Market Thoughts 

Going into the weekend with headline and actual risk, we see bonds and gold getting bid up while miners and silver sell off. Tech is rallying but I contend we are approaching a point soon where this likely becomes a Sold To You rally. Expected move next week: $SPX 3350-3380/3400 still looks very probable, and barring any major disruption, we could accelerate very quickly there. But… Coronavirus is far from under control, and the threat to the global economy is growing. In support of my Sold To You rally …Breadth is terrible (see charts below). Game plan: Short into the weekend and look for bounce on Monday.
We certainly got the bounce Monday, but not much of a pullback to buy unless you grabbed the Futures low at $3300 on “bad virus” headlines before rebounding towards $3335 on headlines that China would be injecting more liquidity into the system.
  • Jan 19: PBOC Injects 1.1 Trillion Yuan
  • Feb 2: PBOC injects 1.2 trillion yuan ($174 billion)
  • Feb 9: PBoC injects 900 billion yuan ($129 billion)
  • … So far 3.2 trillion yuan. PBOC injected 4 trillion yuan during the 2008 global financial crisis.

And this:

Morgan Stanley: Stocks Are Up Because The Worse Things Get, The More Likely We Will Get Fiscal Stimulus

S&P 500 is often viewed as a safe haven itself because of its high quality defensive growth characteristics: “In short, it is the appropriate asset to own if rates continue to fall so long as we don’t have a recession.” As a result, whenever 400bps on the equity risk premium is breached to the upside, there has been a strong bid, as Wilson shows in the chart below. And indeed, two Fridays ago, when the markets had their big one day sell off, “the Equity Risk Premium reached 402bps which attracted capital like a magnet.”

The bottom line is that Morgan Stanley still sees a first half 2020 range of 3100-3500 for the S&P 500 with upside to 3500.

But I contend not in a straight line and Charlie McElligott, managing director and head of cross-asset strategy at Nomura, said as much this morning on CNBC:
  • Next two weeks bullish tied to options positioning – for specific technical rationale see 3:20 min for why.
  • Energy, Commodities, Reflation-type trades will be range bounce until fiscal stimulus is coordinated.
  • Lower band of 10 year at 1.5% is ‘rich’ with swings to 1.90% likely as the feedback loop of buying defensive’s and tech crowds out and then overshoots as the growth scare, CoronaVirus scare, Bernie scare picks up.
  • Election risk of Super Tuesday is accelerating option hedging – that fear of a candidate who will be a strong growth negative – so that the Volatility curve “will absolutely disrupt the market” upon its unwind.
So I couldn’t agree more. With that, we have two weeks until February OPEX (next week Feb 21st) where I suspect we continue to trade choppy to higher into Options Expiration. Market does not want to price in the rising reported death toll, the expected real death toll, the globally expanding epidemic let alone the economic impact from the lost productivity and hit to GDP. Basically, the US stock market continues to roll higher (as CTAs move their “call wall” to $3400 from $3350) with $3325 as pivot and $3300 support, which if broken will trigger volatility.
Speaking of Volatility, it is not selling off very much ($VIX $14.50 has been my PT short since my Jan 27) and bonds and gold have traded higher despite higher SPY and USD. Welcome to the New-Not-Normal!
As I mentioned in my live trading room this morning, I expect a pretty tight trading range compared to last three weeks larger-than-expected SPX moves. Practically no protection was purchased today which also emboldens my call for higher. And if those short-term hedges put on Thursday and Friday of last week start to cover tomorrow, we could have a quick rally this week – before setting up, again, for a pull-down into Friday and more hedges pre-weekend which then get unwound next week. Rinse and Repeat.

Macro Matters

The following are themes I’m watching closely as I believe they have not been priced into the market:

If China Is Sick

As China is the world’s second-biggest economy, that means asking about the short-term economic health of the world. John Authers does just that in his Bloomberg Opinion piece.

Capital Economics’ bottom line is that the coronavirus and its reaction will merely delay this year’s global recovery, and that year-on-year (as opposed to quarter-on-quarter) growth will remain positive. But markets had been priced on the assumption that the recovery was ready to start already. It will be difficult for markets to process what will almost surely be the worst quarterly growth numbers in a decade.

