March 30, 2020

At least for the very short term, as in one week, it seems the Federal Reserve 'bazooka' worked to help calm financial markets, which continue to be in turmoil over the spread of coronavirus. For those who need a reminder, the Fed lowered the benchmark funds rate effectively to zero and made itself ready to lend as needed through the purchase of nearly $1 trillion in Treasury and mortgage securities. On NBC’s Today show Thursday, March 26th, Federal Reserve Chairman Jerome Powell said the U.S. economy “may well be in a recession.” He immediately followed that up with a notion the central bank is taking unprecedented action to help ensure economic activity can resume as soon as the coronavirus pandemic is under control. 


Market bottoms are a process, not a single event the data points above indicate the extreme selling pressure and market structure stress that developed in March is likely subsiding and an internal low has likely developed. What does that mean for investors? Most major cycle lows in the past have developed over a period of weeks to months, beginning with a peak in selling intensity followed by secondary price lows in the indices that can be at higher or lower levels. While it’s premature to conclude that the final lows are in for the market, a bottoming process has likely begun, and we expect to see more positive divergences developing into late April and mid-Q2.

What we’ve seen is a market rally to resistance at the 200-week moving average. The bounce in three days does not seem like new buyers, but short sellers covering their positions on the news of the stimulus program being approved. However, stocks have moved into heavy technical resistance at its 200-week simple moving average, coinciding with a Fibonacci 38% retracement of the Q1 decline. Again, equities will likely trade in a very broad, choppy trading range well into and possibly through April, and could see a significant retracement of the past week’s bounce.  How far could markets pullback? There is no one set playbook, but a retractement of 50-62% of the recent surge would not be surprising in the least, taking the S&P back toward a band of support between 2300-2350. If the market has a full retest, which is likely, you could see the S&P 500 trade back to 2100-2200 level.

As of Friday, according to the John Hopkins Center for Systems and Science Engineering, COVID-19 cases have doubled from the 585,000 world-wide confirmed cases compared to one week ago. Deaths are 27,000 vs 11,150, respectively, with the majority in China and Italy. For the U.S., the next few weeks will be a key indicator of whether the spread of COVID-19 meets the more dire forecasts. 

Lastly, a few weeks ago there was a widely circulated Imperial College study that said the U.S. could see deaths of 2-6 million. This is the reason the White House dramatically shifted strategies and basically shutdown the whole economy. It turns out the authors of the original study now revised down the estimate of deaths by 95%. ( Wow -  what a miss, 95%, not a 5% or 10% miss, but 95%. They were way off. So, there are glimmers of hope and real reasons to be optimistic.

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