“There are no relationships or equations that always work”. Know thyself and know thy foibles, and make sure your facts are right”. – Barton Bigg

Supply chains will be disrupted for months, manufacturing stays in recession perhaps for a year or so. Coronavirus spreads across the globe causing economic pandemonium wherever it touches down. The U. S is not spared, the robust housing market turns building projects into ghost towns. Instead of creating new jobs and hiring, corporations feel the pinch and layoffs are now the “norm”. Consumer confidence around the world is shattered as illness brings on real fear. Global recession hits and the outlook for recovery looks grim as no one is willing to say the virus can be tracked and contained. To echo the words of many reporters;

“We are on the verge of a deadly global pandemic“.

That was the mindset when many market participants came back to their desks on Monday. Except for the Chinese market, the global stock market rout was on. That mindset got more negative as the week went on.

Perhaps other factors can explain the stock market price action this past week. The psychology of markets is such that when they rise so far so fast, +17% off the Oct. 2, 2019 lows without more than a 3.5% correction, ANY event can upset the trend. For sure coronavirus is real, just how real of a threat remains up for debate. The fact remains that the perceived worst-case scenarios are enough to get the “FEAR” snowball rolling down the hill.

Two things occur when markets start to break down and correct. The first is that the entire bull market and the associated gains are immediately forgotten as if they never occurred. It is the human mind at work, and negativity begins to feed on itself.

The second is everyone becomes an expert on what to do now. Oh, I’m not talking about having an opinion. Let’s face it; everyone managing their money has to have one of those. No, this isn’t stating an opinion. These assessments start to take on a life of their own, and it is maniacal at times as it is all based on emotion.

This contingent is comprised mainly of the folks that have had the story wrong for months, if not years. The longer one has been wrong, the higher up in the ranks of that army they are. Another platoon in that force is all of the “Top Callers”. They arrive on the scene after every market high and tell us that THE top is in, and the bull market has ended. It is just another emotional outburst.

What successful investors have learned is that it does not pay to fall into these wild states of human emotion. Market participants should learn being rational is the only way to approach a market correction. Before we go any further let’s recognize this is still a market CORRECTION. If and when the data shows this is a full-fledged BEAR market, I’ll gladly join that contingent and proceed accordingly. People love to embellish the situation, but let’s not lose perspective.

During this bull market we have seen these “scares” play out before in 2015 and 2016, and at various times in 2018. The charlatans want to tell us they can trade around the huge moves with lightning speed and no emotion, while out-gaining all of the other investors combined. Keep telling yourself something and you start to believe it is real. Newsflash, that is a fairy tale.

Global equities started the week in a bit of a free-fall on rising concerns over the spread of the coronavirus. While the pace of the outbreak certainly appears to be slowing in China, flareups in South Korea and Italy over the weekend are causing increased concern of a global spread including here in the US.

Besides the coronavirus fears, the strong performance of Bernie Sanders in Nevada over the past weekend didn’t help sentiment for the market either. Healthcare issues UnitedHealthcare, Cigna and the like were pummeled falling 7+% and that wasn’t due to coronavirus cases jumping in Italy and South Korea. S&P, Dow 30 and the Nasdaq Composite were all lower by 3.%+% to start the week wiping out the gains for the year, with the S&P 500 suffering its biggest decline since February of 2018.

In a flight to safety, Treasury yields plummeted with the yield on the 10-Year dropping 11 basis points to 1.34%. Gold moved up 0.78% to a seven-year high. For market historians out there, we should note the sell-off didn’t make it into the top 50 percentage day losses. It felt much worse but we found out that it was just the beginning of a bad week for the Bulls.

There was no turnaround on Tuesday as the indices racked up more losses bringing the two day total for the S&P to -6.2%. The other major indices followed suit with similar negative results. Only two other two-session drops in the S&P 500 can compare to what investors witnessed this week: August 8th, 2011 (U.S. debt downgrade) and August 24th, 2015 (Chinese yuan float). The financial world didn’t end either time. Both instances signaled near term lows had been put in.

Investors went searching for a waypoint on the path of the coronavirus outbreak and did not have much success on Wednesday. Every headline was met with whipsaw trading action. A 600 point swing in the Dow 30 index shows how volatile and nervous the markets are over the global health scene.

