Bear Market or Godzilla?

What a day? The market has grown from a bear to the so called “Godzilla” that is immune to any attacks. I will divide my report into 2 parts. First, the positive and then the negative.

With the surprise move yesterday by the Fed, they made it clear that they will do whatever it takes to keep money flowing and available to banks, businesses and individuals - basically keeping liquidity loose.

The Treasury and the White House have already made it clear that they will do whatever it takes to keep banks, businesses and individuals solvent. In a situation like this, that’s the most important thing.

In addition, we now have clear coordination among countries, and the commitment to continue coordinating, not just on monetary and fiscal policy but on public health measures. In yesterday’s call between G7 leaders, they pledged to make efforts to increase the availability of access to medical equipment, to share epidemiological data to better understand the virus, and to work together to facilitate trade and keep the supply chain working.

Our ideas about living together in a global village must have taken many steps backward but we are more connected than any other time in the history of mankind and we will be more as we progress as a species.

So, we have that commitment between all global leaders. Remember, it was this type of pledge by global leaders in 2009 that marked the turning point for global financial markets.

Now to the negatives. Yesterday’s performance in the markets compounded the panics in the markets that Wall Street has been following since a month. The Fed, Treasury and the White House also started hitting their panic button. But the Main Street started panicking only two to three days ago. The biggest worry for the mainstream is that the infrastructure is not as fast as how the virus can spread.

Bridging this gap closer is the biggest challenge the authorities face. As day follows night, we should see the light at the end of the tunnel soon.

The biggest challenge with cheap money is also different this time. In 2008, the mortgage industry reached too far and grew to the skies. When the crash happened, the Feds bailed it out with more cheap finance. Now, the problem is in travel, energy, retail, restaurants, nearly a third of the workforce.

The Feds can boost stock prices, but can they make someone book a cruise, hire more waiters or fly? Yes, You can take a horse to the water but can you force it to drink? I get it, now the government does not want you to do any of these too.

Another thing we can expect is since the Fed has exhausted most of the visible policy measures that they can implement, we could see some creative measures. They fired their last bullet yesterday. The bullets turned out to be rubber bullets and they have gone from panic to terror.

Now to the markets.

Equities

As from the beginning of the month Mar 02, the Dow is down 6500 points. March 2020 will go down in history as the most volatile market in equities so far. We feared what could happen on Monday and it came to pass. But did not think it will be so bad despite the Fed actions. Looks like this down move will end only when everyone has given up on it. Some old timers, lucky ones and experience hands should come out good.

The CBOE volatility index (VIX) continues to surge, jumping to 82.70 yesterday, its highest close on record. The old VIX, the VXO which goes farther back in time, closed at 93.85 it’s highest close since the crash of 1987 (150.19). The Dow has now cleaned up over three years of advance since Feb 2017.

So what can we expect from here? The 2350 low is not only the Dec 2018 low (2347) but it is also a .382 fib retracement level (2352 ) of a primary advance. A break below that level could be the steepest part of this down leg leading to 1800- 2135. Meanwhile one can anticipate sharp counter trend moves as well. Whatever it is we are guaranteed of head spinning volatility.

Bonds

In Bonds the junk to US treasury credit spread continued to widen to more than 700 points. This is still not over and there could be more widening. The treasury bonds could rise to 184^05 to 184^25 range. It should top out in that area to start a large move down. If bond closes much above 187^15 will have to review the analysis.

Euro

The Euro again dropped to the 1.1050 area and moved up on the Fed news. It should have moved much higher but though the Fed dropped rates liquidity is still tight in the cross currency swaps and that is keeping the dollar strong. Would still look to trade from long side keeping critical supports in mind.

Gold

Gold has dropped 15% from its highs in 5 trading days. The truth is, large speculators remain heavily net long futures and options contracts but the insiders i.e. the commercials are short. The commercials are much less leveraged. Any short term rally in gold should meet strong resistance between 1550 to 1605.

Apologies the report got too long. Wanted to avoid sending in two parts.

Trade small and be safe!

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.