So many questions. So much not just unknown, but unknowable as well. Domestic equity markets turned in their worst single day in at least several months on Monday (Nasdaq Composite since August, S&P 500 since October). The broader indices fell between 1.5% and 2%. The Transports, again... took a absolutely terrific beating. Trading volumes were not significantly elevated from days prior, but have remained elevated all month. That last trading day that aggregate trading volume for constituent members of the Nasdaq Composite ended below their own 50 day SMA was, wait for it... December 30th. Yup, way back in 2019.
Leadership to the downside came from the Energy, Technology, Materials, Communications, and Financial sectors in that order. What do these groups share? Either a dependence upon global demand (also impacting industrial commodities), sensitivity to the yield curve, or for some, just an abundance of last sales ripe for still lucrative profit taking even at a profound discount to recent highs. Leadership to the upside? Well, there was no upside. All 11 sectors shaded red on Monday, but truth be told... the pain was felt to a lesser degree across the Utilities, Staples, REITs, and Health Care, all defensive in nature... in that order. On the trading floor of the New York Stock Exchange, losers beat winners by almost 4 to 1, while declining volume beat advancing volume by nearly 8 to 1.
U.S. equities were not alone, in fact stocks here at home outperformed much of planet earth on Monday. The beating was worse in London and Tokyo. Both have tried to make a stand on Tuesday, as have U.S. equity index futures though I would call that stand quite shaky. The Shanghai Composite remains mercifully closed for the Spring Festival. Traders here in the U.S., must be cognizant at this point, that across the Dow Jones Industrials, and many individual stocks, 50 day SMA are suddenly "too close" to not feel some gravitational pull.
Some will point out correctly that trend line support is currently being tested...
While this is true, the test appears maybe just a little less severe when one applies a slightly more forgiving Pitchfork rather than underlining a trend that has only been tested once before. This method also allows one to push back the start of the model to a lower low.
Using this method, we can see that the central trend line has behaved both as resistance and support with regularity since early October when the Fed got aggressive with adding liquidity, both in short-term repo markets and in balance sheet expansion. To make a run at recapturing the central trend line, there would need to be a positive catalyst. Is one out there?
What Must Be Considered
The U.S. economy, the world's largest... is consumer driven. The Chinese economy, the world's second largest, as growth has slowed, has made an overt attempt to become more consumer driven. How important is consumer confidence/sentiment? You do not need to ask. This morning (Tuesday), Hong Kong's Carrie Lam and her crew, all clad in blue surgical masks, severely limited travel between Hong Kong and Mainland China. The latest information that I see, and there is a lag, shows that this coronavirus has now infected 4,474 individuals. 4,409 of whom are in Mainland China. There have now been 109 deaths attributed to this ailment and just 63 full recoveries. The real problem, and this is a real doozy, is that people can feel fine and spread the virus for up to two weeks without knowing it.
So, what happens to not just demand in aggregate, but to consumer sentiment as individual freedoms are stripped away and the people you love get sick? Anyone? You, in the back. People get depressed. Economic activity beyond necessity grinds to a halt. Very good. You're spot on. Wuhan, in Hubei Province in China, is the epicenter of this illness, This is a city of 11.1 million human beings. Chicago, Illinois is a city of 2.7 million for the sake of comparison. What do you think would happen to U.S. economic growth if more than four Chicagos were completely shut down? Now, understand that many Chinese cities have been shut down, and that the population impacted by these shutdowns has exceeded something like 60 million people. I haven't even seen a very recent number for this, but if you live in China, you're probably more than concerned by now, and you do not know when you will work again, so you are not spending. The velocity of money, which is the very lifeblood of any economy grinds to a halt. Full stop. Still with me, gang?
Moving Right Along
Still, this coronavirus remains a China-centric problem? People are not yet dying in other countries. Do we have to worry here? That's the wrong question. The concern is that this virus spreads, and it likely will, to poor countries, with weak healthcare systems, and poor security at points of entry. What then? People from those countries move in and out of the U.S. quite frequently. On a grander scale, depending on how badly Chinese GDP is damaged, and it will certainly be damaged, can the nation even live up to the Phase One agreement? My guess, is that this is now a big maybe, and there can absolutely be no timeline for expected purchases, nor can we even ask until the situation on a grand scale improves.
Now, obviously, the yield curve once again becomes an issue here in the U.S. You will hear some cavalier talk in the financial media that central banks have distorted the curve to the point of rendering its usefulness as irrelevant. I agree, that the curve has been distorted. Irrelevant? Be careful with that attitude, cowboy. Last thing we are going to need is arrogance. The Fed has allowed the longer end of the curve to trade freely for quite some time. The demand there has come from foreign central banks in nations that foolishly went down the path of negative interest rates. Now, the demand is for safe haven. The same Fed had wisely (and yes, that's meant as a compliment) focused on anchoring short term rates with their asset purchase program.
