They say that the third day is the charm. Really? Who are they? Why do "they" decide? If you ask me, the third day was a doozy. What the heck is a doozy? Not really sure. I do know enough to be sure that I don't like it very much.
The S&P 500 surrendered 188 points, for a whopping decline of 5.9%. This selloff, far more significant than what traders had experienced the prior two days, was indeed -- for the broadest U.S. large-cap equity index -- the third consecutive "down day". The S&P 500 had not done that in three months' time, since March... earlier rather than later on, as markets melted away before the spread of the coronavirus that forced elected officials to shut down global economies by mandate.
Oh, it was not pretty, not in the least. Fear is rising that a number of U.S. states that, to this point, had appeared to have done well in controlling community spread of this virus are suddenly appearing to do less well in that fight. New cases are higher in a number of spots, as are hospitalizations. And it is difficult to tell, but it does appear to be a bit more than simply increased testing.
Why this hit equity markets as hard as it did, while also reverberating through other financial markets, is not hard to figure out. Investors had bought into the notion that perhaps this virus was truly seasonal. That maybe the economy would be able to find some footing and at least the first tranche (or two) of a V-shaped recovery might be put in place so that there might be a base level of velocity in transaction prior to the next significant test thrown at the nation.
What traders and investors have to understand is that by nature, we are open to risk. There is no way around this. Though across nearly half of U.S. states, it does appear that new cases are rising since reopening their local economies, perhaps there will not be another total shut-down. That said, there will likely be plenty of optional shut-downs at least at the household level. There is good news on the vaccine/therapeutics front. Until we get there from here, however, smart people will remain cautious.
We've talked about the S&P 500. The technical takeaway that I see for the S&P 500 was the lack of that index to hang on to the 200-day simple moving average on Thursday night. The index closed at 3,002, below its own 200-day SMA. That line stands at 3,013. That line was lost very late in the day. Regaining that line early on Friday will be important, at least in terms of an algorithmic reaction.
Equity index futures are showing some overnight strength as I write this missive, but the opening bell is a long way off, and the closing bell even further. That second bell is the one that counts.
The value proposition? Yeah, managers used those stocks the way they would a "drive-thru" ATM. The Dow Jones Industrial Average gave up 6.9%, The Dow Jones Transportation Average backed up 7.7%, while the small-caps were hit just as hard: the S&P 600 -8.2%, the Russell 20000 -7.6%.
Where did the money go? Some of it found its way into gold. Treasury securities have certainly had themselves a week. There was considerable cash creation, as there was nowhere to hide within the equity space. The Consumer Staples Sector Select SPDR ETF (XLP) led the sector performance tables for the day at -3.8%.
Trading volumes were higher on Thursday from Wednesday. Losers beat winners at the NYSE by almost 32 to 1. Declining volume beat advancing volume at that same exchange by a rough 63 to 1. Just incredible numbers, but who among us did not see the marketplace as living on borrowed time for at least a week or two at this point?
Horse of a Different Color
My, how quickly certain things do change. Most traders are probably well aware that the VIX traded above 42 on Thursday after trading below 25 on Monday. I watch the VIX, but I watch the CBOE's Put/Call ratios as well, as I try to gauge what other traders are doing in the way of hedging long side risk. Just take a look at these spikes. First, the Total Put/Call Ratio retakes both its own 50-day and 200-day SMAs:
Boil the ratio down to the point where only equity options are included, and wow...
This is the highest level this ratio has been at in over a month. From the looks of March and April, if news of community spread of this virus in communities not previously severely impacted is ahead of news concerning vaccines and/or treatments, there is room to run.
Just My Own Theory
This is completely non-scientific. Has anyone considered that the spread of this virus has slowed in cold weather states because the weather is now warm and the public is outside more, while the spread seems to be advancing in warm weather states as summer weather forces those folks inside seeking the comfort of air conditioning? No science here. Just a guy staring out the window.
For now, the story for the economy and for stocks is a "demand story". Though that story starts at the family level, where they may take a pass on going out for a special occasion, at the larger level, it's really about reduced capital expenditure that results in a slower recovery for labor markets. This is not anybody's fault, but we find ourselves in the middle of a sharp recession. Even if statistically, the nation comes out of recession rather quickly, many folks may take much longer to recover. Much of the nation thought the last recession lasted until 2014, or even 2016.
The "what if" question is what does this economic recovery look like once there are vaccines or treatments that the public is comfortable with. What we all want, what our leaders want is a sharp return to pre-Covid levels of activity. What I think more likely is a return to the slope of the prior trajectory of growth more than a return to any specific level. This, and I hope I am wrong, is the more painful route. The Fed is doing everything it can. Congress has provided the Treasury with the ability to do a lot. They will call on the Treasury to do more. Soon.
The resultant fiscal situation, while a current necessity, will end up a long-term liability as the nation enters an unknowable phase in its economic history. I don't know how such a large deficit does not suppress long-term growth, especially if the yield curve gets wonky, creating room for consumer level inflation before the consumer is ready for it at the household level. Stay flexible. Maintain higher-than-normal cash levels. Cultivate core positions. Those are my opinions.
Did You Know?
--Boeing (BA) is now 27% off of the stock's high of the week. This stock goes as far as the airlines allow. Bad virus news is bad news for the airlines.
--Moderna (MRNA) actually closed in the green on Thursday after announcing that a Phase 3 clinical trial involving 30,000 participants using a mid-sized dosage of the firm's messenger RNA vaccine candidate in the fight against Covid-19 will get underway in July. Separately, Regeneron (REGN) told the Wall Street Journal that the firm could have a cocktail-like antibody-based treatment for this virus available for emergency use by this Autumn.
--Lululemon Athletica (LULU) surprised Wall Street with misses of Q1 consensus view for both the top and bottom lines. Basically, the firm reported earnings growth of -70% on revenue growth of -17%, without providing same-store sales. E-commerce sales increased 68% year over year as gross margin declined.
Economics (All Times Eastern)
08:30 - Import Prices (May): Expecting 0.7% m/m, Last -2.6% m/m.
08:30 - Export Prices (May): Expecting 0.6% m/m, Last -3.3% m/m.
10:00 - U of M Consumer Sentiment (June-adv): Expecting 74.9, Last 72.3.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 206.
The Fed (All Times Eastern)
10:00 - Speaker: Richmond Fed Pres. Thomas Barkin.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant quarterly earnings scheduled for release.