EB Special Report - Thursday, February 27, 2020
Special Report
I've decided to do more of a "State of the Market" report today than the usual report that provides the market outlook, sector/industry watch, SECL trading candidates, movers & shakers, and economic and earnings reports. In a highly volatile market like the one we're currently enduring, just about everything is sold, with little regard for fundamentals like revenue growth, earnings growth, PE, etc. or technicals like relative strength, trendlines, price support/resistance, etc. The only real driver is sentiment. Currently, the sentiment is extreme fear. The good news is that the VIX hit 36, a level of fear only seen at the Q4 2018 bottom. That certainly does not guarantee us we've seen a bottom now, but over the past couple years, 36 has been a critical level. Check out this VIX chart:
The combination of the S&P 500 testing very important price support at 3025 and the VIX hitting 36 provides us at least an opportunity for a bottom to form. Whether one will or not remains anyone's guess. But the odds are more in our favor at this point.
The other positive that I'm seeing today is the reversal off the earlier bottom in the 10 year treasury yield ($TNX). If you recall, I suggested that the last S&P 500 bounce was at odds with the bond market. The TNX had turned lower while the S&P 500 was trying to bounce. That wasn't a confirming signal for a rally to begin. I believe the TNX rallying this time provides us a better chance of this rally continuing....even if it's just a day or two. Here's that chart highlighting the TNX and SPX:
Do you see the difference? When the TNX is declining, it means that money is moving INTO treasuries. Every dollar that moves into treasuries is a dollar that cannot move into equities. Today, we're seeing a big, big rally in the TNX off the bottom and that money moving OUT of treasuries is supporting today's equity rally. It's very difficult to time an exact short-term top, but I will say that as long as that TNX keeps rallying, the SPY will more than likely rally as well. A warning signal would be a divergence like I saw yesterday morning.
So, in the very near-term, I've turned more bullish for a BOUNCE ONLY. It's just too early to call a major bottom. We could wake up tomorrow morning to additional coronavirus cases in the U.S. and be right back where we were this morning. I don't have a crystal ball. Therefore, if you are trading this bounce today, at least consider taking something off the table later today for protection. The risk you're willing to take overnight is completely up to you.
In the very long-term, I'm still a believer in this secular bull market. The high VIX reading today, plus any others we might get in the next week to couple months, will likely establish a very important price support level for U.S. equities. Is that the bottom today? It's waaaay too early to tell. Quite honestly, I'm not at all focused on later in 2020 or 2021 or 2022. I'm only interested in evaluating sentiment readings to try to make reasonable short-term decisions and calls. And trust me when I say this.....it ain't easy!
Getting into a habit of avoiding remaining long when the stock market's fear meter starts surging is a good thing. Then trying to remain patient for capitulation is the next step. If I had to put a % chance on this being a short-term bottom - perhaps a couple days to a week - I'd say maybe 70-80%. Further out, is it THE bottom? I'd give that one a 30-40%.
There's one thing to remember. Use the trade war fears as a history lesson. The stock market priced in the worst initially. We continued to have bouts of selling in 2019, but that initial support was never lost. I have no idea if the same will result with the coronavirus because I have no idea of knowing if the spread worsens considerably. I do know the headlines will remain extremely negative, but I'll watch the market's price action and sentiment readings to provide me what I really need to know.
Let's see how the market evolves later today. I'll be back tomorrow either with another "special report", if necessary, or our normal Daily Market Report (DMR).
Happy trading!
Tom