Last week’s equity market meltdown caught investors off guard; it was painful, swift, and reminiscent of corrections past, though unique in some respects.
With that carnage as a backdrop, and standing on the smoldering heap that was our reengaged bull market, let’s take a moment to look specifically at Friday’s U.S. equity market price action. In so doing, we may find some indications that our stock market correction may have already started to attract some interested buyers.
As you know well, the leadership for our charge higher this year was provided by the growth sector. Specifically, names like Nvidia (NVDA), Microsoft (MSFT), Advanced Micro Devices (AMD), Amazon (AMZN), Universal Display Corp. (OLED), and Adobe (ADBE) led equities higher as a result of several factors. Among those factors here in the U.S. were strong consumer demand/spending; passage of the USMCA; resolution around the first phase of US/China trade talks; hopeful news around a possible truce in Afghanistan; elevated consumer confidence and optimism; solid Q4 earnings; and largely constructive forward guidance. Additionally, the Q4 economic data we have received and more recent economic releases had provided a solid data-centric underpinning for recent investor enthusiasm.
After a strong start to the year, those leaders began reflecting price/volume weakness on February 19 and 20 as the extent of COVID-19 cases, deaths, and geographic reach impacted markets. Market internals also suggested that breadth was waning. In little more than a week:
Former leaders to the upside sharply reversed course and gave back as much as 10 %-20% in a Covid-19 fueled rush for the exits.
Many leaders, by the their nature, were trading at or close to their all-time highs before the sharp and dramatic reversal of fortunes. The leaders outlined above, as well as much of the broader market including the S&P 500, Russell 2000 and Dow Industrials, saw a continuation of their ill-fortunes for nearly all of last week. But Friday morning’s continuation of the trade lower came to a sharp halt by midday as word on the street began circulating that the Federal Reserve may step in to lower rates in March – possibly this week – as a way of attempting to avoid a COVID-19 induced recession.
That reversal on Friday afternoon saw former leaders once again reemerge, attracting institutional interest. For example:
Nvidia (NVDA) rose 17.47 points or 6.92%. Volume rose 169%.
Microsoft (MSFT) rose 3.83 points or 2.42%. Volume rose 191%.
Advanced Micro Devices (AMD) rose 1.47 points or 3.34%. Volume rose 69%.
Amazon (AMZN) lost 0.55 (erased 72 point decline) points or 0.03%. Volume rose 122%.
Universal Display Corp. (OLED) rose 9.62 points or 6.45%. Volume rose 120%.
Adobe Inc. (ADBE) rose 7.60 points or 2.25%. Volume rose 166%.
There were also market indicators suggesting that markets had become overextended to the downside on Friday and, as a result, susceptible to a reversal. The put-call volume ratio had jumped to 1.26 and the CBOE Volatility Index (VIX) had jumped to an eye-popping 49.48 on an intraday basis on Friday before settling at 40.11. These indicators, coupled with expectations that the Fed may move on rates to reassure markets, worked in tandem to fuel what felt like an unfamiliar trade higher in the afternoon.
That trade higher erased a 3.5% intraday decline for the Nasdaq. The S&P closed the session, having given up 0.82%. The Dow languished with a loss of 1.39% on the session. Even though the S&P 500 and Dow lost ground, they both recovered a large percentage of their intraday losses. Volume exploded across the board. NYSE volume rose 22.01% and Nasdaq volume leapt 15.08%. That escalating volume comes on top of volume that has consistently been well above the 50-day moving average metrics for both exchanges over the past week.
By any measure, Friday’s reversal aside, last weeks tumult in US equity markets left investors and portfolio managers in a state of shock. For the week, the S&P 500 fell 11.5% and the Nasdaq dropped 10.6% – respectively the worst weekly performances for both since 2008. And simply because some buyers showed up on Friday afternoon, doesn’t necessarily mean the carnage is over. It only means that there is capital selectively being put to work – either in an effort to cover shorts or build long positions. While the marginal gain by the Nasdaq on Friday instills a minor degree of comfort, fear still looms.
The COVID-19 narrative looks likely to remain front and center for markets as we move into March this morning. As a result, and even if the Fed moves on rates this month, the Covid-19 overhang will prevent a meaningful trade higher in the near-term.
This week’s Economic Calendar highlights
Every single economic data release moving forward will be examined under the lens of the ongoing Covid-19 virus, its impact on Chinese economic data, global growth (or lack thereof), and its long-term impact on demand.
Today we receive the ISM Mfg. Index – level reading for February. Econoday consensus is 50.4. January’s reading was 50.9. On Wednesday we receive the EIA Petroleum Status Report for the week ending 2/28. Last week’s report reflected relative crude oil market equilibrium. Weekly Jobless Claims for the week ending 2/29 are released on Thursday morning. On Friday we receive the monthly Employment Report for February. Econoday M/M consensus is 175,000.The unemployment rate is expected to remain a healthy 3.6%. All of the other data within the report is expected to remain in-channel and constructive.
Near real-time tracking: Coronavirus
COVID-19 Global Cases by Johns Hopkins CSSE
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Flickr photo: by BostonPhotoSphere