Economic Activity Sudden-Stop Shock

economists are taught early in their careers that goods markets respond more slowly than financial ones. This is the case with the coronavirus. The initial sudden-stop shock has played out more slowly and gradually than what the global economy experienced during the financial crisis. And, I fear, it can take longer to restart economic activity once it is deeply disrupted. Mohamed A. El-Erian

Trump’s Chances

Predictit now gives the Republicans a 56% chance of winning, and the Democrats 46%; they aren’t perfectly efficient. But last summer there was a 15 percentage point lag for the Republicans, which has now turned into a 10 percentage point lead, and that plainly indicates the belief that Trump’s political fortunes have strengthened greatly. If anything this understates the odds that many in Wall Street tend now to put on a Trump re-election.

Breadth Still Weak

No bounce in breadth – in fact the opposite – despite market moving higher.

US Dollar Makes The Weather

Nearly 90% of international transactions in 2019 were in U.S. dollars, so future weak global growth and a strong U.S. currency raise potential for disappointing earnings and emerging market stress. But so far the market doesn’t seem to care. What will make the market care is a USD spike – whether caused by dollar funding shortage, yuan devaluation, or other risk-to-safety bid.

I have been bullish USD for months based on both macro and technical reasons as demonstrated in my charts below. In the short-term, UUP is approaching a daily trend-line of resistance, but on a longer-term view, USD is approaching a potential break-out of a weekly trend-line of importance.

 

Rates Reflate When?

To follow my “Re-Inflation” watch, and as detailed in the McElligot analysis above, market seems to have overshot the bond bid on CoronaVirus fears. The 10-year is seemingly close to breaking lower to 2016 lows of 1.32%, but strength of the U.S. economy and decent inflation levels are likely to limit the drop in yields which should rise to 1.95% next three months.

Convexity hedges — where investors seek to compensate for a drop in rates by buying longer-dated bonds — may have exacerbated the fall in yields. BNP. 

Bonds ‘overbought,’ yields could rise in second-half: JPMorgan

Safety grab may be bigger cause of inversion than U.S. outlook: Eurizon

Oil Vey

As I have mentioned in my live trading room past two weeks, I am waiting for Crude to fill a gap at $48.82 before bouncing – and with it I expect TNX will as well. Almost there BUT not almost out of the woods…

Hedge funds were heavy sellers of petroleum last week for the third time in four weeks, amid mounting anxiety about the impact of a coronavirus outbreak on oil consumption in China. Hedge funds sell oil as coronavirus stokes recession fear: Kemp


Week Ahead

What’s on Tap Weekly Calendar I posted Sunday has the economic and earnings releases for the week. Of most interest will be Powell’s testimony to Congress next two days and whether we glean any insights on Fed’s future role in Repo and Rate cuts. In addition, we have Tuesday’s NH primary which will further narrow the Dem field for POTUS election . Friday kicks of a 3-day holiday weekend and hedging activity. My live trading room will be closed for Monday February 17th as markets are closed for Washington’s birthday.

Trading Ideas Recommended From My Live Trading Room

From Friday – think IPOs! This theme has been my GO TO sector chase and swing trading playground for months. It continues to delight!!

And they continue to perform well today !! See NVTA + 5%, WORK + 20%…  ZS and CRWD look to be next…

For a reminder of IPO and cloud plays with price targets, see my latest videos or just pop into my live trading room 9-12ET.

From Last Week’s Fishing Plan Update: 

Still Working Higher GBTC, DB, REGN, SBAC, OI, PYPL, SQ, ULTA, Copper, GILD, LB, WORK, IWM, NFLX, XLF, SDC, LJPC, GWPH, IIPR, TEVA, SHAK, BILI,

CoronaVirus Plays to keep in mind: INO, CODX, GILD, MRNA, ROCHE, APT, LAKE

Short Theme: Airlines and here’s why:

See you in my live trading room !!

Samantha