VIRUS FEARS|ELECTIONS|FED CUTS 0.5&QE-4?[CAPITULATION WEEK 2020]
Updated
The state of global markets and individual asset classes, ahead of one of the most speculative weekends since the financial crises[Featuring 12 charts + updated decision tree]
Did we capitulate this week? What will be the most likely policy response of central banks and governments globally? What factors will facilitate a bounce in stocks? How low can stocks go? Is the virus panic justified? Performance of gold? Many, many questions...
- I'll attempt to share my perspective through charts on each issue. Starting off with the US stock market.
1. The recent sell-off, no doubt compares closely to some of the largest single week sell-offs in history(1930's, 9/11, 2008, flash crash 1987). The issue with the recent sell-off is the fact that it exemplifies the scary nature of momentum, a product of the rise of passive investing and of course, algo trading. Obviously, this drop was extremely unpredictable, but it has to be said that valuations were walking on a thin string and the coronavirus was the stone that knocked the market out of balance. My idea was based on YoY miss in earnings/growth, hence I can't absolutely take any credit for forecasting the recent crash. Either-way the chart and the analysis are still valid.
Update: Since 2018, each significant drop bounced off the 55 week EMA, except this time the market just blew right through it.
3050 was the crucial level that was taken out, currently should serve as a pivotal point once or if a bounce occurs.
2. In terms of finding the bottom- the market will run lower as long as there's no coordinated response from monetary authorities globally. As they've been silent lately, the market is already pricing in three rate cuts for the year. It seems that they're about to unload stimulus hopefully by the start of next week, otherwise there's no way out. We're already in the late-cycle and markets are as sensitive as it gets to any shocks of reduced earnings. That said, late 2018 can be used as a proxy of the absolute bottom, which should be at the 200 Weekly MA in the range of 2630-2730. At this level is the -20%-25% threshold, that equities can take before recession talks intensify.
3. I am not an expert in epidemiology, and I am not going to discuss any of the potential virus risks. You can read about it here, bbc.com/news/world-asia-51663182. The facts thus far are the following; 1) Each case implies at least 1-2 months loss of productivity 2) Economic impact will extend into the next quarter possible Q3 3) The scariest idea of all is the potential that the virus could spread to the poor developing countries, that do not have transparent media and lack adequate health care systems (Countries such as Iran, that could serve as breeding grounds for the virus - bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/ )
4. The liquidity channel is close to the bottom, which could imply that the bottom in equities in the near term is close. This is the idea from that I am basing my 2022 liquidity cycle bottom call.
5. Speaking of liquidity, credit markets are seeing incredible reversal from a week ago. Junk bond credit spreads are on the rise fred.stlouisfed.org/series/BAMLH0A0HYM2EY , which even further increases the probability that the FED would have to step in to encourage liquidity flow into the credit markets.
6. Equally bad are European sovereign bonds. Just goes to say about how dysfunctional the market is, when northern European banks/investors, do not have faith that the southern states will repay their debt. Bare in mind, it's not corporate debt, but national debt.
If sovereign yields rise, so do corporate yields in these countries= COMPLETELY restraining access to financing for businesses. Taking one country, for instance, Italy without a doubt will enter into a mini-recession at best (similar to the end 2018 x2 Q negative GDP growth). But then again, Italy wasn't really growing in the first place for years now- just the sad reality.
7. Similarly, we have a breakout in 10 year US T. notes, raising the possibility of yield curve control, and the likelihood that the FED would increase the supply of long-duration notes. Just start QE-4 already, what's the point of even canceling the current soft QE repo facilities?![10Y US TREASURY NOTE|PREMIUM[LONG-TERM]PRICE ANALYSIS|PART 1/2|](https://s3.tradingview.com/o/oaxvgWTw_mid.png)
In comparison here's TLT. Likely breakout, although not until the retest happens.
Before I continue into analyzing gold and other commodities, these are some of the news that could facilitate a bounce in stocks.
1) Trump ending the tariffs that were left in place for China and the EU as soon as possible! No one cares about the deal anymore, we all know those promises aren't and can't be kept.
2) 50 bps cut in March, + start of QE-4, further cuts if necessary. The same is required from other major central banks. The FED must continue their bill purchases and extend the repo program. This of course only buys time as it can be seen from the decision tree above.
3) S.Carolina + Super Tuesday in the upcoming days, watch-out on Bernie.
4) When it comes to Europe, fiscal stimulus matters. Monetary policy has reached its limits, hence preferred news would be German fiscal stimulus. Of course, this hasn't happened since the early 2010s, which makes me skeptical that it'll happen this time.
