Mike’s Morning Brief – February 26, 2020

What’s going on in the world…

Market opens higher, trying to bounce off some really oversold levels. Back-to-back 3% decliners are not unheard of. But they are very rare. There hasn’t been three back-to-back decliners since the Great Depression. The S&P undercut 3100 overnight, but has since reclaimed the level. 3080 is an important level of support, followed by 3040+/- which is the 200 day moving average. There is a great deal of support down here. We expect a material bounce from this oversold level, which is why we took hedges off yesterday and went long SPY. We would love to see another sell-off attempt this morning, take the Market back in the red to force more weak hands out, and then see a strong reversal higher. We are thinking that the S&P highs near 3400 (which were reached just a week ago today mind you) will not be seen for a while as this Market chops around between a range of 3,000-3250. At the lows, the S&P was down 7% from the highs. It’s the first 5%+ sell-off in a while. But it’s quite normal and healthy. Since 1950, the average year has had nearly 3 separate 5% mini corrections. The CDC warned the coronavirus is “likely” to spread across the US amid increasing deaths and confirmed cases outside of China. While analysts and policymakers are finding it hard to quantify the economic impact of the virus, many are pricing in a slowdown in world growth, though it’s still unclear how far that will extend. The impact will no doubt be felt by Corporate America and in the US Economy. CEO’s have already lowered guidance, and more will come, with great uncertainty still. The Fed is being forced to move as the Market has sent interest rates down to all-time lows. The problem is, the Fed doesn’t have as much ammo to use in a crisis because it has used up a great deal of liquidity already. This is an important issue and one of contention. Our belief is the Fed has acted so irresponsibly in reaction to the Repo Market stress last Fall and its capital injections, which they claim was not QE, took its balance sheet back up to Financial Crisis levels which sent the Stock Market and other asset prices soaring higher creating excesses and bubble-like conditions. That’s what this week has been about, addressing the excesses. Markets need to be free to discover true price. The manipulation the last few months prevented that. Disney surprised the world with the announcement that CEO Bob Iger will be stepping down from the daily tasks of running the company effective immediately. Stocks are higher. Bonds are lower for the first time in a number of days (a good sign) with rates moving back up. Gold continues to catch a bid. Oil is trying to hold $50. The Dollar is higher and the VIX remains elevated, but down in early trading. There’s a lot of fear in this Market. That’s a really good thing because it has been missing for so long, which created the backdrop of the reckless rally higher. This has been a big, healthy reality check. We are studying developments so closely and have our action plan in place. We anticipate, act and then react. We have a Plan A and a Plan B. Right now, Plan A is working. We will continue to be active. Hang on.

Have a great morning,

Mike Frazier

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