Friday saw another day of wild swings as markets gapped lower and gyrated back and forth on every scrap of news. Among those drivers were a whole bunch of rumor, conjecture, misinterpretation, and some pure lies. What was real is that the bulls believed something positive as they ended the day on a rally. At the close, we had white-body candles and losses were a bit pared. The SPY ended down 0.42%, the DIA down 1.14%, and the QQQ up 0.08%. This closed out the worst week since the financial crisis of 2008, as for the week the SPY was down 11.16%, the DIA down 12.14%, and the QQQ down 10.63%. The 10-year bond yield fell to 1.12% (and fell further over the weekend).
Coronavirus remained the main story. The headline numbers have risen to 90,000 confirmed cases and over 3,000 deaths globally. The outbreaks in places like South Korea (4,300), all 27 EU States (2,100), Iran (1,500), and the US continue to expand. This includes the first two deaths in the US. However, not all the news related to the virus is bad.
On a positive note, the trend in new cases in China continues to go down (fewer new cases found). In fact, on Sunday China announced they officially had more cases who had survived and been released than cases still requiring medical care. This is a great trend change in the world’s second-largest economy. It also points to a theoretical two or three-month course for the virus within a strictly quarantined and controlled population. So, an optimist might be able to extrapolate this into something like a one to two quarter hit for economies and then it's just a question of what shape the recovery graph takes.
This weekend, the President blamed the media and Democrats for a hoax that led to the market losses. However, he also condemned the Fed for not having given the US the lowest rates in the world long ago and then “hoped” the Fed step in to save markets immediately. This raises the question, from a market standpoint, how worried should we really be? So, let’s put some context on the economic impact of the virus.
China’s manufacturing PMI was reported Saturday. It fell to an all-time low of 35.7 for February, down from 50 in January and far below expectations. (A private version of this number based in Taiwan and covering small-medium businesses, reported 40.3.) As an example, last week, two major Chinese electronics manufacturers, Foxconn (Apple’s main supplier for Macs and iPhones) and Compal (Acer, Dell, HP, and Toshiba’s main supplier) told their major customers they were only back to 30-35% of their normal production capacity. This is 3 weeks behind their normal post-Lunar New Year holiday ramp-up and is also a MUCH slower speed ramp-up than a normal year. From a different angle, across the entire country, only about 55%-60% of China’s trucking capacity has resumed work, but that number is almost zero in the quarantined areas. Disease testing checkpoints and disinfection activities are also slowing the transportation of goods.
Outside of China, global tanker and bulk freighter demand is down 70% since the first of the year as of last week. In addition, the American Assn. of Port Authorities are now forecasting a drop of 10%-20% in cargo volume year-on-year between 2019 and 2020. (That is a massive range for a forecast, but also a huge decline if true.) In South Korea, one of Samsung’s electronic flash memory factories has been shut for two weeks. In Europe, NIKE just closed their EU headquarters.
The point is that in a global economy of just-in-time entities, (where inventory buffers have been systematically reduced for decades in the name of cost savings), supply disruption is a huge problem. Not just in China, but anyplace in the world that sources anything from China, South Korea, etc. In a sense, the more “modern” and profitable a business has been, the worse they will feel the impacts of a supply disruption. The good news is that many industries have replaced inventories with the ability to be more agile (ramp up and down faster). So, is coronavirus the end of the world…no. Is it the end of revenue growth and significant profits for at least a few months or even a couple of quarters for many businesses…undoubtedly.
With that all said, Asian markets were volatile but took another beating Monday, ending deeply in the red again. Europe is also once again down sharply across the board at this point. As of 7:45 am, U.S. futures are pointing to a half to three-quarters of a percent gap lower, but continue to be very volatile whipping back and forth.
In terms of major economic news, Monday’s slate is limited to Feb. Mfg. PMI (9:45 am) and ISM Mfg. PMI (10 am). Major earnings are also limited, with only EVRG, JD, and XRAY reporting (all before the open).
The market freefall slowed Friday as bulls jumped at various signs of hope. However, massive volatility continued. The only thing that really changed over the weekend was a couple of days off to reassess how we should really respond as a trader at this point. This morning we still see a lot of volatility in the future, but they seem to be looking to start the week lower again.
The question you need to answer is “do I really want or need to be trading in these conditions?” Is this volatility and fast-moving market something that is in your favor? If not, step away from broker platform and do something else. Don’t let your emotions lead you into mistakes. Keep repeating the mantra: no chasing….no revenge trading…no bottom/top picking. Trading is a business, cash is a valid position, and consistent, effective trading is the goal.
Sorry but due to futures volatility there are no trade ideas for today. 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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🎯 Friday 6/21/19 (10:09 am) Aaron B: Today, my account is at +190% since January. Thanks, RWO HRC Flash Malcolm Thomas Steve Ed Bob S Bob C Mike P and everyone that contributes every day. I love our job.
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