Tue saw a strong reversal which I see as a knee-jerk action similar to the knee-jerk reaction that caused the dip the day before. Lack of new news does not mean much considering that the virus has a 2 week incubation period. Below is a graph showing past effects on markets caused by pandemics, of particular interest is the time it takes for the threat to fully manifest itself then to be managed, this time can be between a month to 4 months or more. As mentioned above, there are other reasons warranting current market movements, at this point, the coronavirus is a trigger, for it to become the cause of a market move will take some time. My overall view is that, at this point, there is more down risk than up risk Looking at the above list, 5 of the 6 killer viruses are animal to human transmission, I think the WHO really needs to take its work seriously and paint red (a no-fly zone) any country that does not practice proper slaughter procedures. No, point looking at the "law" of the land, because if the country does not enforce the law then a law serves no purpose.
What caught my attention is that the FEB futures on the VIX are 2 contango points above the Jan VIX while the contango in the March VIX is negative. I never saw this magnitude of discrepancy before, however, if trading the VIX, shorting Jan then rolling into Feb and rolling again into March can gain you almost 2.5 units without even a price move i.e. you can profit $1,500 on a $10k investment just on the contango without even a price move.
Market participants seem incapable to multi-task, their collective concentration is on increased earnings, they absorb any news that point to that while showing no comprehension of anything else. The fed said a lot on Wed, most of what was said pointed to slower growth and possible negative world economic impact of a China in crisis, yet all that was not absorbed, market participants only absorbed the part that said that the Fed is ready to continue its accommodative policy, markets surged on Wed pushing the DOW close to 29k. My view is that current high levels are not sustainable regardless of good reporting by the tech heavyweights, my longer-term trading strategy is based on that view, my DOW target remains at 28093.
Coronavirus fears have largely being dampened by global markets that are comparing this event to SARS, however, 2003 China is not 2020 China. When the SARS outbreak occurred, China’s economy represented 4% of the global economy, today that number is over 16%. If the virus follows a simple progression model, by the end of February 2020 we can expect to have over 100 million cases of Coronavirus worldwide (figures are according to China National Health Commission). Putting aside the human tragedy, the economic impact could be big.... A two-week shutdown is likely equivalent to -1% of Chinese GDP, a three-week impact is likely equivalent to -2% GDP. The impact on China is very likely to be material for global growth – which will be another body blow for the contracting global economies. As previously pointed out in a post at the start of this event, such events directly impact the consumer and consumer behaviour, in countries that have a large consumer-based economy (such as the US), the effects on markets can be great. Also to be noted, SARS occurred when markets were at "fair value", markets now are "overbought" and therefore more likely to fall harder if shocked.
Market resilience continues to defy gravity. Just released was the Fourth-quarter GDP showing that it rose only 2.1% giving 2.3% for the full-year 2019, the slowest growth in three years, well below the 3% to 4% estimated by the administration. Further, Economic growth looks even weaker for the 1st quarter of 2020, this is without factoring the virus wild card. Despite this release, markets rallied on Thursday. Ray Dalio, the creator of Bridgewater said: “Terrible, unimaginable things could happen anywhere. What we don’t know is much greater than what we do know.,” He was referring to the coronavirus that the hedge fund investor had studied in relevance to past pandemics, he concluded that even though the outbreak is largely centred in China, the reaction to stock markets could be greater than it was during the SARS outbreak in 2003. Despite this warning by a respected fund manager and despite many uncertainties (that market participants traditionally don't like), markets rallied on Thursday and appear to be adding to the rally today. I continue to dislike this strength that seems to ignore all warning, facts, uncertainties and news. I'll be sitting on my hands until markets show some reason to do as they do.
The market is apeshit. Ups are downs and downs are up. I suppose we've found a cure for the corona virus but we plebes do not know about it yet.
Well, after Fri, I like markets a little more...... but as the above shows, last week's dip can't even be called a dip, DOW needs to get to the 200-day average to be seen as being at fair value, a sell-off from there would be a "real" and welcomed sell-off. My heavy buys are currently set at below the 27k handle, however, 2019 taught me that sentiment can defy gravity so I'll be waiting for my initial 28,093 DOW target to get neutral on the shorts and start going net long with scaling as the 27k is nearing. I think the Democratic primaries that have kicked off this month will help drive markets lower, if not immediately then in March (my next target month for a new dip). If Sen. Bernie Sanders continues to gain steam in the polls and gets nominated, I see markets having another reason to go lower. Sanders is viewed by many investors as negative for the stock market and is in favour of significantly raising taxes on individuals and companies, Warren is no better, if she gets the nomination, it will be the same reaction, perhaps worst as her target is the high net worth individuals who, like it or not, are the driving force behind innovation and job creation. I would not put it beyond the vengeful, do-nothing Democrats to intentionally nominate the candidate least liked by the markets so as to lessen Trump's chance of re-election in the face of a market crash. Do not ignore politics! The Dems are a useless party that doesn't care about prosperity or anything like that, they would be happy to see the US in recession during Trump's watch and could well engineer one.
The coronavirus is having a busy weekend, although the WHO, in their wisdom, has not banned travel to & from China, many countries have and many pilot unions of the countries that don't have a band, are saying their members won't fly to China, in effect, both governments and the private sector are enforcing travel bands. For those of you who are saying what's the fuss, comparing this virus to the usual influenza season, you now got your fuss... the tourism industry is almost at a standstill, if nothing else, retail (particularly luxury goods), airlines and the thousands of jobs that support the travel industry are going into crisis. The overall economy has to take a hit and markets will adjust at least temporarily. Remember also that there are other factors, so far ignored by the perma-bulls, that warrant a market drawdown. My 1st target is a 28,093 DOW although 27,715 is a probability if we get to under 28k with some speed, the bots then might overshoot the bottom by a good margin... a 25k DOW handle is not pie-in-the-sky at this juncture.
A very surprising session on Tue. The HSI surged over 2% in Asia so investors speculated that since HKG is close to the epicentre of China's woes, they know something we don't, the EU kept the momentum going till the US opened with no results on the primary but a further 17% surge on Tesla, so, the US celebrated. Altogether, everything was taken as a reason to buy the dip... was the risk-on action justified? Well, it was based on speculation, whether justified or not will be clearer in a day or so. I was set-up for buys to neutralize my shorts at a 28,093 DOW, the target fell short by some 50pts, this keeps me net short in the US, however, I was long EU & in the NIK225, both surged >2% so t/p there and had a $12.8k day. What next? I remain with the view that the US is overbought but I won't fight sentiment, I'm playing both sides and will see which is the right side to add to.
The rally was not the only surprise on Tue.... Tesla hit $900 giving it a market cap equal to Toyota, not bad for a company yet to show a profit and that produces 50 times fewer cars than Toyota's 10m. No doubt markets are forward-looking, but how far forward do you go for Tesla to increase production 50x? Not to mention that it loses money on each car so even a 10m cars production (requiring investment in scores of new plants) is likely to see a profit. Have markets gone mad or do we add "magician" to Musk's attributes?