Equities still couldn’t find a floor on Thursday, as the day started with newsflow on the spread of the coronavirus outside of China hasn’t shown any signs of improvement. The losses increased with the S&P and Dow 30 losing 4.4% for the day. The S&P set a historic mark, drawing down by 10+% from an all-time high in six days for the first time ever. That left us all in uncharted territory.

The week ended with a seven-day losing streak for the S&P 500 which produced a 12.4 % loss in that stretch. The index shows an 8+ % loss for the month and that represents the total loss for the year as well. After hitting a seven-year high on Monday, Gold (the safe haven) dropped $101 to end the week in the red. Fear continued to be present with the 10-year Treasury closing at a record low of 1.13%

Right now, it’s the FEAR of what could happen that’s driving the markets, rather than what is happening. Pure speculation is now directing the show. It was the worst week since the financial crisis. Unless I missed it when I went out to buy my coronavirus prevention masks, we aren’t in the middle of a global financial crisis.

The recent equity sell-off has been global as concerns of a pandemic rise. Perhaps the most surprising aspect of the way equities sold off recently is that the country that has been hardest hit by the virus is closer to its year to date high than any other major global equity benchmark. A global rout where China was the only stock market that was spared.

China’s Shanghai Composite is down just 4.4% which is better than any other country tracked. The ETF that tracks the CSI 300 (ASHR) is down less than 6%. At the bottom of the list, Brazil’s Ibovespa index is down more than any other country at 11.6% and that country has only reported one confirmed case so far.

Concerning U.S. indices, the Russell 2000 is down the second most of any major global benchmark, while the Nasdaq is down the fourth most. The S&P 500 stands next in line. These weak U.S. readings come in a backdrop where there have only been 60 confirmed cases and all but a couple are instances where Americans contracted the virus outside of the United States and have been brought to the US under quarantine. It’s the speculation and then the fear that the situation will get a lot worse before it gets better that has gripped the markets here. Speculation and fear resemble nitro and glycerin.

Perhaps there is a message that coincides with just how the markets work. The Chinese market had NOT rallied to new all-time highs, it wasn’t extended like U.S markets, or the Stoxx 600, which is down 12.9% in 7 trading days. The only 7 session drops that have been larger came in August of 2014, October of 2008, around the 9/11 attacks, and near Black Monday in 1987.

It then stands to reason that China wouldn’t be caught up in the 12+% drop in a few trading days. Instead, the Chinese market as measured by the CSI 300 dropped less than 3%. Up until they got caught in the U.S. fear trade on Friday, that index was down less than one half of one percent this week.

Economy

The latest Conference Board Leading Economic Index for January was up 0.8% from the December figure of 111.2, setting a new high at 112.2.

Chart courtesy of Advisor Perspective

Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board;

“The strong pickup in the January US LEI was driven by a sharp drop in initial unemployment insurance claims, increasing housing permits, consumers’ outlook on the economy and financial indicators. The LEI’s six-month growth rate has returned to positive territory, suggesting that the current economic expansion, at about 2 percent, will continue through early 2020. While weakness in manufacturing appears to show signs of softening, the COVID-19 outbreak may impact manufacturing supply chains in the US in the coming months.”

Atlanta Fed’s GDPNow estimates a 2.7% growth rate for Q1, up from the 2.6% clip. Remember, this is a purely mathematical result of the model, with no “subjective adjustments,” according to the Fed. The upward bump resulted from the reports from NAR, and government numbers that leave Q1 real gross private domestic investment growth at a 7.7% clip from 6.4%, with real net exports boosted to -0.23% from -0.27%. Analysts are still forecasting a 2.0% Q1 rate of growth, but analysts see downside risk from inventories.

No surprise and since this is in the rearview mirror it’s not very meaningful. Q4 GDP growth was unrevised at the same 2.1% from the advance report.

The Chicago Fed National Activity Index increased to –0.25 in January from –0.51 in December. All four broad categories of indicators that make up the index increased from December, but only one of the four categories made a positive contribution to the index in January. The index’s three-month moving average moved up to –0.09 in January from –0.23 in December.

