Market Direction Week of March 9, 2020: Correction Continues

Market Direction: BEARISH alert issued 2/27/2020



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Market Direction Week Review: This week Trump administration officials described the COVID-19 outbreak as “contained” in the US, despite the fear seemingly impacting equity and bond markets. Relative to China, where 80% of the outbreaks have occurred, the impact in the United States, which has diagnosed only 0.3% of the cases, has been relatively small so far. The greatest number of diagnosed cases have been in the states of Washington (75), California (53) and New York (36). This week President Trump signed into law a $7.8B emergency spending bill to fight the outbreak. Vice President Pence said the Centers for Disease Control (CDC) will be prioritizing Washington and California and that enough kits will be distributed to test 1.2M people by early next week, and that another 4M will be available by the end of next week.

At the time of this writing, over 101,000 cases of the COVID-19 virus have now been confirmed, including over 3,400 deaths. I continue to be amazed at how well the Chinese stock market has done amid this outbreak. Since the initial news of the virus broke on 1/21, the SPX is -9.2% but the Shanghai Shenzhen 300 Index is +13.7%. Below is an update of the table comparing the COVID-19 outbreak to others in the past. As you can see, for the first 30 days the impact on US markets was relatively small (+0.2%), but as we moved into the second month, the decline (-9.2%) has now exceeded all previous outbreaks. 

In Europe the COVID-19 outbreak is also spreading, with cases in Italy (4,636) topping the list. Among other countries, the greatest number of diagnosed cases are in Germany (670), France (577) and Spain (386). On Friday, officials from the World Health Organization (WHO) said all countries should make containing the outbreak their top priority right now.   

How the market finished last week, the S&P 500 up 0.6%, the Nasdaq up 0.1%, and the Dow up 1.8%.

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).

Q4 earnings season is essentially over now. With 494 companies (99%) of the S&P 500 reporting, 74% have beat EPS and 64% have beat revenues.

Since the news first broke on January 21st, COVID-19 virus news has dominated the headlines and the markets. With volatility at extreme levels and the S&P 500 still in correction territory, there is little reason to believe that will not continue into next week.

High volatility usually means large price swings in both directions and bargain hunting during pullbacks can be a risky proposition. It is generally best to wait for two consecutive solid “up” days before adding exposure. If you are going to trade, consider reducing your average share size and dollar amounts per trade. If you find high volatility unsettling, you may want to avoid trading altogether in the near term.

Implied volatility is high, and that means both calls and puts are rather expensive. If you are going to trade directional option strategies, consider spreads instead of long calls and puts; if you are going to hedge your equity positions using options, consider collars instead of protective puts. Spreads and collars can both help minimize the adverse impact of volatility swings.

Trade this week with caution, the indicators are all over the map this week. This is not a good time to try and catch falling knives. The only possible outlook for the full week is Volatile again.

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

Economic Calendar: CPI (3/11), PPI (3/12), International Trade (3/13), University of Michigan Consumer Sentiment (3/13)

Some of the major earnings announcements on deck: ADBE, AVGO, ORCL, ULTA.

$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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