Morning Comment: Will the U.S. Follow Europe?

WHAT AN UNBELIEVABLE DAY YESTERDAY!!!!! Tom Brady decided to leave the Patriots!!!!.......Oh yeah…the stock market rallied 6% too after a large fiscal plan was proposed….BUT TOM BRADY LEFT THE PATRIOTS!!!!!

Of course, SOME people will try to say that the market rallied strongly yesterday because the Trump Administration proposed some bazooka-style fiscal plans…and due to the report that the Fed is going to reinstate their commercial paper facility. However, anybody who really understands how the markets work…OBVIOUSLY knows that the real reason the stock market rallied so strongly was because people outside New England became MUCH more positive on their own personal future…now that the Patriots no longer have Tom Brady!!!! That’s right! Teams outside of New England finally have a chance of winning the Super Bowl. Therefore, people said to themselves, “Yes, there IS a God”…and they started buying stocks aggressively!!!

Ok, we’re sorry…..but in times like these, we think it’s important to add a little humor from time to time. This is especially true given how bad things have become in Europe. We’ve talked a lot about how the next support level on the charts for the U.S. stock market is the late 2018 lows (of 2350 on the S&P 500 index). However in Europe, the STOXX Europe 600 index has not only ALREADY fallen below its 2018 lows, it has ALSO dropped below its 2016 lows!!! If the S&P is going to do the same thing, the stock market has another 30% drop from last night’s close over the coming weeks…..That’s not a prediction, but a lot of people are saying that the U.S. is 2-3 weeks behind Italy in terms of the coronavirus. So a test (and break) of the 2016 lows is not out of the question (eventually) in the U.S. either.

Speaking of Italy, its stock market is now down over 40% from its highs…and it has also broken below both its 2018 and 2016 lows. More importantly, Italian CDS prices have exploded 186% higher over the last month…and have moved above their 2018 highs. Don’t get us wrong, those CDS prices (th price to buy insurance on Italian sovereign debt) is NOWHERE near the levels they reached in 2011 or 2012 during the European crisis. However this is another indication of something we began warning people about several weeks ago (when very few people were talking about it). The biggest concern is that this healthcare crisis…which is causing a crisis in the global stock markets…could morph into a credit crisis of some sort at some point.

Ok, we have painted a pretty bleak picture here so far this morning. This is different than the picture we were highlighting over the weekend when we pointed out that there were several signs of short-term capitulation that could cause the market to bounce over the near-term (and for more than one day). Well, “one day” is all we got…and to be honest, some of the rhetoric we’re hearing out of people in authority is not helping.

Some people are calling for a closure of the markets. That’s a horrible idea. If you believe we’ve seen some panic so far, wait until people think that they can’t get to their money in the market place! Another comment says the odds of a depression (that’s depression, not just a recession) has grown to 10%-20%...while yet another one says unemployment could rise to 20%. Guess what, in the last depression, the stock market did not regain is former highs for 25 years!!! Do you think individual investors are going to “ride out” this decline if they begin to worry about the kind of unemployment rate that would go with a depression??? No, they’ll sell everything and hunker down.

We think it’s a very good development that the Fed…and now the government…are using bazooka’s to try to help in this healthcare crisis. It might not be able to cure it, but the hope is that it will build a bridge to the other side of the valley that will help people weather this crisis a little bit better than they otherwise would. However, using scare tactics to get people to react a certain way will only make the situation worse. (This is especially true this week…when none of the safety havens are working very well. Gold is tumbling…the Treasury market is selling off (yields rising)…and the cost of hedging in the options market has become incredibly expensive with the VIX above 70.)

No, we’re not looking for the authorities to sugar coated things. That was the original reaction by the authorities was in several different countries (including out own)…and that has only made the situation worse. However, going to the other extreme isn’t the answer. We need more people like Dr. Fauci…who tell us what is really going on…and trusts us.

As for the U.S. stock market, it has become very oversold on a technical basis…as have many individual stocks. (BA’s chart is about as oversold as any stock you will ever see for a company that is not going out of business…and BA is NOT going out of business!!!) However, that does not mean that they cannot go lower. If history is any guide, we’ll need to see at least one extended rally…that fails. We usually see an extended rally that sucks people back in…and then kicks them in the teeth. THAT’S when the REAL (longer-term) capitulation tends to take place.

In other words, those who say bottoms are usually a “process” are absolutely correct. Therefore we believe that those who followed our suggestions and raised cash in January & February should take their time moving back into the markets with that cash. Nibble a little bit here…then nibble a bit more down at a lower level (say, 5%-7% lower from here)…then do it again down another 5%-7% or so…etc. That way, when you are much more confident that a bottom has been put-in, you’ll feel very comfortable “paying up” for stocks in a real rally…because you will have already built some nice positions at much lower levels in your favorite names.

Matthew J. Maley

Managing Director

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.

Posted to The Maley Report on Mar 18, 2020 — 9:03 AM
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