Selloff Resumes, With Bond Yields Hitting New Record Lows As CDC Virus Report Spooks

A few green shoots sprouted this morning, but they quickly got snowed under by a coronavirus blizzard that just won’t let up. Most of the major indices fell more than 3% Tuesday, and the S&P 500 Index (INDEXSP: .INX) is down nearly 8% from its all-time high set a week ago.

The latest bad news was a warning Tuesday from the Centers for Disease Control & Prevention (CDC) that spooked investors and helped accelerate losses after a relatively mild start to the day. The CDC’s assertion that “disruption to everyday life may be severe” appeared to change the tenor. By late in the session, the Dow Jones Industrial Average (INDEXDJX: .DJI) was down nearly 2,000 points from Friday’s close.

Just a few weeks ago, stocks scampered to new highs as many people seemed scared they’d miss the rally. Now stocks are getting hammered in part because many appear anxious to get out before more damage occurs. Some of the stocks that got a lot of love earlier this year, including Tesla Inc TSLA, are having a tough time.

It’s been a full 180 that’s spinning investors’ heads, but in the long run, sentiment might be overblown on the way up and the way down. Whatever the case, some chart points could offer road signs as people lick their wounds and try to avoid glancing at their depleted 401(k) balances.

It’s interesting to note that the SPX on Tuesday revisited the area near 3150 where it was back in mid-December when a Phase 1 trade agreement with China got announced. That could give investors some pause, though 3150 didn’t end up holding much support this time around. The next key level to monitor is near the 200-day moving average down around 3050, which also lines up with a series of highs the market hit last summer. 

Remember, the SPX has generally been able to bounce off the 200-day moving average pretty regularly over the last 14 months. A drop below that would be more serious. The 200-day moving average was 3043 going into the day Tuesday.

Another area to keep an eye on is around 26,700 in the $DJI. A drop to that point would represent a 10% correction from the peak, and also it’s a region the market had a lot of trouble breaking above back in early 2018. Once it did get past there, it rallied strongly. Now the adage about old resistance becoming support might be in order (see chart below).

CHART OF THE DAY: DOES SUPPORT BECOME RESISTANCE? When the markets went into a freefall Monday and Tuesday, some traders looked for a support point, especially after the 50-day and 100-day moving averages were breached. One such level of possible support for the Dow Jones Industrial Average ($DJI—candlestick)might be the 26,700 level. Not only was that an area of significant resistance on the way up—and market technicians often view levels of previous resistance on the way up as support levels on the way down—the level also represents approximately a 10% pullback from the all time high.  Data source: S&P Dow Jones Indices.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

CDC Spooks Stocks While 10-Year Yields Hits Record Low

Returning to today’s action, selling picked up in a big way around noon ET after those unpleasant tidings from the CDC. Before that, the SPX was down about 30 points and several of the stocks that got hardest hit yesterday—including Microsoft Corporation MSFT, Facebook Inc FB, and Apple Inc (NASDAQ: AAPL)—had shown signs of life. After the CDC spoke, the SPX losses more than doubled and all of those stocks slipped back underwater.

The CDC created more uncertainty, and the market hates uncertainty. Without the CDC announcement, it’s hard to believe things would have fallen so far today. The CDC later said it’s likely the virus will become a global pandemic.

Soon after the first CDC report of the day, a Trump administration official appeared on CNBC to tell investors that things are under control, but those words didn’t seem to carry much weight. Major indices all saw losses accelerate. Cyclical sectors like Energy, Financials, and Information Technology took the biggest blows, with Financials getting cooked by record low 10-year Treasury yields, which dipped below 1.32%. Crude slid below $50 a barrel for the first time in about a week, and volatility galloped higher.

However, gold sank a bit, so the three amigos of risk (bonds, volatility, and gold) aren’t all moving in the same direction like they did yesterday. That said, volume in stocks once again became heavily weighted to the downside, with only a handful of companies able to peek above the waterline. These included Xerox Holdings Corp. XRX, which is trying to take over HP Inc HPQ, and HPQ, which rebuffed XRX and announced a buyback plan.

McDonald’s Corp MCD also vacillated between positive and negative during the session. Sometimes when people worry about the economy, businesses that offer low-cost food and staples can benefit. However, two other stocks that fit this particular description—PepsiCo, Inc. PEP and Procter & Gamble Co. PG—both lost ground.

