Sunday, February 23, 2020

Did The Market Just Got Infected By The Coronavirus too ? -- Market Crash 2020

Just last week, we were asking the opposite question, as traders were believing that the market had immunity to the risks from the “coronavirus.” “As noted last week: ‘With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.’ But the belief is currently ‘more stimulus’ will offset the ‘virus.’ This is probably a wrong guess. Extensions to this degree rarely last long without a correction. Maintain exposures, but tighten up stop-losses.” For the week, the market declined, but it was the “5-Horseman Of The Rally” (Apple, Microsoft, Google, Facebook, Amazon) which led the way lower. This is the first time we have seen a real rotation out of the “momentum chase” into fixed income and was a point we discussed in Thursday’s RIAPRO Intermarket Analysis Report. To wit: “Stocks and bonds play an interesting ‘risk on/risk off’ relationship over time. As shown above while stocks are extremely outperforming bonds currently, the relationship is now suppressed to levels where a reversion would be expected. This suggests that we will likely see a a correction in equity prices, and a rise in bond prices (yields lower), in the near future.” Currently, this is just a correction within the ongoing bullish trend, however, there are things occurring that do not rule out the possibility of a larger correction in the short-term. Carl Swenlin from Decision Point (h/t G. O’Brien) came to a similar conclusion. “Yesterday (Thursday) SPY penetrated the bottom of a short-term rising wedge, but couldn’t make it stick. Today was a different story, but the support line drawn across the January top impeded excessive downward progress. The VIX didn’t quite reach the bottom Bollinger Band, but it is possible that we will see continued weak price action similar to the short January decline if the VIX breaks through the band. Being so close to the band, the VIX is also oversold, so it is also possible that we’ll see a bounce.” The intermediate-term market trend is UP and the condition is SOMEWHAT OVERBOUGHT. The negative divergences spell trouble, and all four indicators are below their signal line and falling.

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