on a break at the 50 day line. See what I mean below...
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last +13.834M.
10:30 - Gasoline Stocks (Weekly): Last +7.524M.
13:00 - Thirty Year Bond Auction: $17B.
The Fed (All Times Eastern)
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (RPM) (.21)
After the Close: (PSMT) (.79)