Mar 8 Session Profile | /ES S&P 500 E-Mini FuturesDescription:
An analysis for this historic week ahead.
Points of Interest:
Fib clusters at 2710, 200 moving average, failure to get above key retracement levels, Friday $VIX pop to $50+ and break out of balance.
Technical:
Failed to get above key retracement levels (i.e., 50% and 61.8%). Poor structure (untested POCs or the levels where most amount of the volume was traded -- fairest price to transact) created by the market getting too long, beneath /ES February high, were erased in the initial correction, while /NQ still has untested POCs below from 8070 to 7550. The bounce on Feb 28 into a balance zone failed to take out a VPOC at the 3140.50 level. In my opinion, the virus-related news is the match that lit the fire (i.e., this was coming).
Friday, we finally broke out of -- gapped below -- a multi-day balance that was trending up, mechanically, along a slanted trendline. My belief, going into last week was that we would get a recovery similar to what was seen in the beginning of 2018.
I now think the circumstances warrant a move lower, especially considering Friday’s value area and POC which were at the lows, prior to the end-of-day rally which indicated the potential for maybe a continuation into the next session, all-else-equal. I’ve studied that downmoves will rarely end until we put in some sort of excess low. We went from bear to balance to bear again with Sunday night taking out the Feb 28 lows.
Sunday’s open gapped and traded below October’s low, accepting the initial downmove price spike on Feb 28.
Downside /ES Fib Target 2710 based on a cluster of multiple extensions and retracements meeting in one place.
Time from Feb 20 top to Feb 28 bottom = Time from Jan 18 top to Feb 18 bottom
Time from Dec 18 bottom to Feb 20 top = Time from Mar 09 bottom To Apr 10 high
/NQ POCs: NQ1!
Index Analysis:
$RUT: TVC:RUT
$NDX: TVC:NDX
$DJI: TVC:DJI
$NYA: TVC:NYA
Fundamental:
U.S. Expansion: “Economic activity expanded at a modest to moderate rate over the past several weeks, according to the majority of Federal Reserve Districts” (bit.ly). "Outlooks for the near-term were mostly for modest growth with the coronavirus and the upcoming presidential election cited as potential risks."
Employment: “The number of Americans filing for unemployment benefits fell last week, suggesting the labor market was on solid footing despite the coronavirus outbreak, which has stoked financial market fears of a recession and prompted an emergency interest rate cut from the Federal Reserve,” according to Reuters (reut.rs).
Talk Of Credit Crisis: According to Bloomberg, the fear that a coronavirus-panic and slowdown may cause a credit crisis was ignited this week after financial conditions tightened despite the Federal Reserve’s emergency rate cut (bloom.bg). Now, according to CME Group’s FedWatch tool, the market is pricing in a 100% chance that rates will be cut at the next Fed meeting (bit.ly).
Adding, Bloomberg suggests that signs of stress in the credit market are apparent through multiple channels; credit card and loan delinquencies are appearing on the consumer lending front, while across the world, “Non-bank companies have drastically upped their leverage since the last crisis, as treasurers have taken advantage of historically low interest rates” (bloom.bg). The same article alleges that this increase is debt and leverage is a problem, even in a low rate environment, due to the “profitability drought that is making it harder for companies to service debts.”
“V-Shaped” Recovery: Despite the rapid increase in coronavirus cases (bit.ly) across the rest of the world, China seems to be recovering. According to Bloomberg, “Reservations for domestic flights and hotels in China are recovering from a coronavirus-induced slump as people return to work across the nation” (bloom.bg). Additionally, Chinese cargo flows at ports are recovering, according to Freight Waves (bit.ly).
Slowdown Arrives Elsewhere: Countries like Italy have seen a rapid rise in deaths (nbcnews.to) and international travel is getting beat hard; “Travel analytics company ForwardKeys found that flight bookings to Italy fell by nearly 139% in the final week of February, compared with a year ago, the Washington Post reported,” according to Axios (bit.ly). The slowdown in travel is expected to cause almost $113 billion in loses for airlines, according to Guardian (bit.ly).
Fear Prevails: Some speculation around last week’s sell-off after the emergency rate cut was fed-induced fear -- “A quick response might exacerbate the market sell-off because it could suggest panic on the part of policymakers. It may also be ineffective because monetary policy moves such as rate cuts typically take a while to feed through to the broader economy,” according to Reuters (reut.rs).
Falling Dollar: The dollar has fallen “under the weight of expected rate cuts form the Fed and record-low U.S. Treasury yields,” according to Axios (bit.ly). This is important to take note of because -- according to the same article -- “Multinational companies prefer a weak dollar because it makes U.S. exports cheaper overseas, but it also makes imported goods more expensive for American consumers and can push inflation higher.” As a result, a falling dollar may pressure bottom lines.
