Market Direction Week of March 2, 2020: Correction Time

Market Direction: BEARISH alert issued 2/27/2020



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Market Direction Week Review: Stocks experienced their largest weekly drop in a decade on increasing concerns that the coronavirus outbreak will turn into a global pandemic with severe implications on economic growth. While the rate of new cases slowed in China, the headlines that the virus is spreading at an increased rate outside China triggered the first 10% correction in the S&P 500 since 2018. Volatility spiked, and commodities declined sharply, while bonds rallied, helping stabilize portfolios. Given the uncertainty of the economic fallout from the virus and its effect on corporate profits, it's prudent to expect volatility to remain elevated.

The World Health Organization (WHO) upgraded its global risk assessment of the potential for spread of the coronavirus from “high” to “very high”. The heightened uncertainty has put investors into “risk-off” mode, but the selling has also been exacerbated by other factors:

• Investor complacency – the S&P 500 index had rallied 18.8% off of the October low of 2,855 to the all-time high of 3,393 on February 19^th.
• Relatively high valuation – the forward P/E ratio on the S&P 500 was nearing 20 when the index was at all-time highs.
• 2020 election uncertainty – Senator Bernie Sanders has been gaining momentum recently and investors appear to be concerned that if he wins the Democratic presidential nomination it reduces the odds of a Trump re-election (which is being perceived as a potential negative for stocks).

Whether or not this week’s plunge in stocks turns out to be a market correction (which has been characterized as a drop of 10% or more but less than 20%) or the start of something more severe is unclear at this point in time, but the drop has been swift and severe - as of late-Friday morning all of the major U.S. indices are down over 11.0% on the week. Where markets go from here will likely be driven by whether or not the recent outbreak can be contained and to what extent it impacts the global economy. On a positive note, the SPX is off the morning low and the Relative Strength Index (RSI) is in oversold territory (currently 17), so we may be nearing a relief rally. 

How the market finished last week, the S&P 500 down 11.5%, the Nasdaq down 10.5%, and the Dow down 12.4%.

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).

With roughly 90% of the S&P 500 companies having reported earnings so far, 65% have beat estimates on the top line while 71% have beat on the bottom line.

The Federal Reserve Chairman Jerome Powell basically stated the Fed will “use our tools and act as appropriate to support the economy”. The lack of conviction from the bulls buying tells me that investors are still concerned and for the most part are not willing to add new positions and Monday will tell it all. Yes, markets are near-term oversold by essentially any measure you look at, and a near-term counter-trend rally could be close, but the problem is that nobody really knows when the COVID-19 outbreak will be contained. If more U.S. cases are reported over the weekend we could see additional selling on Monday, but we could also get a coordinated stimulus announcement to help instill investor confidence. From a technical perspective it’s encouraging to see the major indices respond to some of the support levels, and the RSI readings are extreme, so it feels like a relief rally is on the horizon. However, it’s impossible to predict what coronavirus developments will occur over the weekend (if any) and therefore the only reasonable outlook to provide for next week is "Volatile".  

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

Economic Calendar: ISM Mfg Index (3/3), ADP Employment Chg (3/4), ISM Non-Mfg Index (3/5), Employment Report (3/6)

Some of the major earnings announcements on deck: AZO, ROST, DLTR, COST, KR.
 

$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Building a community of investors one trade at a time. Share with a friend. Cha-ching!

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