Stepping Back A Little

Let’s take a few steps back and try to make as much sense as possible out of what’s going on. There’s no point in scaring the children, so to speak, but as investors it’s best to be prepared for any kind of scenario, good or bad. The market appears to be building in a worst-case scenario, but if that doesn’t actually happen there could be a return to buying the dip.

One question is whether people are building the case for a mere correction, which in market terms is down 10% from the highs, or a recession, where 20% drops are common. If a correction is what people are thinking, then the 26,700 in the $DJI mentioned above and a 2700 in the SPX might be a zone of possible capitulation where selling slows.

If, however, people expect the virus to lead to a recession (and there’s no proof that’s going to happen, by the way), then one target for the $DJI might be more like 24,000, with the SPX perhaps testing the December 2018 low near 2350.

But before we get carried away, it’s worth noting some positives even in the middle of this storm. For one thing, the spread of the virus beyond China into countries with more modern health systems and open news media could give people more of a sense of how quickly the virus spreads and just how deadly it might be. Though no one wants to see the virus spread, any signs that countries like South Korea, Italy, and other European nations can keep it contained might be a dose of good news for the markets. At this point, few analysts trust the numbers out of China.

There’s also a bunch of solid earnings to consider, including HPQ. The company’s results yesterday beat top-and-bottom-line Street expectations and shares surged.

Things also looked firm at Home Depot HD, a company that often gets seen as a barometer for the housing industry. HD beat analysts’ estimates on earnings and revenue, and saw same-store sales climb 5.2% in its fiscal Q4. Shares rose more than 2% early Tuesday but then fell below the flat line later on.

The other piece of good news Tuesday came from the Conference Board, which said that February U.S. consumer confidence grew slightly from January to a headline number of 130.7, up from 130.4. What’s important about this one is that it includes the period when people knew about coronavirus, though it doesn’t include the latest cratering on Wall Street.

You could also argue that even though some companies like United Airlines UAL and Mastercard Inc MA are cutting their forecasts due to the virus in a follow-up to AAPL doing that last week, the damage doesn’t seem like something that goes beyond virus fears. Supply chains out of China are slowing, but demand for products like iPhones hasn’t gone away. Fear of the virus might hurt consumer spending, but that spending could bounce back if things improve.

It’s just that no one knows how long that might take. The virus is likely to be temporary, but no one knows how long “temporary” lasts. It might be one quarter of pain. Or it could be more. As an investor, being patient and having a game plan might be the best way to approach this. The fear, however, is that things could snowball, especially with the CDC sending shivers through the market and social media spreading that message well beyond investors and into the general population.

What’s Good For Apple...

At this point, it looks like AAPL’s warning last week was a shot across the bow. In this era, AAPL is arguably what General Motors Company GM was 50 years ago—a harbinger of what’s happening in the broader economy. Last year, it was AAPL’s January revenue warning that ironically helped kickstart the rally. Now we’ve come full circle, possibly, and AAPL’s warning stopped the rally in its tracks.

Volatility remains elevated with the Cboe Volatility Index (VIX) climbing to 29 on Tuesday and nearing peaks last seen when the market almost turned into a bear in December 2018. This volatility isn’t likely to dissipate anytime soon. The question is whether people might start to nibble a little tomorrow, which will mark the third day of the sell-off. Sometimes that’s when you see some buying.

Fed Vice Chair Richard Clarida said Wednesday afternoon that it’s too early to speculate about how much impact the virus could have on the economy, but said the Fed is ready to “respond accordingly.” The Fed lowered rates three times last year, but with the Fed funds rate parked between 1.5% and 1.75%, there is a bit more room if Fed officials decide more easing is necessary. At this point, the futures market puts around 80% odds of at least one 25-basis point rate cut between now and June. The chance of a rate cut next month is closing in on 25%, up from 10% a week ago.

The bond market looks overbought by some metrics, but people keep piling in as they search for what they apparently hope is a safer spot on the bench. If the Fed doesn’t make any near-term moves, investors might read that as the Fed having faith in the economy’s resilience. That in turn could finally be what turns bonds back lower and adds a bit more heft to yields. We’re not there yet, however.

Speaking of “there yet,” don’t forget that six of the last seven Fridays have featured lower stock indices. So even if the market shows signs of new life tomorrow or Thursday, get ready for possible danger on Friday. Investors haven’t shown much inclination lately to go long into the weekend.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

Image Sourced from Pixabay