Sentiment: 38.7% Bullish, 21.6% Neutral, 39.6% Bearish as of 3/8/2020. (bit.ly)
In The News:
“Bruno Braizinha at Bank of America had this perspective, earlier this week: When we abstract from the near-term noise and volatility and refocus on year-end scenarios we find two limiting cases: (1) a U.S. recession scenario with the pricing of the Fed to the Zero Lower Bound, which implies 20 basis points for two-year Treasuries and 50-80 basis points for 10-year Treasuries; or (2) an upswing back to trend growth as the coronavirus outbreak dissipates, which likely implies a Fed on hold after a 50 basis-point cut (two-year Treasuries around 1.1%) and 10-year Treasuries in the 1.5-1.7% range. A 50/50 weighting of these scenarios implies a 1-1.25% range for 10-year Treasuries at year-end. With forwards currently around 1.1%, the market seems to be assigning a marginally higher probability to the bullish rates scenario (bearish risky assets) for end-2020.” (bloom.bg)
“There is also reason to worry about international debt. According to the Bank for International Settlements, some $17 trillion is owed by non-U.S. corporations without what CrossBorder Capital describes as “obvious U.S. dollar access.” It is hard to see how this will be refinanced without resort to further quantitative easing, just as some of the worst pain for individuals and small businesses to emerge from the virus may require helicopter money drops. None of this makes a credit crisis inevitable, and it should certainly be possible to avoid a crisis on the scale of 2008. The scale of the fear should increase the scale of the subsequent recovery if credit issues can be eased. But the fear that the coronavirus will be the trigger to spark the next generalized credit crunch is widespread, and is rational.” (bloom.bg)
Vehicle sales are down 80% in China. (bit.ly)
“High yield and investment grade CDX spreads are at their highest levels in over a year, and have widened materially this week. In the case of the junk, an optimist's explanation might be “well, that’s down to energy – an increasingly small part of the S&P 500, so it shouldn't ring alarm bells.” High-yield CDX had its biggest daily widening since 2015 on Thursday. But it’s fairly rare for the S&P 500 to be up 0.8% or more in a week with investment-grade CDX at least five basis points wider. The last time that happened was in September 2018. In other words, the top of the 2018 markets before that year's fourth-quarter rout in risk assets.” (bloom.bg)
Outflows Surged: “Fixed income funds have suffered their worst outflow ever, while equity funds have also suffered sizable outflows,” according to BoA Research (bit.ly).
"The healthy reserves of many states and cities are why we think municipalities are well positioned to weather some economic dislocation,” according to Cumberland Advisors (bit.ly).
An energy price slump may hurt: “While many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices, significant declines in U.S. production may take time. The largest American oil companies, Exxon Mobil Corp. and Chevron Corp., now control many shale wells and have the balance sheets to withstand lower prices. Some smaller drillers may go out of business, but many will have bought financial hedges against the drop in crude.In the short run, Russia is in a good position to withstand an oil price slump. The budget breaks even at a price of $42 a barrel and the finance ministry has squirreled away billions in a rainy-day fund. Nonetheless, the coronavirus’s impact on the global economy is still unclear and with millions more barrels poised to flood the market, Wall Street analysts are warning oil could test recent lows of $26 a barrel.” (yhoo.it)
Oil drops more than 30% Sunday due to OPEC failure and Saudi Arabia price cuts. (bloom.bg) “Hammered by a collapse in demand due to the coronavirus, the oil market sank deeper into chaos on the prospect of a supply free-for-all. Saudi Arabia over the weekend slashed its official prices by the most in at least 20 years and signaled to buyers it would ramp up output -- an unambiguous declaration of intent to flood the market with crude. Russia said its companies were free to pump as much as they could ... Aramco’s unprecedented pricing move came just hours after the talks between Organization of Petroleum Exporting Countries and its allies ended in dramatic failure. The breakup of the alliance effectively ends the cooperation between Saudi Arabia and Russia that has underpinned oil prices since 2016.”
Information I'm Carrying Forward:
Historically, "Epidemics normally have a severe but relatively short-lived impact on economic activity, with the impact on manufacturing and consumption measured in weeks or at worst a few months." (reut.rs)
"Asia’s economies, especially China, have grown much faster than their western counterparts, pulling the centre of gravity steadily deeper into the eastern hemisphere and Eurasia.” "In 2020, coronavirus has reinforced the point that an economic shock originating in China can and will propagate throughout the international economic system, impacting on businesses and financial markets worldwide."(reut.rs)
"Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash. Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now." (bit.ly)
"Still, consumer fundamentals remain healthy. Personal income jumped 0.6% in January, the most since February 2019, after gaining 0.1% in December" (reut.rs)
"So add low interest rates to suppressed inflation (temporarily) coupled with slowing worldwide growth, and we get a powerful upward force for stock prices. Our upside target for the S&P 500 Index is now 3600 or higher." (bit.ly)
"The shrinking goods trade deficit could somewhat limit the downside to GDP growth. A third report on Friday, the Commerce Department said the goods trade deficit contracted 4.6% to $65.5 billion in January. Goods imports tumbled 2.2% last month and exports dropped 1.0%" (reut.rs)
"A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months. While China’s government has cut interest rates, ordered banks to boost lending and loosened criteria for companies to restart operations, many of the nation’s private businesses say they’ve been unable to access the funding they need to meet upcoming deadlines for debt and salary payments. Without more financial support or a sudden rebound in China’s economy, some may have to shut for good." (bloom.bg)
"While the coronavirus is disrupting supply chains for manufacturing, some sections of the industry do not appear to be experiencing significant distress. The Chicago Purchasing Management Index rose 6.1 points in February to a reading of 49.0, the highest level since August 2019, a fourth report showed. The joint MNI Indicators and ISM-Chicago survey suggested a marginal impact on businesses in Chicago area from both the coronavirus and last month’s signing of a “Phase 1” trade deal between the United States and China" (reut.rs)
Disclaimer:
This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve (myself especially), so if you see something wrong, speak up.