Just briefly on commodities and how hard it is to argue for a bearish case in gold
1. Wave III target reached, regular profit-taking in place today. The sell-off today in gold might seem weird, but it has happened at the onset of the last three broader market downfalls(2008, 2000 ~, etc). Currently, on its way to wave IV.
Updated chart:
With all said, the only thing that can trigger a sell-off in gold, is a resurgence in global growth. For 2020, global growth was estimated at 3.3%. Considering that growth occurs naturally, simply by growth in population, if we get a dip in growth below 2% and with the onset of the virus that makes this plausible, one safe spot to put your money in would be gold.
2. Crude looking for support around 42.![THE END of the FOSSIL FUEL AGE?[MULTI-FACTOR Simple Crude Guide]](https://s3.tradingview.com/r/r9qb0PVT_mid.png)
I do not think we will immediately drop below 42, most likely will get a chop first. One thing's for sure, oil is not going above 56$ for the rest of 2020.
3. Lastly, Reuters core-commodity index continuing the downward trend. Of course with a relatively lower drop than equities, nevertheless, this is not a good indicator for aggregate demand, moreover confirming issues over supply chains globally due to the virus.
To conclude this idea, one thing's for certain and that's the uptrend in volatility will continue.
If I haven't mentioned already soo many scary indicators, I'd have to include the best one for last. Trump and his administration (Mr. sniff guy Larry) are actually turning into contrarian indicators! His latest tweets on the virus, and the press conf. with the CDC, both turned out to be sell signals. Some will argue that this shock is temporary - I'm arguing that it is permanent. Simply because of the fact that lately there has been a growing lack of trust in the system, that'll last as long as the virus spreads. Lack of trust in the Chinese system(no one knows the true number of cases), as well as the system in the US. Trump's only talking point is about the economy, I've addressed this many times in the previous analysis. The market drop coincides with the drop in his approval ratings for a reason(projects.fivethirtyeight.com/trump-approval-ratings/). He was the champion of the markets and one of the main factors that created this, now arguably, "irrational exuberance" environment. The last thing that's certain is that the probability of a democratic president in 2020, has risen substantially. Bernie 2020, could become a reality.
This is it, apologies for the long & extensive idea, but I haven't posted any ideas in some time. Hope that at least some found it useful. I would really appreciate feedback and comments with arguments that you have. It's been a busy week!
Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
Did we capitulate this week? What will be the most likely policy response of central banks and governments globally? What factors will facilitate a bounce in stocks? How low can stocks go? Is the virus panic justified? Performance of gold? Many, many questions...
- I'll attempt to share my perspective through charts on each issue. Starting off with the US stock market.
1. The recent sell-off, no doubt compares closely to some of the largest single week sell-offs in history(1930's, 9/11, 2008, flash crash 1987). The issue with the recent sell-off is the fact that it exemplifies the scary nature of momentum, a product of the rise of passive investing and of course, algo trading. Obviously, this drop was extremely unpredictable, but it has to be said that valuations were walking on a thin string and the coronavirus was the stone that knocked the market out of balance. My idea was based on YoY miss in earnings/growth, hence I can't absolutely take any credit for forecasting the recent crash. Either-way the chart and the analysis are still valid.
Update: Since 2018, each significant drop bounced off the 55 week EMA, except this time the market just blew right through it.
2. In terms of finding the bottom- the market will run lower as long as there's no coordinated response from monetary authorities globally. As they've been silent lately, the market is already pricing in three rate cuts for the year. It seems that they're about to unload stimulus hopefully by the start of next week, otherwise there's no way out. We're already in the late-cycle and markets are as sensitive as it gets to any shocks of reduced earnings. That said, late 2018 can be used as a proxy of the absolute bottom, which should be at the 200 Weekly MA in the range of 2630-2730. At this level is the -20%-25% threshold, that equities can take before recession talks intensify.
3. I am not an expert in epidemiology, and I am not going to discuss any of the potential virus risks. You can read about it here, bbc.com/news/world-asia-51663182. The facts thus far are the following; 1) Each case implies at least 1-2 months loss of productivity 2) Economic impact will extend into the next quarter possible Q3 3) The scariest idea of all is the potential that the virus could spread to the poor developing countries, that do not have transparent media and lack adequate health care systems (Countries such as Iran, that could serve as breeding grounds for the virus - bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/ )
4. The liquidity channel is close to the bottom, which could imply that the bottom in equities in the near term is close. This is the idea from that I am basing my 2022 liquidity cycle bottom call.
5. Speaking of liquidity, credit markets are seeing incredible reversal from a week ago. Junk bond credit spreads are on the rise fred.stlouisfed.org/series/BAMLH0A0HYM2EY , which even further increases the probability that the FED would have to step in to encourage liquidity flow into the credit markets.