The FOMC, as you are well aware... will huddle up today, and come out with a policy statement tomorrow (Wednesday). What must be understood is that as this virus has become headline news, its impact on psyche has distanced itself ahead of the macro, and ahead of Q4 earnings. That is all past performance. This virus renders all forward looking guidance as subject. Get over it. That's fact. All may be well, this illness may be halted in its tracks. Solid fact is that U.S. equities were overbought, primed for profit taking, and in need of an excuse. The greater risk is to the downside, my friends. I am not saying this can not end well. I am saying that investors can not be casual about this risk. If you see one of your children playing with a book of matches, you probably don't wait to see what happens.
Evolution of Monetary (Fiscal?) Conditions
It will be impossible for voting members of the FOMC to avoid discussing behavior of the U.S. 10 year note. Let me correct that. Some of these folks have proven to be less than focused on the mission at hand in the past, so I'll lay it out for them. This is what yields for U.S. 10 year paper look like over the past few months.
Some week, huh? At the same time, investors have started selling, yes... selling short term paper. Three month T-Bills ended Monday yielding more than late last week. No kidding.
Stay with me gang, I know this is a lot, but if they come for us, we have to understand what we face, and so do the voting members of the FOMC. What this action has done is compress the most important spread anywhere in the U.S. economy. There is no close second place. The 3 month/10 year spread collapsed to 6 basis points on Monday afternoon.
The potential tragedy here would be that the correlation between this spread and equity performance as measured through the prism of the S&P 500 has once again re-correlated.
I have been at this for several hours now, so we are no longer dealing with zero dark thirty type data. It's past 6 am by me. Most commuters are well on their way, if not already at the office. (highly motivated, truly dedicated) This spread? Back up to 5 basis points after trading below 4.
As for the Fed? Futures trading in the above mentioned city of Chicago are pricing in a small chance of either a 25 basis point reduction, or a 25 basis point increase made to the Fed Funds Rate in March. Jerome Powell, unless this spread expands significantly by Wednesday afternoon, is going to have to pay some lip service to the idea of cutting the targeted overnight rate in order to give the yield curve some breathing room. In other news, it is said that the Fed is considering yield curve control as a method meant to stimulate the economy in the event of a downturn while interest rates are already low. I am fine with the idea of focusing on the short end, which they have been doing. Focus on capping yields on the 10 year? Have we learned nothing? Have we not learned that true quantitative easing, or what the Bank of Japan has done to its people, only serve to suppress economic growth. C'mon, man. The financial crisis ended more than a decade ago, yet most Americans employed in the private sector lived like they were in a recession until 2017. Let's not repeat the errors of the past.
Oh, one more thing... Treasury needs to float something gigantic while the iron is hot. Gigantic, Stevie. That means right stinkin' now.
Apple (AAPL) ... Wearables (Apple Watch, AirPods), iPhone sales, recurring revenue through the services ecosystem (Apple Pay, Apple Music, Apple TV Plus, the Apple Card, the App Store, Apple Arcade, the installed base? Will it matter if the firm can not speak as to sustained production in Asia, or expected demand from "Greater China"?
Clorox (CLX) ... Too late to grab a few? Probably not. Yes, these shares did trade higher on Monday, but they also closed at the low of the day's range, below Friday's high, and below Thursday's high. I don't know if the stock trades higher. The last sale stands at $159.96. The shares need to see a pivot of $165 to break out on momentum. I do know that people frightened by deadly flu virus are going to buy disinfectant like it was golden.
Starbucks (SBUX) ... Another one reporting tonight that will have to talk about China. This one is a prime example of a name going into earnings while testing the 50 day SMA.
Just look at that algorithmic snap-back at the level. The shares are up small overnight. Know what, the 50 day SMA only goes up from here as well. That rising line, should it move above last sales across a number of names will provoke a negative reaction among portfolio managers. Their risk managers will see to it.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (Dec): Expecting 0.6% m/m, Last -2.0% m/m.
08:30 - ex-Transportation (Dec): Expecting 0.2% m/m, Last 0.0% m/m.
08:30 - ex-Defense (Dec): Expecting 0.5% m/m, Last 0.8% m/m.
08:30 - Core Capital Goods (Dec): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - Redbook (Weekly): Last 5.3% y/y.
09:00 - Case-Shiller HPI (Nov): Expecting 2.4% y/y, Last 2.2% y/y.
10:00 - Consumer Confidence (Jan): Expecting 128.0, Last 126.5.
10:00 - Richmond Fed Manufacturing Index (Jan): Expecting 5, Last -5.
16:30 - API Oil Inventories (Weekly): Last +1.6M.
The Fed (All Times Eastern)
Today's Earnings Highlights (Consensus EPS Expectations)