Capital 19 Catch-Up

Traders don’t know which way to go as volatility remains high

The major indices managed to eke out small weekly gains last week, but the final result belied the dramatic moves in each of the sessions, with the market swinging back and forth like an oversized pendulum. Investors are still grappling with how to deal with the as yet unknown impact of the coronavirus, an impending oil price war that threatens the social and economic stability of the oil-producing nations, and the inconsistent results coming out of the democratic party’s national convention that will decide their runner in the 2020 tilt for President.

Monday started with a comeback rally, the previous week being the worst weekly result since the GFC. Despite woeful manufacturing data coming out of China, which saw its weakest PMI result ever, the S&P500 jumped 4.6%, and the Dow had its biggest percentage jump since March of 2009. Apple (AAPL) was up 9% on its own, which played a large part in putting a halt to the markets seven-day losing streak.

When the Federal Reserve held an emergency meeting on Tuesday to announce a .5% rate cut, it was thought the good times would continue into the following session. There’s nothing Wall St likes more than free money. However, the cut seemed to scare traders rather than console them, with bond yields falling to unprecedented lows and gold spiking 3%. The benchmark S&P500 dropped 2.81% while all of the major indices turned back into correction mode. The banks copped the brunt of the selling with Bank of America (BAC) down 5.5%, and JP Morgan (JPM) and Citi (C) both falling 3.8% each.

With things looking ominous, and the futures pointing to another heavy down night in the Wednesday session, “sleepy” Joe Biden strolled to our rescue with an impressive comeback effort in the Super Tuesday primaries which saw him take favouritism in the Democratic convention. Healthcare stocks were jumping for joy as medicare for all proponent Bernie Sanders stumbled, and fellow progressive Elizabeth Warren pulled out of the race altogether. United Health Care (UNH) jumped a whopping 10.71%, and Centene Corp (CEN) leapt 15.6% on their good news. The S&P500 gained an impressive 4.22%, the Dow racked up its second 1000 point gain for the week, and all was well on Wall Street again.

Until the next day of course. When the S&P500 lost another 3.39%, and the Dow dropped just shy of 1000 points. This time it was the coronavirus rearing its ugly head again, as headlines took a turn for the worse. Countries across the globe increased travel restrictions to the worst-hit regions and further quarantines were implemented. California declared a state of emergency, while over the weekend Florida, Indiana, Kentucky, Maryland, Utah, and Washington have all followed suit. These moves weren’t good for the airlines, with United Airlines (UAL) losing 13.4%, and American Airlines (AAL) falling 13.2%.

Friday had the smallest moves of the week with the S&P500 and Nasdaq down just under 2% and the Dow losing 1%. The oil price had its worst day in five years as OPEC, led by Saudi Arabia, and Russia couldn’t come to an agreement on how to manage the world’s oil supply. OPEC wants to increase production cuts by 1.5 million barrels per day while also extending the cuts, which are slated to end in March, through to the end of 2020. Russia seems happy to extend the current cuts but without the increase.

Over the weekend, the situation has escalated with Saudi Arabia slashing official crude selling prices for April. Today the west crude oil price is down more than 20% and about to head under $30 a barrel. It’s great news for those of us going to fill up at the petrol station. It’s also great news for China, who is the worlds largest importer of oil. It’s not so great for those countries who produce and sell oil. Which now includes the US.

Not surprisingly the US futures aren’t looking healthy for tonight. With coronavirus cases escalating over the weekend, and the oil price plunging today the S&P500 has slipped into “limit down” mode – which means the futures cannot drop below 5% from Friday’s close – that’s 2819 for the March futures.

Once the session opens tonight it’s all back on again, although the market has circuit breakers in force. If the S&P500 drops 7% to 2764.3 this evening trading will shut down for fifteen minutes before opening up again. After that, it stops again at 13% down (2,585.96 tonight) and then closes for good if it manages 20%, not that it’s likely to ever come to that. I can’t imagine the market will get anywhere near those levels tonight, but it’s nice info to have regardless.

The last limit down we had was back in November 2016 on the day of the Presidential election. A shock Trump win sent tremors through the futures market, but lo and behold when stocks started actually trading the market staged a massive turnaround and ended with strong gains. Not to say this is the same situation of course, but trading in the futures, which happen overnight in the US, can tend to be more volatile than the trading sessions themselves.

The week ahead will be no doubt be focussed on two events. The ongoing oil negotiations and the spread of the coronavirus. The airlines will be an interesting segment to watch this week. On the one hand, the virus has undoubtedly affected their business in the short term, but on the other, you also have the cost of their largest expense -fuel- dropping by near one third in the last two days. How do you trade that scenario? I imagine they’ll be piling heavily into the oil futures to keep their costs low for the next year or so.

The drama has also been a boon for retailers selling household products. You only need to look at the panic buying we have seen in Australia over toilet paper to realise someone somewhere is selling a lot of product. Procter & Gamble (PG), Clorox (CLX), Colgate Palmolive (CL) and Kimberly-Clark (KMB) all make products that will benefit from hoarding such items. These companies will likely outperform over the next few months.

Also, please keep in mind that daylight saving began in the US over the weekend. That will push market times forward an hour from wherever you are in Australia. The US market now opens at 12:30 am Sydney time and closes at 7:00 am. For those of us on daylight saving time in Oz, it’ll change again for us next month when it moves an hour earlier again.