Current Market Conditions

[Trade Theory]

Currently we've seen a 9.5% selloff from its peak, with the Coronavirus being an ongoing source of news to fuel the fire. The aggressiveness of this downmove is very similar to Feb 2018 and Jan 2016. The SPX has already had a 4 standard deviation move for this week and the week only half over.

We will likely have high volatility for much of 2020, both to the upside and down. The election is coming up to add some excitement to the latter half of 2020. Bond prices have been skyrocketing. Fund managers across the world have been buying Treasury bonds as a safehaven because there's no other safe asset out there that produces a yield. Because of this the yield curve is completely inverted. Vol futures are in backwardation. The VIX sitting at 30 and the VVIX at peaking at 120; volatility is not backing off. A lot of the world is in duck and cover panic mode right now, at least in the short term. Scary conditions for the average investor. Exciting if you're a trader.

Where we're going from here: my guess is SPX will sell off to around 3000 then bounce up 200 points or so before either channeling or selling off further. The fed will likely step in and cut rates which will bring a bid back to the market. If cities start being quarantined in the US and businesses start shutting down, this could develop into a real selloff. Keep on your game people, keep your risk defined.

 

[notagain]

/ES almost at the 200sma, trouble if the bulls play dead.

 

[gaussian]

I hope we do not bounce back quickly. Any significant bounce will be treated as a dead cat on my side. I think it's safe to say that the market is correcting back to fundamentals. The ecstasy is over, MSFT is leading the Coronavirus downturn for Q3 and more stocks will come. Think about how many stocks in the S&P and Dow have supply chain ties to China. All of those will be suffering. Imagine if it gets worse and Mexico/Central America shut down their borders to us or we do it to them - now car companies, produce, etc are suffering.

If this thing doesn't get stopped, especially given its 14 day incubation time, we could see a global recession and/or local depression. If companies cannot produce value because supply chains are nuked it may be numerous quarters of poor earnings before state side supply chains can be spun up - and then they have to become profitable. We are feeling the effects of globalization crushing our economy...yet again. Perhaps we'll learn this time.

Fundamentally there's nothing the PPT, Trump, or The Fed can do if the market is just unable to produce value due to a supply chain that is shambles.

It's bad. Anyone who says Coronavirus is a nothingburger is a shill. Anything further than a 10% drop will be teetering on the floor falling out thanks to completely algorithmic trading in the indexes. The only positive thing is us millennials will finally be able to buy in cheap and maybe scrape up some value before the next recession.

 

[Cuddles]

 

[notagain]

The Fed is proactive, if the bulls remain in the fetal position. Trump will quickly restrict travel if the virus gets loose. Globalism caused this, mixed feelings all around.

 

[piezoe]

Currently we've seen a 9.5% selloff from its peak, with the Coronavirus being an ongoing source of news to fuel the fire. The aggressiveness of this downmove is very similar to Feb 2018 and Jan 2016. The SPX has already had a 4 standard deviation move for this week and the week only half over.

We will likely have high volatility for much of 2020, both to the upside and down. The election is coming up to add some excitement to the latter half of 2020. Bond prices have been skyrocketing. Fund managers across the world have been buying Treasury bonds as a safehaven because there's no other safe asset out there that produces a yield. Because of this the yield curve is completely inverted. Vol futures are in backwardation. The VIX sitting at 30 and the VVIX at peaking at 120; volatility is not backing off. A lot of the world is in duck and cover panic mode right now, at least in the short term. Scary conditions for the average investor. Exciting if you're a trader.

Where we're going from here: my guess is SPX will sell off to around 3000 then bounce up 200 points or so before either channeling or selling off further. The fed will likely step in and cut rates which will bring a bid back to the market. If cities start being quarantined in the US and businesses start shutting down, this could develop into a real selloff. Keep on your game people, keep your risk defined.

Nicely summed up, I think. My strong suggestion is to look and the S&P monthly bar chart. I have a target of 2870 in eleven months or less. We are, very likely, in the middle of a ~twenty year bull market cycle. When the market goes out of its long term channel and up parabolicly, the move can't be sustained unless the GDP and earnings do likewise. This can be real growth or inflation, but neither is the case at present. Thus eventually, once arrogance and exuberance have had their day, fundamentals will will pull back on the reins. The day to day market is driven by the media, particularly the financial media, and irrational behavior, i.e., the market goes up or down because it's been going up or down. The long term market, however, is driven by fundamentals. These corrections, such as we are seeing now, take out a good deal of the irrational excess, but usually not all. The crashes, such as the 2007-2009, take out all the excess and then some.

We are experimenting with major deficit spending (1 trillion over two years) in a full employment economy. That leaves a huge excess of money in the economy, some of that will wend its way to the market. Either inflation will correct the situation or fundamentals will. You can goose the market -- profits end up invested in the market -- short term by deficit spending on wasting assets, or you can goose it long term by deficit investment in infrastructure, education etc. In the latter case, you'll likely get a real gain; in the former, the likely result is inflation rather than real gain. We have currently chosen the former route.

I'm not preaching or clairvoyant here. I am channeling Minsky.

 

[piezoe]

ooops, some rather bad editing, or rather lack of. Oh well.

 

[piezoe]

ooops, some rather bad editing, or rather lack of. Oh well.

And I note we hit the first target rather quickly (2870) and bounced. I would guess that will be it for the Feb. Bar. Then ~2750 ? after a little bounce at 2800, should finish the selling for now on the March Bar I would think. That would be ~20 %. A major correction.

 

[Trade Theory]

I took a mild bullish position in the ES just after the equity market closed today. I think the probability of a surprise rate cut is very likely this weekend. Jerome hinted at it today. The Fed Fund futures are pricing in a 100% probability that by the March 18th FOMC meeting, they will cut rates. There's a 61.6% chance of a 50 basis point cut which is equal to 2 cuts. If the cut is a sure thing and the market is crashing right here and now, why would the fed want to wait 3 weeks to cut rates?

If a surprise cut happens the market will likely give us a ripping rally to the upside. In the ES, we ended the trading session more than 100 points off its low. If they cut rates we'll most likely see a 3-6% rally early next week. Dead cat bounce or not, I want to be part of that upside move. But it doesn’t mean the pain is behind us. Longer duration, I’m still a bit hesitant thinking we’ve even come near the bottom. The SPX made a 7 standard deviation move this week. There’s panic out there. This week, baby boomers especially were liquidating their 401ks and their IRAs that have been extremely profitable by holding positions that have been appreciating for decades. There wasn’t a bid in sight. 4 months ago, we were at these same levels and we were calling them all time highs. There still a long way down if conditions intensify.

 

[Trade Theory]

I have a target of 2870 in eleven months or less.

Ha it took a lot less than 11 months. Looks like your next target is 2650

Think about how many stocks in the S&P and Dow have supply chain ties to China. All of those will be suffering. Imagine if it gets worse and Mexico/Central America shut down their borders to us or we do it to them - now car companies, produce, etc are suffering.

I agree in the short term which is why the market is tanking. But longer duration supply chains will open back up and people will just live with the risk of the virus.