Coronavirus Spread Could Push Market Towards Correction
There are recent market factors that are giving global investors some pause about the durability of this nearly 11-year old bull market, and I can sympathize somewhat.
However, please don’t call me a bear. I think that despite the potential for an up to 10% or so correction, the bull beat will go on.
Nevertheless, volatility in equity markets have risen sharply this week (with the VIX “fear index) pushing above 18 now) as the increasing apprehension around the coronavirus outbreak, coupled with mixed GDP visibility due to Boeing’ s (BA) MAX 737 production woes, are creating broad de-risking (U.S. Treasury 10-year bond yield falling and high yield spreads widening, etc. I recommend staying defensive with tech and healthcare sectors.
And as I noted earlier in the week, this does not feel like a reflexive 2%-3% drawdown that ‘needs to be bought’ but rather, this seems 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 – 50 DAY MOVING AVERAGE OR 100 DMA IS WHERE I SEE INITIAL BOTTOMS
I think a likely place to expect markets to find some footing is maybe the 50 dma but more likely between 100 dma and 200 dma. These levels are: (i) 50 dma: 3,211, (ii) 100 dma: 3,111, and (iii) 200 dma: 3,011
How odd is it that the moving averages are spaced 100 points apart?? Really interesting.
POINT 2: IN 2019 THE CORRECTIONS ENDED SOMEWHERE BETWEEN 100 dma AND 200 dma… PROBABLY THIS ONE WILL TOO…
In 2019, we saw 3 drawdowns greater than 5% and those are marked above. We also have the moving averages and the daily RSI indicated. See chart above.
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 RELATIVE STRENGTH INDEX <35
The reason I believe the 50 dma may not hold (3,211) is that at 3,211, the S&P 500 is at a negative year to date return. I think this makes some asset allocators, investors, speculators and machines think this is January 2018 again.
- Thus, selling would amplify at the 50 dma.
We are not bearish for the year, however, because we see economic and valuation tailwinds in 2020.
- Economic: Momentum (post-Coronavirus) will likely strengthen on pent-up demand, post-trade war ramp-up and fiscal stimulus (US possibly, Japan and potentially Europe) and thus, EPS growth should be >10% in 2H2020.
- Valuation: the Fed “Put” plus the TINA (there is no alternative) “put” added to accelerating 2H20 economic momentum, I believe, will equal equity risk premiums falling and a rising stock market.
STAY DEFENSIVE AND THAT IS TECHNOLOGY (YUP) AND HEALTHCARE…
Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight
Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
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