See bottom of email for analyst certification and important disclosures.
Preliminary thoughts on equity correction "initial bottom" -- probably 3,011 to 3,111 (between 100D and 200D)
Volatility in equity markets have risen sharply this week (VIX pushing above 18 now) as the increasing apprehension around the Corona virus, coupled with mixed GDP visibility due to Boeing, are creating broad de-risking (10-yr falling, high yield spreads widening, etc). And as we noted at the start of this week, this does not feel like a reflexive 2%-3% drawdown that ‘needs to be bought’ but rather, this feels like the start of a broader correction. Hence, the character of the market is changing from the relentless buying since October, to one where we need to ‘wait for the initial bottom’ before becoming more aggressive.
POINT 1: PRELIMINARY THOUGHTS — 50D OR 100D IS WHERE WE SEE INITIAL BOTTOMSWe think a likely place to expect markets to find some footing is maybe 50D but more likely between 100D and 200D moving average. The levels are:
How odd is it that the moving averages are spaced 100 points apart?? Really interesting.
Figure: S&P 500 and the 50D, 100D and 200D mavg
POINT 2: IN 2019, THE CORRECTIONS ENDED SOMEWHERE BETWEEN 100D AND 200D MAVG… PROBABLY THIS ONE TOO…
In 2019, we saw 3 drawdowns >5% and those are marked below. We also have the moving averages and the daily RSI indicated.
Notice a few commonalities?
– The sell-offs ended between the 100D and 200D mavg
– Daily RSI fell to ~30 (<35 in one case).
BOTTOM LINE: INITIAL
BOTTOM MAY BE BETWEEN 3,011 TO 3,111 WHICH IS 100D/200D AND DAILY RSI <35
The reason we think the 50D may not hold (3,211) is that at 3,211, the S&P 500 is negative YTD. I think this makes some asset allocators, investors, speculators and machines think this is January 2018 again.
– Thus, selling would amplify at the 50D moving average.
We are not bearish for the year, however, because we see economic and valuation tailwinds in 2020.
– Economic: Economic momentum (post-Corona) will strengthen on pent-up demand, post-trade war rampup and fiscal stimular (US possibly, Japan and potentially Europe) and thus, EPS growth should be >10% in 2H2020.
– Valuation: Fed PUT + TINA PUT (there is no alternative) + accelerating 2H2020 economic momentum = equity risk premia falling.
STRATEGY: STAY DEFENSIVE AND THAT IS TECHNOLOGY (YUP) AND HEALTHCARE…