Warnings, Washouts & Willy Wonka

The broad based rally ran into a wall Thursday. In just one day, the S&P 500 went from 96% of its constituents above their 50 Day Moving Average to 80%. That is still a large percentage, but it shows how extremely overbought the Stock Market was after the relentless rally upward. A decline was inevitable.

This week brought a total washout. All 11 S&P sectors were down. Would you believe that Apple, Amazon and Microsoft were actually up on the week? These three $1 Trillion companies dominate the index and are considered safe havens for investors, despite their elevated valuations. Bond prices were up this week. Gold was up too.

Volatility exploded higher yesterday. The VIX went from 26 to 42 in an instant. There have only been seven other times in history that volatility jumped that much. Complacency went to fear in lightning-fast fashion.

What triggered the rally? You never know. But I don’t think it was a coincidence that it occurred after the Fed meeting. The Fed is still concerned with what it sees out there. Fed Chairman Jerome Powell said this: “We aren’t planning on raising rates. We aren’t even thinking about thinking about raising rates.” That is indeed a very bold statement. But ultra-low rates generally inflate asset prices. There’s a case for bubbles.

We have been hammering the point of the huge disconnect between Wall Street and Main Street. The Stock Market was priced for a much stronger recovery than the US Economy is likely to experience. It’s going to take more than two months to repair the damage from the economic shocks from the shutdown. It is going to take time for the US Economy to recover and start expanding again.

What if there’s a second wave? That might not be the right question because the first wave seems to be coming back to life. The curve is rising in certain regions. The Center for Disease Control warned that a return to lockdown might be necessary for America to avoid another breakout.

The growing warnings about a possible second wave of the coronavirus gained some urgency when officials in Houston said they are considering reimposing stay-at-home orders. Dallas saw a new record-high for single day cases reported since testing began in March. If you recall, Texas reopened its economy in early May.

The problem is, people are getting conflicting guidance from elected officials and health experts. It’s also become so political, like everything these days. The pace of openings has been very inconsistent across the country. States are taking different courses of action. There are even inconsistencies within states. Orange County, California just announced that masks are no longer needed out in public. But the County Health Director strongly encourages them. Oregon announced a pause in its reopening after record new cases were reported.

In Arizona, where coronavirus patients are landing in the ICU in record numbers and a growing percentage of tests are coming back positive, the state health department instructed hospitals to “fully activate” emergency plans for the first time since March. That said, there are no discussions about shutting down parts of the state.

I found this quote quite telling. It came from the Governor of South Carolina today: “If people would use their head and follow advice that’s been given to them repeatedly, we would not be having the hot spots and the rise we see here.” South Carolina was among the last to shut down and the first to reopen. The Palmetto State has seen the average daily infection rates double since late May.

Without the political desire or public pressure to reimpose shutdown measures, medical professionals are worried the recent spikes signal a steady increase of virus infections through the Summer. It’s too soon to know if the nationwide protests have sent case counts higher, as public health officials fear. Consumers are likely to proceed with caution as they venture out. The US Economy depends on the American Consumer. If the Consumer doesn’t spend, the US Economy doesn’t grow.

For now, the recovery continues. 500,000 people have been flying per day this week. That is a huge increase from last week, let alone the lows in April. TSA reported over 350,000 passengers flew in American airspace a week ago. The daily average for the week is now 5x the low of 95,674 seen during the week ended April 18. It is still a far cry from the 2 Million plus passengers flying everyday a year ago, but it’s an improvement nonetheless.

Back to the Market: After Thursday’s washout, an oversold bounce was set up. It was a wild tug-of-war between Bulls and Bears all day on Friday. The Dow and S&P gapped higher at the open, erasing roughly 40% of yesterday’s decline. The gains were completely erased within the first two hours. Buyers stepped in and took stocks higher midday before falling again. But the final hour brought another surge of buyers sending the Dow into the weekend up nearly 500 points, but still lower on the week. Roughly 1/4 of Thursday’s decline was recaptured.

Thursday’s volume swelled and was 98% decliners. That is decisive price action rarely seen. Today saw 80% advancers, but the volume was much lower. Buy the dippers showed up today, like they have since March. But the confidence and conviction seemed to be lacking. The Bulls got punched in the face Thursday, which had not happened for quite a while. It’s a feeling you won’t soon forget.

The Bond Market seems pretty nervous. There were wild swings in yields in a week. Yields fell every day this week but Friday. It wasn’t up much though. The front end of the curve is locked in with the Fed keeping the overnight rate at zero. But the back-end of the curve has been gyrating mightily. This is highly unusual.

The 10-Year Treasury went from near 1% last Friday to just 0.64% yesterday. That is a big move in Bond Land. It’s also just 0.1% away from the all-time low yield for the 10-Year. That level was reached in March during the panic. The Bond Market continues to signal things are far from perfect. The Dollar has been sliding too. It’s a mixed relationship, which could very well be summarized that the rest of the world doesn’t trust what’s going on in America. It is going to be a bumpy road to November.

I will leave you with some wise words from Willy Wonka: “You should never, never doubt what nobody is sure about.”

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


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