26 Feb ANOTHER UGLY DAY
The S & P has experienced its biggest four-day slump since December 2018. The 10- and 30-year Treasury yields have plunged to the lowest levels on record. As widely discussed, the coronavirus is blamed for the current rout.
In my view, the greatest risk to the market is when the 10- and 30-year Treasury unwinds from this incredible advance. The yield on the 30-year is around an unfathomably low rate of 1.78%. If yields rose back to levels of four weeks ago of 2.30%, Bloomberg suggests the benchmark would have a negative annual return of over 19%.
How will equities respond if such an increase in yields occurs? Will stock volatility increase further as been the case with every other increase in yield over the last 12 years? Unfortunately, no one knows the amount of leverage being utilized in either the equity or debt market.
Several days ago, Bloomberg wrote the involvement of “Mom and Pop” investors are at an apex, perhaps the result of zero commission trading. The Newswire comments “emboldened by a brokerage price-war, mom and pop investors have effectively doubled their trades over the last several months to levels that are even greater than the dot com frenzy of 2000.”
Bloomberg writes the vast majority of this money gravitated into FAANG and several other momentum driven names such as Tesla, Virgin Atlantic and Plug Power.
Historically massive public participation is consistent with a major top for the popular averages.
Is today different?
To write the incredible obvious, there is not a shortage of opinions about the coronavirus with many making unsubstantiated conclusions. History suggests the coronavirus will be nothing other than noise. The simple fact of the matter is that no one knows.
Radically changing topics, some commented the recent rout is partially the result of Bernie Sander’s front runner status. Like most, I think a Sander’s presidency would be economically disastrous.
Also, like most I don’t think he is electable and I believe if Sander’s is the Democratic nominee, November’s results could be similar to that of Britain’s several weeks ago where the Labor Party was absolutely decimated.
Similar to the coronavirus, libraries have already been written about the 2020 Presidential campaign.
Returning back to the markets, all major averages have violated pivotal moving average lines. The Dow has broken the 200 day, the S & P 500 the 100 day and the NASDAQ the 50 day. Moreover, all averages are down for the year, anywhere from 1% to 5%.
Bloomberg writes the S & P 500 has four straight down sessions, the first time since at least 1927 that the index fell so fast in the days after hitting a record.
Moreover, the Newswire comments the NASDAQ 100’s 14-day relative strength index, a gauge of the magnitude and persistence of price movements, is seeing the worst four day stretch on record, worse even than during the bursting of the dot-com bubble.
Another measure of volatility, stocks trading on downticks versus upticks paints a similar picture. At around 230 yesterday almost 1800 more stocks traded at lower prices on the NYSE, the most extreme reading since the May 2010 flash crash according to Bloomberg.
Wow! Talk about the velocity of change.
The next several days could be of significance in determining the amount of leverage that has been employed and the possible ramifications of such.
What will happen today?
Last night the foreign markets were down. London was down 0.53%, Paris down 0.59% and Frankfurt down 0.86%. China was down 0.83%, Japan down 0.79% and Hang Sang down 0.73%.
The Dow should open nervously flat. The 10-year is unchanged at 1.28%