Market Direction Week of March 16, 2020: Correction Continues

Market Direction: BEARISH alert issued 2/27/2020



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Market Direction Week Review: Stocks suffered a week of historic losses as worries deepened about the impact of the novel coronavirus outbreak. The declines pushed the major indexes well into bear market territory, with the Dow Jones Industrial Average falling over 28% from its recent peak to its Thursday low and the S&P 500 Index down about 27%. The onset of the bear market was the fastest in history—major indexes were setting new highs as recently as mid-February—and the Dow suffered its worst daily decline since 1987 on Thursday. The CBOE Volatility Index (VIX) reached its highest level since the financial crisis of 2008, and “circuit breakers” designed to halt trading when the S&P 500 falls by more than 7% were deployed on Monday and Thursday for the first time since 1997.

All S&P 500 sectors fell sharply, but energy shares performed worst as oil prices tumbled. Health care, technology, and communication services shares held up best. As companies and individuals continued to cancel travel and events, shares in the affected industries were dealt the heaviest blow. Some cruise ship shares shed roughly half of their value as of the previous week at their Thursday lows, and airline shares accelerated their declines following President Donald Trump’s announcement of a 30-day ban on travel from most of Europe to the U.S.

While many factors were undoubtedly at work, the sell-off seemed to have four major drivers:

• On Monday, crude oil prices sank the most since the Gulf War in 1991 following Saudi Arabia’s decision to radically increase exports in order to drive down prices and punish Russia for its refusal to follow production limits (see Saudi Arabia section below).
• Confusion over the federal government’s response to the crisis appeared to deepen over the week. Stock futures fell sharply as President Trump addressed the nation from the Oval Office Wednesday night. The president’s surprise announcement of the European travel ban seemed to unsettle markets, and investors also appeared disappointed that the address did not include firm details on a broad fiscal stimulus plan. The president urged Congress to pass legislation cutting payroll taxes, but Democrats in the House appeared cool to the idea, proposing instead relief targeted at lower-income individuals.
• News that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were working on a compromise plan appeared to help calm markets on Friday. On Thursday night, Speaker Pelosi told reporters that a deal was just “awaiting an exchange of paper,” while Secretary Mnuchin told CNBC on Friday morning that “we’re very close to getting this done.” Late Friday afternoon, stocks rose further after President Trump declared a national emergency and announced new stimulus measures, as well as plans for drive-through testing procedures.
• The number of COVID-19 cases climbed sharply over the week, while delays in supplying testing kits led many experts to caution that the actual number of cases was much higher. The cancellation of major sporting and cultural events seemed to highlight the severity of the outbreak, as did reports of new quarantines and the World Health Organization’s official designation of a global pandemic. Signs of panic buying also emerged, especially in the curious global run on paper products.
• Signs of stress in credit markets emerged early in the week, while borrowing costs for energy companies and other stressed industries jumped sharply. Particularly prominent was Boeing’s decision to draw down a $13.8 billion credit line to help it deal with falling airline demand and its MAX 737 problems.

How the market finished last week, the S&P 500 down 8.8%, the Nasdaq down 8.2%, and the Dow down 10.4%.

Market Direction This Week: We track the stock market based on our Bullish and Bearish Alerts a new Bearish Alert recently started on 2/27/20 and we suggested to our followers not to trade any new long positions. We will continue to provide you the current stock market conditions as they develop. The current stock market environment is in a correction so trade with caution (see Market Direction Mid Week Update: Trading Strategies).

The number of coronavirus cases in the U.S. has continued to march higher, with the outbreak ushering in a host of disruptions to individuals’ daily lives and businesses’ operations.

The financial market volatility stemming from the pandemic reached historic levels last week, with each of the S&P 500 and Dow posting their worst percentage declines since since 1987’s Black Monday late in the week. All three major indices are now languishing in a bear market, after sinking more than 20% from their recent record highs.

Amid the outbreak, U.S. officials increased their efforts to combat the economic fallout from the virus, unveiling further stimulus aimed at some of those most hit by outbreak-related disruptions.

In a surprise decision Sunday evening, the Federal Reserve slashed rates to a zero lower bound, bringing the target rate down a full percentage point to a band of between 0% and 0.25%. This came less than two weeks after the Fed decided to slash rates 50 basis points to between 1% and 1.25% earlier in March, and two days before the start of the Fed’s scheduled March monetary policy meeting.

“The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” the Fed said in a statement of its decision.

The Fed also announced Sunday it would be launching $700 billion in large-scale asset purchases, buying at least $500 billion in Treasury securities and $200 billion in agency mortgage-backed securities over the coming months.

The Federal Reserve’s response was lauded by President Donald Trump, a frequent proponent of lower rates who said Sunday that market participants “should be very thrilled” with the decision, according to multiple reports.

Earlier, in a press conference Friday afternoon, Trump stepped up his administration’s response to the coronavirus outbreak, declaring the coronavirus outbreak a national emergency and unlocking some $50 billion in funding that could be given to state and local municipalities to respond to the outbreak.

Trump also waived interest payments on all student loans held by federal government agencies until further notice, and instructed the Department of Energy to purchase large quantities of crude oil for the U.S. Strategic Petroleum Reserve – an effort to help support U.S. shale producers hit hard by the recent precipitous decline in oil prices.

And on Saturday, the House of Representatives passed a bipartisan bill to help provide further support in response to the coronavirus. The legislative package, which passed with a vote of 363-40, broadens access to free testing, expands sick leave benefits and helps provides food aid for vulnerable populations, including children whose schools have closed due to the coronavirus.

The Senate is expected to vote on the bill this week, and could take it up as soon as Monday. President Donald Trump wrote in a Twitter post that he “fully support[s]” the bill, saying at the time that he encouraged “all Republicans and Democrats to come together and VOTE YES!”

The standard caveat still applies; “President Trump’s tweets still trump everything else”.

Economic Calendar: Empire State Index (3/16), Retail Sales (3/17), FED Press Conference (3/18), Leading Economic Indicators (3/19)

Some of the major earnings announcements on deck: FDX, DRI, LEN, FIVE, OLLI.

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