The Great Coronavirus Unwinding?

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Fred Imbert, Yun Li and Eustance Huang of CNBC report stocks post biggest rally since 2008, clawing back some of their coronavirus collapse:
Stocks rose sharply in volatile trading Friday as Wall Street tried to rebound from the sharp losses suffered in the previous session — the worst since the “Black Monday” market crash in 1987.

The Dow Jones Industrial Average closed 1,985 points higher, or 9.4%, at 23,185.62. Friday marked the Dow’s biggest-ever point gain. The S&P 500 climbed 9.2% to 2,711.02 while the Nasdaq Composite surged 9.3% to 7,87.23. The averages posted their biggest one-day gain since October 2008.

“Volatility, I always remind people, means big moves in both directions,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “After as big of a rout as we’ve seen in the last 30 years, it’s not at all surprising to see at least a little bit of a bounce.”

Equities rallied to their session highs Friday after President Donald Trump also said 50,000 new coronavirus tests will be available next week. Trump also said he asked the Energy Department to purchase oil for the U.S. strategic petroleum reserve, boosting oil prices.

“This is certainly an important step forward. The first thing we learned from South Korea is you need to understand the scope of the problem, and you need to identify the disease and who has it and who does not,” said Ed Keon of QMA. “Today will be an important step forward…You saw a big drop when the response seemed inadequate and then when you had a more aggressive response, the market responded positively.”

Stocks surged on the possibility of fiscal stimulus from the U.S. government and others around the world. Treasury Secretary Steven Mnuchin told CNBC’s “Squawk on the Street” the White House and Congress were nearing a deal. “The president is absolutely committed that this will be an entire government effort, that we will be working with the House and Senate,” Mnuchin said. The Federal Reserve also released more details on its funding measures on Friday.


House Speaker Nancy Pelosi said U.S. lawmakers and the White House were close to a deal on economic relief amid the coronavirus outbreak. “We’ve resolved most of our differences,” Pelosi told reporters Thursday evening, noting it’s about “testing, testing, testing.”

In Germany, the government pledged to spend all the money needed to support the economy amid the outbreak. “We are using all necessary measures to protect workers and companies,” German Finance Minister Olaf Scholz said in a news conference.

Central bank action from around the world also boosted equities. The Bank of Japan injected 500 billion yen as a response to the global market sell-off. Norway’s central bank cut rates by 50 basis points and the Bank of Korea was reportedly in talks over a possible emergency rate cut.

For the week, the major averages posted steep losses despite Friday’s sharp gains. The Dow lost 10% this week while the S&P 500 and Nasdaq slid more than 8% each.

Friday’s action followed the official end of the longest bull-market run in history. The S&P 500 plummeted 9.5% Thursday in its worst day in more than three decades, joining the Dow in a bear market, or more than 20% from its recent peak. The Dow also suffered its worst point drop ever and the biggest percentage decline since 1987.


“It almost seems as if the market has a gravitational force to that Dec. 24, 2018 low,” said Quincy Krosby, chief market strategist at Prudential Financial. “It feels as though the market wants to go back there.”

“That said. there has been indiscriminate selling, which is good thing,” said Krosby. “That’s the kind of panic you wait for.”

The market’s historic drop on Thursday indicated that investors believe the government’s fiscal plans and the Federal Reserve’s ramped-up funding actions wouldn’t be sufficient to offset the economic impact from the coronavirus.

On Friday, the New York Fed said it will start buying Treasurys across all durations, starting with 30-year bonds. These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak,” the New York Fed said in a statement.

Investors were bombarded with a slew of negative headlines about the fast-spreading coronavirus. The NCAA has canceled its March Madness basketball tournaments, a day after the National Basketball Association suspended the remainder of its season indefinitely. New York Mayor Bill de Blasio declared a state of emergency, while new restrictions for large events and businesses were imposed.


“We expect volatility to remain for a while,” said Gene Goldman, head of research at Cetera Investment Management. “There’s so much unknown about the virus and the economic impact.”
It was an absolutely insane week in markets, I just finished watching the press conference at the White House where President Trump, his coronavirus task force and business leaders addressed the nation.

The bulls certainly came out swinging on Friday and here's a small snapshot of what I was looking at:


Interestingly, all of the big gains in the markets came soon after Trump's press conference, which was conveniently scheduled for 3 p.m. Friday afternoon, an hour before market close (press conference actually started late, around 3:30):


Kind of makes you wonder if the Fed called in the Plunge Protection Team to ramp up stocks into the close so people don't go into the weekend wanting to slice their wrists as they open their investment and retirement accounts online.