Dallas Fed’s manufacturing activity survey rose 1.4 ticks to 1.2 in February after rising 3.0 points to -0.2 in January. This breaks a string of 4 straight months in negative territory (not seen since the summer/fall of 2016). The index was at 11.6 a year ago. It had dropped to -12.1 from June on renewed tariff angst, which was the weakest since June 2016 (-17.1). The 38.2 from February 2018 was the strongest since December 2004.

Richmond Fed index tumbled -22 points to -2 in February, weaker than expected, after surging 25 points to 20 in January. The index was at 14 a year ago. This is the lowest level since September’s -2; last month’s print was the best since the 26 from September 2018.

KC Fed Manufacturing month-over-month composite index was 5 in February, higher than -1 in January and -5 in December. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The future composite index remained solid, inching slightly higher from 14 to 16.

Chicago PMI climbed to 49.0 in February, much better than expected and is the highest since August’s 49.8. The 6.1 point February bounce more than erases the -5.3 point decline to 42.9 in January, which was the lowest since November 2015. The 3-month moving average improved to 46.7 from 45.9.

Consumer confidence index rose 0.3 ticks to 130.7 in February after January’s revised 2.2 point jump to 130.4 (was 131.6). The index was at 131.4 last February. The 135.8 from last July was an 8-month high. The 137.9 from October 2018 is an 18-year peak. The 121.7 from January 2019 is a 16-month low. Strength was in the expectations index which climbed to 107.8 from 101.4 (was 102.5).

Michigan sentiment bucked COVID-19 fears with a February rise to an upwardly-revised 2-year high of 101.0 from an 8-month high of 99.8, as late-month responses trimmed the expectations readings, perhaps due to the virus, but with a big boost for the current conditions measure. Analysts saw gains in every major consumer confidence measure in both January and February.

Personal income climbed 0.6% in January, with spending rising 0.2%, following December’s respective gains of 0.1% and 0.4%. Wages and salaries increased by 0.5% from 0.1%. Disposable income jumped 0.6% from 0.1% . The savings rate rose to 7.9% from 7.5%.

Housing.jpg

New home sales beat estimates with a 7.9% January surge to a new 12-year high of 764k, following 11k in upward Q4 revisions, leaving a pace that sharply exceeds the prior 12-year high of 729k last June. The mild winter likely provided a big boost to the January data, though the steep sales uptrend since late-2018 transcends weather. The median sales price defied downward seasonal pressure with a 7.4% surge to a $348,200 new all-time high, leaving a hefty 14.0% year over year gain. Analysts saw a 0.3% inventory up-tick to a still-lean level that translates a -6.6% year over year drop. This week’s new home sales surge accompanies strength in nearly all recent housing measures.

While there could be economic impacts from COVID-19 in the U.S. the decline in interest rates and the subsequent boom in housing demand that is already quite strong could offset any of that weakness.

We should also note that wage growth is currently running more than 250 basis points over 10-year rates at 3.8% and is higher than mortgage interest rates as well; that is absolute rocket fuel for housing activity going forward.

Pending home sales index climbed 5.2% to 108.8 in January, better than forecast, after dropping a revised -4.3% to 103.4 in December. This is the largest monthly gain since October 2010 and follows the steepest decline since October 2010. We are now at the highest level since June’s 109.2. The 12-month gauge slowed slightly to a 6.7% y/y growth rate versus the prior 6.8% y/y pace.

Lawrence Yun, NAR’s chief economist;

“This month’s solid activity, the second-highest monthly figure in over two years, is due to the good economic backdrop and exceptionally low mortgage rates.”

“We are still lacking in inventory, noting December’s and January’s combined supply was at the lowest level since 1999. Inventory availability will be the key to consistent future gains.”

“With housing starts hovering at 1.6 million in December and January, along with the favorable mortgage rates, among other factors, 2020 has so far presented a very positive sales climate. Moreover, the latest stock market correction could provide exceptional, even lower mortgage rates for a few weeks, and that would help bring about a noticeable upturn in the coming months.”

Global Economy

Global headline data on COVID-19 net case growth remains positive. It’s just that no one recognizes it. Tens of thousands of cases in Hubei are confirmed as recovered and the number continues to rise while total cumulative case counts have decelerated dramatically, existing case growth net of recoveries and deaths has slowed dramatically. The day-over-day net case growth has been negative for five of the last six days, while total cumulative cases are down to a growth rate of less than a half percent globally. Deaths currently stand at about 3.1% of all cases, while 31.5% of all cases have recovered.

