Virus Fear Still Calling the Market's Tune

Markets gave us a head fake at the open Tuesday with a half-percent gap higher followed by a minute of momentum that took markets up an additional half percent.  However, this was met by a sharp reversal a couple of minutes into the day that turned into a brutal all-day selloff.  There is no mistaking the decisive, large-body black candles printed across all the major indices on the day.  The SPY closed down 3.05%, the DIA down 3.15%, and the QQQ down 2.72%.  As you’d expect the VXX jumped again and is now at 19.38, a level it has not seen since October. 

Coronavirus remains the main story as it seems the possibility of economic impacts has just dawned on many traders in the last few days.  That said, governments do continue to downplay this story.  For example, both China and South Korea “predict” a turning point in the outbreak in their countries this week.  Meanwhile, President Trump and his economic advisor Larry Kudlow said again Tuesday that the virus has been well contained in the US and economic growth will not be significantly impacted.

The headline numbers have now risen to 81,250 confirmed cases and about 2,800 deaths globally.  Of course, the vast majority of cases have been inside China.  However, looking at major economic centers outside China, South Korea now reports more than 1,260 cases, Japan about 200 cases, Germany 20 cases, France 20 cases, the UK 15 cases, and Italy more than 375 cases. 

In terms of impact, many major companies have lowered forecasts.  This includes key indicators of consumer activity like MA warned they will miss 2020 revenue forecasts by at least 2-3% (even though those original forecasts were published less than a month ago) as a result of the virus.  The European Automaker Groupe PSA warned the entire auto industry worldwide is now working with extremely short supplies of parts.  In other indications, the Dept. of Health and Human Services said the virus is “likely to cause a global pandemic” and “it’s just a matter of time before the outbreak starts spreading in the US.”  The CDC spokesman agreed with that assessment and went so far as to predict disruption to daily lives in the US.

Overnight, Asian markets were all in the red again.  Europe is slightly mixed, but shows losses across most, including the 3 major (FTSE, DAX, CAC), bourses at this point.  As of 7:45 am, U.S. futures are pointing to a flat open, but they have been very volatile all night.

The major economic news for Wednesday is limited to Jan. New Home Sales (10 am), Crude Oil Inventories (10:30 am), and a couple more Fed speakers. In terms of major earnings reports, SJM, LOW, NI, PEG, and TJX report before the open.  ANSS, APA, BMRN, BNKG, CCI, LB, MAR, NTES, FTI, TCOM, and UHS report after the close.

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The bears are firmly in control, but the drop has moved so far, so fast that it certainly looks like chasing to add shorts here, unless you are a very short-term trader.  Yes, Asia and Europe continued to slide, but that doesn’t mean we can’t see an up day in a downtrend.  Be careful to not let your emotions get the better of you.  No revenge trading.  No chasing.  No reversal picking.  Keep that discipline.

Remember that cash and sitting on your hands is a valid position and sometimes the best move you can make.  Be cautious, follow the trend, listen to price action and trade consistently.  Keep reminding yourself, trading is a job/business and sometimes, calling in sick for a couple of days is the only way to avoid burnout.

Ed

Sorry, but there are no trade ideas for today. Markets need to settle before we can plan out quality swing trades. 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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