Table of Contents
Market Thoughts
- That Repo $$$ needs time to make it to trading desks.
- Election fatique
- Faith in government response – COVID19 or Markets – is low.
- Perception/Reality of contagion from COVID19 on economy + earnings – is high.
- VIX is still bid…
Pro-tip: $VIX north of 25 means market participants are engaged in risk management; and trading is forced.. people are doing what they have to ( cutting longs and covering shorts ) and not what they want to ( initiating new risk with a well thought out thesis )
Waiting On A Bounce:
Yields Have Fallen and Can’t Get Out of Bed
The largest 5-day decline for the 10-year yield going back to the start of data in 1980. $TNX https://t.co/iUBGvvQlxS
— Samantha LaDuc (@SamanthaLaDuc) March 4, 2020
Shockingly, even after a morning REPO backstop of $120BN (much bigger than expected), AND a Fed issued surprise Emergency Rate Cut of 50 bp – announced soon after the G7 communique was released that they had no political action in response to the spreading COVID-19 – market still sold off!! To be clear, markets were taken swiftly higher on rate cut news by algos but immediately pulled back in response to Powell’s comment that QE was not a tool they were considering using at this time. Market clearly disliked this dismissal of use of QE and closed on the lows in response.
Basically, the Fed acted when other nations didn’t, but…
‘Money hasn’t been this tight since the Chinese devaluation crisis of 2015.’ @johnauthers in BloombergOpinion
So in reality, the Fed 50 bp rate cut was ‘simply’ the Fed catching up to the markets.
With that, here is what the rates traders priced in after the announcement: More Cuts!!
For perspective: Yields fell out of bed, or the channel, I have been drawing on this stacked chart of multiple maturities. Is this The Overshoot that reverses – and strongly?
From my friend Chris Kimble’s vantage point, it could be!
Big Picture: as much as some may want to credit the Fed with propping up markets, in reality, it hasn’t really done much but keep it from falling:
This is what 5 rate cuts and $420B+ in balance sheet expansion gets you these days. @NorthmanTrader
And speaking of falling, here is what has happened in the past when Emergency Rate Cuts were enacted: H/t @CoryLVenable
I’m watching this chart of TLT for clues: bottom panel may give some idea of resistance – pullback at green line or red arrow?
Volatility Still Bid But For How Long
This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.
With 12 trading days until March expiration, the day-weighted premium between March and April allocated 60% to March and 40% to April for a premium of -38.02%, well into the red zone beyond previous sell-off episodes with the entire curve inverted and well below the abnormally high VIX.
The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next futures expiration on Wednesday March 18. iVolatility
Here’s my hand-made version…
Breadth Still Not Great
Having said that, this rally will have a tough time getting back in trend after confidence and accounts have been rattled, COVID-19 is dominating headlines and breadth continues to be weak
Gold
This gold vs treasury yield graph seems to be a bit of a blow off to in the making and yet my gold vs spx chart seems to be a break-up in the making. How does this get resolved?
One of Two ways most likely: gold goes down or yields go up; gold goes up or spx goes down. Oh, the suspense!
Pulling back in time, gold is tracking the yen and both are rising on a monthly picture. This would also support my NIKK falling thesis.
Fishing Ideas From My Live Trading Room
- Trend Plays Still Working Long: TWTR, GILD, REGN, SBAC.
- New Swing Plays Long: PFE, AMRN,
- New Chase Plays Long: COST, SPY, IWM, SMH
Today, REGN tagged my intraday PT of $495,. GILD broke up to $76 on way to $80 (financed 70x80CS w $65P sold against it), PFE is pushing higher past 21D into $37 PT.
Chases at open ATVI + EA did not disappoint, but NVDA, MU, AMD intonate even farther to go.
DIVIDEND STOCKS are on a tear!
There are 370 stocks in the S&P 500 with a dividend yield above the current 10-year Treasury yield. Have a look at stocks flying today: CLX, ED, PG, KMB…
I grabbed a sampling of High Dividend players inside this ETF and sorted by %Change from Open: it’s a wow. Low Vol Plays Are Hot!!
Datatrek had a good write up on the worst that can happen to US labor markets and S&P dividends if COVID-19 becomes a full-blown negative catalyst like Gulf War I, 9-11, or the Financial Crisis?
Because we’re starting from a strong baseline for job growth, unlike those 3 periods, labor markets may see only modest impact. As for yields, even if the S&P 500 payout declines by the 24% drop we saw from 2008 – 2010, it still pays 1.47%. That’s more than 10-year Treasuries at 1.15%, and dividends can’t go negative.
But here’s the crux of the matter and why I suspect dividend plays are well bid and trading like momentum stocks:
The conclusion here: even if you haircut the current S&P 500 payout by the 24% declines in the aftermath of the Financial Crisis, the index’s yield is still 1.47%. That is well ahead of 10-year Treasury yields, showing how either 1) equities are structurally very cheap to bonds and/or 2) how overbought Treasuries are just now.
Healthcare – hospitals, health care providers, drug manufacturers, pharmacies… were up for three reasons:
-
- Oversold bounce – helped by COVID-19 speculation names trading in the tape.
- Trump admin may want to allocate additonal resources in this sector – think stimulus funds.
- Biden trumped Sanders in Super Tuesday so “Medicare for All” is off the table, for now!
Quant Color
It still appears that we will have to push over over 3150->3200 area to regain stability in this market. The PutWall has moved to: 3050.0 from: 3000.0
The Call Wall has moved to: 3200.0 from: 2910.0. The 3221.0 level is first level of resistance and is critical as its the negative gamma threshold. @SpotGamma
Samantha