The problem with this headline analysis and the biggest reason that the S&P 500 fell out of bed this week is that the material improvements in China are being overshadowed by the growth in the number of cases outside of China. No surprise here, the human mind will always seek out a negative to dwell on.

Established disease clusters in Hong Kong and Singapore where there have been active cases since January 23 are not growing rapidly but in Italy, South Korea, and to a lesser extent Japan, the case count is being reported higher. These industrial economies with robust public health infrastructure all can manage even large outbreaks, albeit at a great economic cost.

The true pandemic risk remains low, but the cost of shutting down large swathes of northern Italy, Korea, and Japan are significant. One can now speculate just how large any shutdown may have to be.

China’s coronavirus epidemic will likely cut 0.1% from global growth this year, according to the IMF, and drag down growth for China’s economy to 5.6%, which is 0.4% lower from its January outlook.

IMF Managing Director Kristalina Georgieva;

“But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted.”

“In our current baseline scenario, announced policies are implemented and China’s economy would return to normal in the second quarter. As a result, the impact on the world economy would be relatively minor and short-lived.”

Eurozone.gif

IFO data for Germany beat expectations as the Business Climate Index rose from 96.0 points in January to 96.1 points in February. Although companies assessed their current situation as a little worse, they are less pessimistic about the next six months. The German economy seems unaffected by developments surrounding the coronavirus. The survey results and other indicators suggest economic growth in the first quarter will amount to 0.2 percent.

Economic sentiment indicators from across the European economy came out this week. These indicators combine consumer, manufacturing, services, and construction sentiment in various ways to reach a headline indicator.

Another sign that the overall economic situation improving is evident in the uptick in these sentiment results lately. Before the shock of COVID-19, the European economy was finally bottoming out and ready to ramp growth after multiple quarters of deceleration dating to late 2018. We will now have to wait and see what develops now.

So far, there have been 23 “antivirus” stimulus moves by Beijing, from lower rates to liquidity injections, to lower tariffs to credit relief to a car buying subsidy.

Over the past few days, official government newspapers have said the government would not implement “over-aggressive stimulus,” noting “a prudent monetary policy” is a precondition.

Singapore saw a surge in industrial production in January. On a month-on-month and seasonally adjusted basis, industrial production rose 18.2 percent in January. Manufacturing output in January rose 3.4 percent on-year, data from the Singapore Economic Development Board showed, compared with a downwardly revised 3.7 percent decline in December. The median forecast was for a 0.6 percent increase.

This result shows how tantalizingly close the global economy was to turning a corner properly before COVID-19 entered the scene in January.

Business confidence in the UK surged as uncertainty from Brexit was lifted, rising from near-decade lows last summer to multi-year highs in January. February numbers were unchanged. While we can’t be sure about attribution, it looks to us like these numbers imply businesses are not yet terrified of what impacts COVID-19 will have. The UK has 15 cases in a population of 67 million.

The Political Scene

Vermont Senator Bernie Sanders won 40.5% of Nevada Caucus votes on Saturday, more than twice as many as second-place Joe Biden. Following the delegate allocation process, Sanders ended up with 47% of possible delegates, versus 21% for Biden.

Sanders’ win in Nevada is important for three reasons. First, his vote totals rose from Round 1 (34.3%) to Round 2 (40.5%), a sign that his base of support includes a material number of second choice voters rather than a relatively narrow hard-core base only. Second, his vote share is rising rather than stable or falling, taking 26.5% in Iowa and 25.6% in New Hampshire but 40.5% in Nevada. Third, “entry” polling (similar to exit polling but done before the caucus rather than after a ballot is cast as a traditional election) showed Sanders dominating among Latino voters, winning a quarter of black voters, and expanding is existing strength among younger voters, giving him the sort of broad coalition that could mean huge delegate wins on Super Tuesday.

Odds of primary victory are spread wide depending on the market used; for instance, PredictIt prices Sanders at 65% for primary victory post-Nevada while ElectionBettingOdds.com has him at 52%. ElectionBettingOdds data also shows Sanders’ odds of beating the President in the general election roughly even with other major candidates. The next major primary is in South Carolina, where voters cast their ballots on today (Saturday). As far as markets go, COVID-19 fears are of course front-and-center, but we think the results in Nevada over the weekend implying a likely charge to the nomination for Sanders are also impacting markets this morning.

