The news that the Trump administration was going to come forward with a fiscal stimulus plan that includes a payroll tax cut (and maybe even some relief for the energy industry) helped the stock market (which had become quite oversold on a very-short-term basis) bounce strongly yesterday. The rally came on strong volume (6.3bn shares on the composite volume) and breadth that was quite positive (17 to 1 positive on the S&P 500 and almost 5 to 1 positive on the NYSE composite index). However, these strong “internals” were not as extreme as we saw in Monday’s big decline, thus it’s going to be hard for the stock market to see some strong upside follow-through today.
Of course, it’s VERY easy to say that the market is not going to see upside follow through…given that the S&P futures are trading over 80 points lower as we write this morning. So we’re not adding anything compelling by saying this, but we just wanted to point out that the “internals” were not as good yesterday…as they were bad…on Monday. Therefore, it’s not a big surprise that the futures are giving back much of yesterday’s gains…..…Sharp bounces are very normal during deep corrections and even bear markets. So we’re probably going to have to see the situations with the two black swans we’re dealing with right now calm down significantly before we see a sustainable rally.
As we all know, more rate cuts from the global central banks and big stimulus packages on the fiscal side are not going to do anything to contain the coronavirus or help oil prices bounce in a substantial way. Therefore, the “sell the rallies” strategy that we’ve been pushing lately remains firmly in place.
Another key reason why the strategy remains in place is a very simple one. The stock market had been priced for perfection as we moved into February this year…and things HAVE changed. Like we said above, we’ve been hit by TWO black swans…one right after the other. (Yes, people did have a couple of weeks to raise some cash after the coronavirus broke-out, but it was still a black swan event.) In other words, the stock market is doing exactly what it SHOULD be doing! It’s reacting to the fact that coronavirus is having a negative effect on the economy (and will have a further negative effect going forward.) The market is also reacting to what impact the crash in oil prices could have on the employment picture and the credit markets. In other words, the economic outlook has changed dramatically in recent months…and the stock market is merely reflecting that change…JUST LIKE IT SHOULD!!!
The pundits can complain all they want about the impact of the algos, but the algos exacerbated the rally in 2019, so it shouldn’t be a surprise that they’re exacerbating the decline this time as well. Yes, the day-to-day moves (and even the intraday moves…like we saw yesterday) ARE getting out of control. However, the aglos did not CAUSE the market to decline, these two black swan events have been the cause…and the fact that they came at a time when the stock market had become overbought, over-loved and over-valued didn’t help the situation either.
What we’re trying to say is that investors need to spend less time trying to figure out what has happened over the past month or so…and spend more time figuring out how to navigate the investment waters over the coming weeks and months. They need to accept what has happened…and that a global slow-down IS taking place…and the odds of a recession HAVE grown in a material way. More importantly, we need to realize that the odds that the stock market will bounce back and regain everything it lost as quickly as it did after the last deep correction are starting to decline.
For us, this originally led us to suggest to investors that they raise as we moved through February…while the market was still at record highs. Now, we’re saying that investors should be raising some more cash on bounces…and avoid getting sucked-in by the strong one-day rallies we see from time to time. Finally, it means putting a plan in place IN ADVANCE for when the REAL capitulation takes place…and the baby is thrown out with the bathwater.
Okay…moving on. The support/resistance levels on the S&P 500 index remain the same. However, the first support level has become even more important. Just below the 2750 level…in the 2735-45 range…became an even more important yesterday. Remember, that level was the June 2019 lows…and the lows from Monday. It was also the low from yesterday, so that level has now become even more important. (Even though the S&P rallied almost 5% by the close yesterday, it did drop dramatically midday…and retested those Monday lows.) Therefore, any meaningful break below the 2735 level over the coming days & weeks is not going to be good at all for the S&P 500 on a technical basis…and it will leave it quite vulnerable to a quick drop down to its 200 week MA of 2640. (First chart below.)
One final note. A couple of weeks ago, we highlighted South Korea’s KOSPI index. This has always been an important indicator for the global economy…given how much South Korea exports to the rest of the world. This has become even more important recently given the number of coronavirus cases in that country.
Well, the KOSPI is now testing a very important support level on a technical basis. If it drops below 1900 in an significant way, it’s going to move below its 2019 lows and give it a key “lower-low.” However, that kind of move would ALSO take it below the “neck-line” of a “double-head & shoulders” pattern. Therefore, if we get more downside follow-through in the KOSPI over the near-term, it’s going to be quite unfavorable on a technical basis…and it will probably indicate that growth around the world is going to slow in a more noticeable fashion than the bulls are saying it will right now. (Third chart below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.