6. Equally bad are European sovereign bonds. Just goes to say about how dysfunctional the market is, when northern European banks/investors, do not have faith that the southern states will repay their debt. Bare in mind, it's not corporate debt, but national debt.
If sovereign yields rise, so do corporate yields in these countries= COMPLETELY restraining access to financing for businesses. Taking one country, for instance, Italy without a doubt will enter into a mini-recession at best (similar to the end 2018 x2 Q negative GDP growth). But then again, Italy wasn't really growing in the first place for years now- just the sad reality.
7. Similarly, we have a breakout in 10 year US T. notes, raising the possibility of yield curve control, and the likelihood that the FED would increase the supply of long-duration notes. Just start QE-4 already, what's the point of even canceling the current soft QE repo facilities?
In comparison here's TLT. Likely breakout, although not until the retest happens.
Before I continue into analyzing gold and other commodities, these are some of the news that could facilitate a bounce in stocks.
1) Trump ending the tariffs that were left in place for China and the EU as soon as possible! No one cares about the deal anymore, we all know those promises aren't and can't be kept.
2) 50 bps cut in March, + start of QE-4, further cuts if necessary. The same is required from other major central banks. The FED must continue their bill purchases and extend the repo program. This of course only buys time as it can be seen from the decision tree above.
3) S.Carolina + Super Tuesday in the upcoming days, watch-out on Bernie.
4) When it comes to Europe, fiscal stimulus matters. Monetary policy has reached its limits, hence preferred news would be German fiscal stimulus. Of course, this hasn't happened since the early 2010s, which makes me skeptical that it'll happen this time.
Just briefly on commodities and how hard it is to argue for a bearish case in gold
1. Wave III target reached, regular profit-taking in place today. The sell-off today in gold might seem weird, but it has happened at the onset of the last three broader market downfalls(2008, 2000 ~, etc). Currently, on its way to wave IV.
Updated chart:
2. Crude looking for support around 42.
3. Lastly, Reuters core-commodity index continuing the downward trend. Of course with a relatively lower drop than equities, nevertheless, this is not a good indicator for aggregate demand, moreover confirming issues over supply chains globally due to the virus.
To conclude this idea, one thing's for certain and that's the uptrend in volatility will continue.
If I haven't mentioned already soo many scary indicators, I'd have to include the best one for last. Trump and his administration (Mr. sniff guy Larry) are actually turning into contrarian indicators! His latest tweets on the virus, and the press conf. with the CDC, both turned out to be sell signals. Some will argue that this shock is temporary - I'm arguing that it is permanent. Simply because of the fact that lately there has been a growing lack of trust in the system, that'll last as long as the virus spreads. Lack of trust in the Chinese system(no one knows the true number of cases), as well as the system in the US. Trump's only talking point is about the economy, I've addressed this many times in the previous analysis. The market drop coincides with the drop in his approval ratings for a reason(projects.fivethirtyeight.com/trump-approval-ratings/). He was the champion of the markets and one of the main factors that created this, now arguably, "irrational exuberance" environment. The last thing that's certain is that the probability of a democratic president in 2020, has risen substantially. Bernie 2020, could become a reality.
This is it, apologies for the long & extensive idea, but I haven't posted any ideas in some time. Hope that at least some found it useful. I would really appreciate feedback and comments with arguments that you have. It's been a busy week!
Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
Note
Small correction, a high probability that the Treasury will increase the supply of long-duration notes.And other typos, are inevitable.
-Step_ahead_ofthemarket-
Note
The more rate cuts we get, the larger the debt bubble gets + blown out of proportion price. Similar to the late 90's, when the fed made mid-cycle adjustments that ended up with a bubble pop Note
Good morning guys! Latest Chinese PMI's are depressing, the one thing that should've gone right this weekend. (46, 53.8 expected, instead got numbers 35 and 29.8... ) If Caixin PMI's aren't any better on Monday, this screams both demand and supply shock, at worst could be interpreted as the onset of a recession. Certainly complicates things for an expected bounce for Monday!Not looking good!
_step_ahead_ofthemarket_
Note
Update: Obviously by now we all know the virus has been declared a pandemic. This means that we have a higher inclination to enter scenario 3 on the chart above. We don't know the real number of cases in the US, hence I'd argue that the systematic risks are undoubtedly high.The only significant update for this idea is that it seems that Bernie got screw again by the dem establishment. And yes, Biden will be better for some sectors but do not think that if he wins, everything will be the same as before.
Every political shift brings volatility simply because of the importance of regulatory requirements and legislative risks (changing laws affect business). Arguably, most democrats argue for a larger government and more regulated economy, and Biden although a moderate is no different.
I haven't had time lately to post or update any ideas. This is the best I can do for the time that I have. Stay ahead, and stay healthy.
_step_ahead_ofthemarket_
_
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