Martin’s Market Update

Panic in the Stock Market

Earlier in the week, when I wrote that oil’s brief rally after a dramatic fall shouldn’t be trusted and that markets weren’t about to recover in a hurry, I couldn’t possibly have envisaged where we be just a couple of days later. Not in terms of where oil is, but in terms of the extent of the reaction in the stock market and elsewhere to the Covid-19 coronavirus.

Stocks in Freefall

As I’m sure you are aware, stocks are in freefall.

As I write, the Dow is down over 2,000 points on the day, and more than 27% from its recent high. Other major indices are also off over 25% from their peak.

Logically, we all know that Warren Buffett was right when he said that we should be greedy when others are fearful, but in a full-blown panic like this, logic takes a back seat. At some point, we will look back on this as many now do at the S&P 500 at the low of 666 in 2009, as a golden opportunity to buy cheap stocks. It is worth remembering though that that level was reached after a roughly 40% drop, and after several mini bounces.

Economic Impact

This has now passed from a panic about what might happen, to selling based on what is actually happening.  All aspects of normal life are being affected, here in America and around the World. Schools are being closed, sporting events cancelled, and business disrupted in any number of ways. That will have a real economic effect, even if the virus itself is contained quite quickly or turns out to be nowhere near as bad as feared.

The history of markets tells us that even so, the selling will be overdone at some point, and there will be a recovery. A market that can survive the 1929 crash, WWII, the 9/11 attacks, and the events of 2008/9 and still keep moving higher will survive this too.

Right now, though, that end looks some way away.

Signs of Hope?

There are some technical signs that we may be getting at least close to the bottom of stocks’ collapse.

Most measures of how bad this collapse is are at levels that have in the past presaged a turnaround. The put/call ratio is in its 99th percentile historically speaking, for example, and the 25-27% drop from the highs has marked at least a pause on the way down following previous dramatic declines, and usually a reversal.

One can also look to other markets. Treasury yields have actually been on an upward path over the last few days, and oil, which is very demand-dependent, usually has held up relatively well.

Still, as I said in the Newsletter, when looking for a real turnaround in a volatile market, you should be patient and wait for confirmation. Smaller intraday moves, whatever their direction, would be a welcome sign, and three or more successive days of steady gains certainly would.

Until we see either or both of those, panic is still king, and as long as that is the case, calling a bottom is impossible. Panic doesn’t respect technical signals or logical analysis.

Implications for Oil

As I said, oil, while lower as I thought it would be, has held up quite well when compared to the stock market. Some might see that as another encouraging sign, but it looks more like a consequence of the massive drop on Monday.

That pretty much priced in all the bad news for a while, so some consolidation was always likely. Eventually, though, absent any noticeable supply cut, the demand factors will start to weigh. Just the huge decrease in travel will have a big impact, let alone the overall economic slowdown that now looks unavoidable.

The only sensible reaction to all that is to maintain the short bias that I talked about with regard to oil-related positions.

I have lived through a lot of crazy weeks and seem some sickening drops in markets and some stunning surges. This, though, is different.

This is about an illness, so concerns for our own lives are being added to the economic worries. That creates a climate of fear that serves to increase the sense of panic.

For the moment then, to use a phrase from Hill Street Blues all those years ago “Be careful out there.”

Oh, and don’t forget to wash your hands.

Cheers,

M

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