All of the Dow components posted big gains but there were huge gains in the following companies: Intel (19.5%), American Express (19.2%), JP Morgan (18%), Goldman Sachs (17.6%), Microsoft (14.2%), Cisco (13.4%), Walgreen Boots Alliance (12.6%), Procter & Gamble (12%) and Apple (12%), all stocks which were clobbered hard this week prior to Friday:


But while bulls were cheering on Friday, there was real fear and panic on Thursday as the Dow fell into bear market territory, dropping more than 20% from its recent peaks:



In fact, frightened investors grappled to understand what the hell was going on:









So what happened on Thursday to cause this massive selloff? Zero Hedge called it "the biggest VaR shock in history":







Did risk parity funds exacerbate the plunge in markets on Thursday? No doubt, they did but I would go a lot further to blame algos, quant funds, CTAs, hedge funds deleveraging, large carry trades gone awry, margin calls and good old retail panic selling in exchange traded funds.

The indiscriminate selling was also exacerbated by dislocations in markets and people were worried after the Fed came in massively on Thursday mid-day, injecting a total of $1.4 trillion in repo markets to address disruptions in the Treasury market, and the stock market popped and then dropped to give up all its gains and close down 10%.

The volatility we are witnessing in markets is savage and unnerving retail and institutional investors:



These types of moves are unprecedented, and it really makes you wonder if the world is one big carry trade away from blowing up.

Typically, this type of volatility in markets isn't a harbinger of good times and as Jim Bianco notes, these big swings lead to profound changes in markets and/ or the economy:



In his latest comment, Jim notes that investors are waiting for politicians to do whatever it takes to stem the coronavirus.

Jim has been warning people that the US is lagging Italy by two or three weeks, and the worse is yet to come:



Politicians all over the world are grappling with a once in a century health scare, a pandemic which is disrupting the lives of billions.

In Italy, one of the hardest hit countries, there are rumors of a third, far more aggressive strain, but I have not been able to confirm any of this despite seeing sporadic references on Twitter and hearing about it through friends.

I can tell you with Italy already submerged in a national quarantine, Spain took a major step Friday toward a similar lockdown as it struggles to address a serious coronavirus outbreak.

French President Emmanuel Macron announced on Thursday evening a set of unprecedented measures to combat the spread of COVID-19, including the closure of schools until further notice.

The UK just announced it is banning mass gatherings a day after its government came under growing criticism for its 'surprising and concerning' approach to the coronavirus.

Germany pledged to spend whatever was necessary to protect its economy and the European Commission said it’s ready to green-light widespread spending after a market meltdown and a forecast that the euro zone was headed for recession:



All over the world, we are seeing drastic measures being implemented to address a nasty epidemic which threatens to overwhelm hospitals and kill millions of people.

We are living in surreal times and it's hard to gauge the economic fallout from this global pandemic. It's clear some sectors/ industries will be hit a lot harder than others but make no mistake, all sectors will feel the brunt of this coronavirus epidemic, and a global recession is coming.

How bad will it get? Nobody knows, it really depends on how bad this pandemic gets and how long our lives are disrupted.

One thing I can tell you, I agree with those who think the monetary and fiscal response will accelerate the zombification of the economy:



What else? Despite Friday's massive rebound, I agree with those who claim the coronavirus has damaged the stock market and the bears are hungry:
A word of caution after a violent week on Wall Street: Stocks tend to rally hard during bear markets like we are in currently.

So proceed with both eyes open even if it appears a bottom has formed, experts say.

“I think too much damage has been done [to the market]. I think rallies for now should be viewed as potential selling opportunities, unless the government comes out with something so inspiring that it really changes that dynamic,” Sevens Report Research founder Tom Essaye said on Yahoo Finance’s The First Trade.

Essaye couldn’t have put it any better.

The Dow Jones Industrial Average exploded 1,110 points in pre-market trading Friday — then gave back half of those gains by 10:00 a.m. ET — on optimism regarding a U.S. fiscal stimulus plan to combat the aftershock of the coronavirus. Further firming up investor sentiment was fresh stimulus action from the European Central Bank on Thursday and from the German government Friday.

But to Essaye’s point, this is a damaged market staring the barrel of months of brutal economic data and profit warnings from Corporate America. Just consider how damaged in fact the market is at this juncture.

The Dow has plunged more than 4,000 points this week. Both the Dow and S&P 500 are in bear markets, pressured in the last five sessions by the likes of Disney shutting domestic parks and Gap warning of a $100 million first quarter sales hit from coronavirus. The coronavirus-rolling financial crisis has rolled right into corporate boardrooms.

