Market Direction Week of March 23, 2020: Market Fear Factor High

Market Direction: BEARISH alert issued 2/27/2020



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Market Direction Week Review: Extreme volatility persisted last week, with stocks declining sharply as the number of coronavirus cases globally continued to rise. The effects of social distancing will take a significant toll on the global economy and hurt employment, and major central banks and governments around the world announced measures to support the economy. The U.S. called for a $1.2 trillion stimulus plan, European countries announced a combined $1 trillion in new fiscal spending, and the Federal Reserve cut rates by a full 1%, returning its policy rate back near zero in addition to restarting its bond-buying program.

Stocks suffered another week of steep losses, as concerns deepened over the novel coronavirus and its economic impact. The S&P 500 Index fell back to its lowest levels since early 2017, while the Dow Jones Industrial Average touched lows not seen since late 2016.

The downdraft was the most intense on Monday, with the Dow suffering its biggest percentage loss since 1987 and the Nasdaq Composite Index experiencing its sharpest daily decline on record, according to The Wall Street Journal. The sell-off came despite the Federal Reserve’s announcement on Sunday that it would slash the federal funds target rate to the 0.00%–0.25% range and restart aggressive purchases of Treasuries and agency mortgage-backed securities. On Monday, the CBOE Volatility Index (VIX) hit its highest level on record, surpassing its peak during the financial crisis of 2008. Sharp declines on Monday and Wednesday again triggered “circuit breakers” designed to keep trading orderly. The New York Stock Exchange announced on Wednesday that it would temporarily move to fully automated trading beginning Monday, March 23.

European equities posted sizable losses, as countries imposed lockdowns and economies faltered, raising the prospect of a prolonged recession. However, a flood of fiscal stimulus and further interest rate cuts helped equities claw back some losses at the end of the week. The pan-European STOXX Europe 600 Index fell 1.85%. Germany’s Xetra DAX Index slipped 3.56%, France’s CAC-40 Index declined 2.51%, and Italy’s FTSE MIB Index dropped 0.4%. The UK’s FTSE 100 Index slid 2.78%.

Japanese stocks produced mixed returns in the holiday-shortened trading week. Japanese markets were closed on Friday to celebrate the Vernal Equinox Day holiday. The Nikkei 225 Stock Average declined 878 points (5.0%) on Thursday and closed at 16,552.83, down 30.0% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index posted gains for the week but are down 25.5% and 29.5%, respectively, in 2020. The yen weakened and stood at ¥109.81 per U.S. dollar on Friday.

How the market finished last week, the S&P 500 down 15.0%, the Nasdaq down 12.6%, and the Dow down 17.3%.

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).

It is gearing up to be another potentially volatile week for markets as coronavirus cases continue to rise and economic data reveals the outbreak’s damage on the U.S. economy.

There are currently more than 311,000 confirmed cases of COVID-19 globally with roughly 26,700 cases in the U.S., according to John’s Hopkins. The rapid spread of the virus sent investors into a frenzy last week. The Dow (^DJI) tanked more than 17%, while the S&P 500 (^GSPC) fell more than 15% and the Nasdaq (^IXIC) sank more than 12%. All three of the major indices close at three-year lows and logged their worst week since the financial crisis. Meanwhile, crude oil (CL=F) declined more than 29% and had its worst week ever.

With the Federal Reserve doing almost everything it can to provide stimulus, all eyes are now on Washington for a fiscal response. Congress is working on a stimulus package of more than $1 trillion and is running up against a Monday deadline. White House economic adviser Larry Kudlow said that he believes the stimulus package will be worth between $1.3 trillion and $1.4 trillion. Coupled with the Fed’s actions, it would have about a $2 trillion impact on the U.S. economy, according to White House officials.

“Daily life came to a screeching halt this week as governments, businesses and consumers took drastic steps to halt the COVID-19 pandemic. U.S. equity markets fell 12% on Monday—the second worst daily loss in history—as it became clear just how much, and for how long, economic activity could be interrupted,” Wells Fargo economists wrote in a note March 20. “The situation has rapidly progressed beyond being either a ‘demand shock’ or a ‘supply shock’; it is an unprecedented interruption and reorganization of economic life.”

COVID-19 impact on economy

Most of the economic data releases this week will be backwards looking and will provide few clues of the true impact of the COVID-19 outbreak. But, initial jobless claims data released Thursday will be the most relevant and up-to-date look at how the virus in impacting the U.S. economy.

The number of Americans filing for unemployment benefits is expected to be in the millions for the week ended March 21, up from 281,000 the week prior. Though economists from major firms have varying estimates, the average estimate among economists polled by Bloomberg is for 1.5 million initial jobless claims.

Economists at Bank of America predict upwards of three million initial jobless claims for the week. “Job loss will be severe. We expect private payrolls to shed 1mn workers per month in 2Q with most of the loss suffered in April before returning gradually back to trend by 1H 2021. This will lead to a spike in the unemployment rate to 6% in 2Q 2020 and a peak at 6.3% in 3Q 2020,” economist Michelle Meyer said in a note March 20.

“The disruption to the labor market will disproportionately impact low-income hourly service workers. Industries that have and will be impacted the hardest (e.g. leisure and hospitality, transportation) employ more hourly workers than the average,” she added.

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

Economic Calendar: PMI (3/24), Durable Goods (3/25), GDP (3/26), Personal Income and Consumer Spending (3/27)

Some of the major earnings announcements on deck: NKE, MU, FDC, LULU, KBH.

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