Limit Down, Limit Up

By March 13, 2020Weekly TGIF

We are going to remember this week for a while. We’re going to remember it for a number of reasons. We are going to remember it for the Coronavirus. We’re going to remember it for declared states of emergency across the country. We are going to remember it for school closures. We are going to remember it for Spring Break adjustments. We’re going to remember it for Disney Theme Park closings. We’re going to remember it for the NBA season suspension, MLB season delay and March Madness cancelation. We’re going to remember it for Broadway shutting down. We’re going to remember that Tom Hanks and Rita Wilson tested positively for the virus. We will, without a doubt, remember this week for what is almost certain to be called the Corona Crash.

This was the worst week for stocks since 1987. For those that remember, the ’87 Crash was referred to as “Black Monday.” The Dow and S&P both fell over 20% that day. On Thursday of this week, the major indexes fell 10%. The Dow fell over 2,000 points. It gained almost 2,000 today, 24 hours later. This has been the fastest-moving, most volatile price action I’ve ever seen. It is faster and more volatile than the Financial Crisis was. There was panic like not seen since the Financial Crisis. This is the fastest a Bull Market has turned to Bear in history. It happened in just 19 days. Thursday’s sell-off was the 6th time in the last three weeks, where the down volume exceeded 90% of the total trading volume. That didn’t happen in 2008. It didn’t happen during the Crash of 1987. It never happened before. This has been historic. It has not been fun. But we keep navigating the choppiness, ready for whatever comes our way.

The week finished with some optimism, but it certainly didn’t start that way. Monday brought crash-like price action after the Futures Market closed limit-down. It did it again Thursday. Limit-down occurs when there’s a 5% decline in the Futures Market. It triggers a halt on trade until the regular session opens. That’s the first time it happened since the Financial Crisis. The circuit breakers were triggered within minutes of trading in the regular sessions, which resulted in a 15-minute halt. We had to brush up on our exchange logistical facts, as it’s been a while since they have come into play. Once the Market opens, NYSE circuit breakers work like this: trading halts for 15 minutes if the S&P 500 falls 7% at any time before 12:25 p.m. Another 15-minute pause is triggered if losses reaches 13%. If the decline hits 20%, the Stock Market will close for the day. These were created after the 1987 crash. It happened twice this week. In a bit of irony, it took place on the 11-year anniversary of the Bull Market beginning. It officially came to an end. How did the Market respond the day after the biggest daily decline since the ’87 Crash? How about limit-up? It happened. The Futures Market was halted after a 5% gain, which set-up Friday’s explosive rally, which went a long way to erase Thursday’s decline. This was a week we will remember for the rest of our lives.

The Fed sent record liquidity to the Market Thursday, with intent to cool the crisis. It didn’t work. The sharp decline highlighted the diminishing ability of stimulus to cure the crisis. Fiscal policy is what’s required for recovery. Washington has been so divided, which has exacerbated the issue and caused so much confusion and fear. It is finally looking like Congress is working in a coordinated fashion with the White House, putting aside partisan issues, to get things done. The Market responded favorably to that. A recession is pretty much guaranteed. But the coordinated response will go a long way to determine how deep and how long the US Economy contracts.

Volatility has been at historic proportions around the globe. The Volatility Index (VIX) hit a high of 77 this week. That is by far the highest it’s been since the Financial Crisis. It closed the week at a still hyper-elevated 57. For reference, the VIX spent the better part of the last 2 years between 10 and 20. The news is almost certainly going to get worse. But the Market already knows that. A lot of negativity has been priced in. For example, the day to sell Disney is not the day they announced the park closures. That’s historically the time to buy. It was already anticipated if not expected and priced in. The question is how long and how bad. That remains to be seen. Disney’s stock has been hammered this year, but had a really good day today. There are so many stocks like that. That’s what bottom formation is like. Bad news becomes good news. Stocks start moving higher in anticipation of recovery. In some better news, all of Apple’s 42 stores in China have reopened. That is significant. You can start seeing how things could be better 2-3 months from now. The Market looks past the now.

We are in deep detection mode to study signs of bottoming. We think it’s close. It is a process. Price discovery always is. There were definite signs of capitulation Thursday. Friday’s rally looked and felt good. It’s refreshing to see green on the screen heading into the weekend. Make no mistake, there are still so many issues and unknowns that need resolution. Even though we think a low is near, there’s likely to be a lot of backing and filling to form a strong base and prove a bottom is in. That generally brings a series of rallies and failures. How that transpires will go a long way to determine when a sustainable recovery begins. Our sense is this volatile price action continues throughout the Spring. We’ve been active. We’ll continue to be active. We’re all over it.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

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