The S&P 500 has seen daily average daily swings of 5.7% in the past five sessions, according to Bloomberg data. The CBOE Volatility Index — aka Wall Street’s fear gauge — spiked to a record this week. There hasn’t been two back-to-back up days for the S&P 500 in a month.

Meanwhile, most key international equity indices are in a bear market. And to top it all off, coronavirus infection cases in the U.S. and Europe remain on the rise.

Says Essaye, “We have got to remember the economic fallout of this is just starting. Jobless claims last week were incredibly good. I doubt that will happen next week. We’re at the beginning of the economic fallout of this. Our main hope is that it is short. If this is wrapped up by April or May, this economy can recover relatively quickly. If it goes beyond that we have got a bigger problem.”

Looking for a positive amidst the carnage? Essaye is bullish on Apple stock because of its strong brand and cash flow.
A lot of young investors have never lived through a savage bear market to really appreciate what Essaye is saying.

In a prolonged bear market, you will witness massive, rip-your-face bear market rallies, but that's all they are, bear market rallies. They are not sustained, the market keeps heading lower and lower, so don't get too excited about a massive one-day rally from deeply oversold conditions.

Have a look at the daily one-year chart of the S&P 500 ETF (SPY):


It rallied hard today from deeply oversold conditions, and might continue rallying a bit, but don't be fooled, the damage is done and it won't be rallying back to new highs. It's basically pricing in a US recession and traders are waiting to see how bad the global economic and health fallout will be.

If you look at the 5-year weekly chart, you'll see there's more downside risk to the overall market:


This is why I caution my readers not to get too excited about a massive one-day rally, there's been so much damage done to this market, it will take months before we get back to where we were just a month ago.



The other thing I want to tell my readers is to stop focusing so much on the bloody stock market, and pay much closer attention to high yield bonds (HYG) which got whacked hard this week after oil prices plunged:


Credit markets are far more important than the stock market because as credit woes spread from junk bonds to investment grade bonds, companies are at risk of not making payrolls, which is why they are beginning to draw on credit lines for fear that capital markets may be closed to them for the time being.

Lastly, have a look at how S&P sectors performed today, this week and where they stand year-to-date:




Financials (XLF), Technology (XLK) and Energy (XLE) led the surge today but this week, all sectors got smacked and it was Energy, Utilities (XLU) and Materials (XLB) which got whacked hardest. Year-to-date, all sectors are down and Energy and Financials are down the most.

Anyway, it's Friday, let me end on some good news. US health regulators have approved a new coronavirus test that will speed up by tenfold the ability to test patients, helping solve a significant obstacle to American efforts to contain the virus:



The US needs to significantly ramp up testing to gain a better understanding of how many people are infected, and to gain a better understanding of where it needs to focus its attention to treat its most vulnerable citizens.



And remember, if you test negative, doesn't mean you can't spread the infection. White House coronavirus response coordinator Dr. Deborah Birx said that even if a person has a negative coronavirus test, “that means you’re negative that day” and they shouldn’t let up on taking precautions to prevent infection:



This is important because the US has not reached its peak of coronavirus cases in the country, according to Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Disease:



With that, I wish you all a great weekend, stay safe out there and for Pete's sake, avoid manic crowds at Costco trying to panic hoard toilet paper and god knows whatever else (avoid crowds, period!):



Below, billionaire investor Carl Icahn speaks to CNBC's Halftime Report stating "some companies are fairly cheap" but warning the market "may have longer way to go down".

Next, CNBC Contributor Ron Insana; Brad McMillan, Commonwealth Financial Network CIO; and Mark Tepper, Strategic Wealth Partners CEO, join 'Power Lunch' to discuss where they expect the markets to be headed as coronavirus fears continue.

Also, two must watch clips I posted yesterday. CNBC's "Halftime Report" spoke with Chamath Palihapitiya, CEO of Social Capital, who said this is like “the Great Financial Crisis and the dotcom bubble together” and that “we’re nowhere near a bottom”.

And Guggenheim Global CIO Scott Minerd discusses Thursday's massive sell-off with CNBC's Brian Sullivan and the Fast Money traders, Tim Seymour, Brian Kelly, Dan Nathan and Guy Adami.

As far as whether this will cause a US recession, earlier this week, former Federal Reserve vice chair Alan Blinder put recession odds at 90 percent. Great insights, listen carefully to Blinder, he's a top economist who explains why a US recession is imminent.

Lastly, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, talked to Good Morning America this morning explaining why the virus "hasn’t peaked" and why the measures to contain and mitigate it are necessary. Pay attention to what he says about exposing elderly to kids and why school closings are necessary to flatten the curve.




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