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.
- 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.
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.
- 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.
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
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.
Bonds ‘overbought,’ yields could rise in second-half: JPMorgan
Safety grab may be bigger cause of inversion than U.S. outlook: Eurizon
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
— Bob MacMinn (@RobertMacMinn) February 6, 2020
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.
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:
"Almost 170 million residents of China traveled outside the country in 2018, the most recent year for which figures are available, according to the U.N. World Tourism Organization, and they spent about $277 billion." https://t.co/jZ4fusxmcc
— Samantha LaDuc (@SamanthaLaDuc) February 11, 2020
See you in my live trading room !!