The Democratic Party’s ‘wish’ for a ‘star’ frontrunner has yet to ‘come true.’ With Super Tuesday upon us, the probability of a brokered convention has risen (53% according to PredictIt) as the ‘reality’ of the delegate projections begins to set in. Based on many post-Super Tuesday projections, Sanders would need ~60% of all remaining delegates while other candidates would need over 70% to capture the nomination outright, a very tall order.

Federal reserve 2.jpg

The Fed

In the last four months, the 10-year Treasury rate rallied off the low of 1.47%, reaching an interim high of 1.94%. The 10-year Treasury blew the bottom out of the trading range over the coronavirus fears. The 10-year note yield was battered down closing at a record low of 1.13%.

The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3 month/10 year yield curve for ONE day this week. The renewed flight to safety inverted the 3 month/10 year yield curve once again on February 18th. It remains inverted today. The 2 /10 Treasury curve is not inverted today.

Source: U.S. Dept. Of The Treasury

The 2-10 spread was 30 basis points at the start of 2020; it stands at 27 basis points today.

The Technical Picture

The daily chart of the S&P clearly shows a breakdown of many support levels. All occurring in a very short period. The scope of this decline leaves technicians in uncharted territory.

These quick reversals seem to now be part of the landscape in the latter part of this secular bull market run. No matter how one approaches the situation, they can be quite unnerving. We now have a waterfall decline in place similar to December 2018.

Chart courtesy of FreeStockCharts.com

Corrections are always full of false breakdowns and breakouts as we saw whipsaw price action that gave intraday signals that appeared to be valid, only to be quickly reversed. One of those moves saw price drop right to, then slightly below the October 2018 breakout level at 3025 before rallying higher, then reversing to end the day in free-fall. From there it was a ball rolling down a hill. Emotion rules, and when it gets to these levels it is best to get out of the way from that moving ball.

No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the long-term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.

“We are on the verge of a deadly global pandemic”.

If I heard it once I heard that a dozen times this past week.

No matter how much common sense can be gleaned from what we read;

“Two Months After Initial Reports of Coronavirus Only 93 Cases and 2 Deaths in Population of 8 Million in Hong Kong.”

FEAR will always win the debate. It will continue to do so until at some point common sense prevails. The issue is we just don’t know when that may occur. For some, it never occurs.

With all of the commentary about the virus, I wonder how many took notice of my comment last week.

“The S&P is up 16+% from the October lows. It wouldn’t be a wild occurrence if half of that is given back. “

No one thought it would be the entire 16% in a week. The quickest 10+% decline from an all-time high in history. As mentioned earlier this is uncharted territory.

Investors now ponder whether that turns into 20+% and a full-fledged bear market, or whether the S&P can recover completely given some time. When the markets react violently, many market participants do so as well.

The playbook is the same. First, investors need to tune out the army of people that have been wrong. They ALWAYS appear as self-ordained experts on how investors should proceed in times of market stress.

Second, and more importantly, investors should have a good plan or strategy in place. If one is prepared and has a plan, they will get through any difficult period ahead with little to no stress. Believe me, IF this is the onset of more market weakness ahead, things will get worse, and one needs to know how they are going to react when that happens.

In simple terms, know yourself, know your plan. I am aware that the next bear market could be coming, just as I was aware of the possibility in 2016 and December of 2018. The skeptics aren’t telling me anything I don’t already know. The issue is always about timing any major investment strategy changes. I follow a plan and a strategy that allows me to proceed without emotion. That same plan offered assistance in 2016, December 2018 and it will once again do so today.

Premature decisions lead to huge mistakes. Each can decide how they want to proceed. Employing speculation as a strategy is not the way I would move forward. Given that 1,000 point declines are the norm now, the Dow 30 should be at zero by the end of March and all worries will be over.

“Anticipate, Monitor, Adjust if Necessary, There are no Guarantees”

I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.

Thank you #2.jpg to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.

This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.

IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.

Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.

The opinions rendered here, are just that – opinions – and along with positions can change at any time.

As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.

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2020-02-29