Tuesday was another roller-coaster day for markets. We sold off at the open but rallied massively for 5 minutes on the news that the Fed cut rates. However, that very short-lived and the rest of the day was a jagged and volatile bearish move. The day closed with the SPY down 2.86%, the DIA down 2.89%, and the QQQ down 3.21%. The good news is that markets did close off their lows. The VXX was also volatile but closed up almost 11% to 24.45. Shortly after the rate cut, the 10-year Bond yield fell to another all-time low of less than one percent (0.906%).
There was an emergency conference call between G7 Finance Ministers during the premarket. However, this resulted only in a statement that they would support global markets against the impacts of coronavirus as appropriate. There was no mention of specific actions or timing in the message. This lack of action by the G7 (many of which already have negative or zero interest rates, and thus limited responses available) may have forced the Fed’s hand in the face of pressure to do something. Either way, the Fed did announce an emergency half percent rate cut just two weeks before their next meeting.
While that rate cut was fully expected by markets in two weeks, the urgency of action and Chairman Powell’s statement led to fear as he said we might see forecasted growth cut in half this year. Perhaps worse, many economists, pundits, and traders have questioned if rate cuts will have any real impact. The critics say this move does nothing to impact the core issues of supply chain disruptions, and both customers as well as workers staying home. In short, the problem simply isn’t that high-interest rates are inhibiting economic activity. So, they label this move as nothing but a transparent stock market circuit-breaker, which failed. To top this off, the President then immediately demanded further rate cuts and Quantitative Easing. (Trump wants the U.S. to have the lowest interest rates and the easiest money in the world.) Something about this picture did not strike markets as good news. So, the rest of the day was a volatile, but strongly bearish selloff.
In virus-specific news, there was a significant development as the global mortality rate has climbed from 2% up to 3.4%. The headline virus numbers have risen to 93,500 confirmed cases and over 3,200 deaths globally. This includes over 13,000 cases outside China as the outbreaks in places like South Korea (5,600), Italy (2,500), Iran (2,400), Japan (300), France (215), Germany (200), Spain (170), and the US (130) continue to expand. In the US, cases exist in 14 states and the death toll has now risen to nine. The Dept. of HHS also said they are working to resolve issues with inaccurate originally-distributed test kits and get 75,000 new (presumably good) kits distributed.
In terms of business impact, every day a host of companies are banning travel, canceling events, closing facilities, warning customers of delays, cutting guidance, and/or suggesting workers telecommute. On Tuesday, that included GOOG, F, the US Federal Government (Seattle), AMZN, INTC, CSCO, CRM, V, among others. Japan also announced they are hoping to hold the Olympics as scheduled, but may delay them as far as year-end. It is also worth noting that markets STILL have fully priced in three more Fed rate cuts this year. So, the expectation seems to be that much more pain is to come as well as much more help.
Overnight, Asian markets were volatile and mixed Wednesday. Europe is green across the board, so far, maybe responding to yesterday's Fed rate cuts. Maybe the U.S. markets are reacting to Super-Tuesday results or just following Europe. Either way, as of 7:30 am, U.S. futures are pointing to another big gap. This one a gap higher of about 2.5%.
Wednesday’s major news includes Feb. ADP Nonfarm Employment (8:15 am), Feb. Composite PMI and Feb. Services PMI (both at 9:45 am), Feb. ISM Non-Mfg. PMI (10 am), Weekly Crude Oil Inventories (10:30 am), Fed Beige Book (2 pm), and a Fed speaker. Major earnings reports are limited BFB, CPB, and DLTR before the open and SPLK after the close.
As volatility continues, markets swung back to bearish for the 8th time in the last 9 days on Tuesday. With gaps and ATR both at their largest since 2018, this is not a market for new traders or anyone who is not very fast and attentive. With that said, now that the Fed has fired one of its few remaining bullets, markets expecting more, and no action on the fiscal side or across the G7, the odds seem to stack up as more bearish than bullish in the near-term. But, will markets trade on news or expectations? I certainly can't (and won't) handicap that race.
Traders need to keep asking themselves…"Is there really a good reason to be trading markets that are more wide-ranging, more gappy, and less consistent than they have been in years?" Are you chasing the “action,” reacting to emotion, or scrambling to somehow get back to even? If so, you probably don't have a good reason to be trying to swim that raging river. Trading is a business and consistent, effective trading is the goal. This day, week or even month will not make the difference between the success or failure of your trading year (let alone lifetime). Good trading is good risk management. Remember that.
Swing Trade Ideas for your watchlist and consideration: SMG, RP, GNRC, ENPH, CLX, MSCI, ETSY, ZAYO, AYX, SEDG, GLD. Trade smart, take profits along the way and trade your plan. Also, don't forget to check for upcoming earnings. Finally, remember that the stocks/etfs we mention and talk about in the trading room are not recommendations to buy or sell.
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