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The Standard and Poor’s 500 Index (SPX) closed Friday at 2711, down 5.3% for the week. But what a difference a day can make. SPX closed Thursday at 2481, down 13.4%. Wow! Friday afternoon’s price action was wild. Any traders who left their offices a half hour early had a surprise waiting for them when they arrived home. At 3:34 pm ET, SPX was trading at 2548, down almost one percent since the open. In those remaining 26 minutes the S&P 500 ran up 163 points or 6.4% to close at 2711, resulting in a 5.5% gain for the day. Thursday's low represented a correction of 27%.

We observed a much weaker bullish spurt last Friday afternoon, March 6th, and I was encouraged. Those hopes were dashed on Monday as the market gapped open lower and sunk to a new correction low of 19%. Was this past Thursday’s low finally the capitulation we have been waiting for? Or will this just turn out to be another head fake?

VIX, the volatility index for the S&P 500 options, opened the week at 41.9%, peaked Thursday at 76.8%, and closed the week at 57.8%. I am impressed with Friday’s market strength, but the market is still very spooked. This remains a dangerous market environment.

IWM, the ETF based on the Russell 2000 group of small to mid-cap stocks, closed Friday at 119.47 for a weekly loss of 10.9%. The intraday low on Friday at 109.55 represented a 35% correction from the recent high on February 20th. IWM’s bounce on Friday was very impressive. After opening the day at 118.31, IWM plunged to 109.55, and then recovered to close at 119.47, posting a gain of 7.50 points or about 1% for the day.

The NASDAQ Composite index closed Friday at 7875 for a gain of 673 or 9.4%. NASDAQ’s low on Thursday set this index’s correction at 27%. NASDAQ tested Thursday’s lows on Friday but then spiked higher in a strong recovery, opening at 7610, falling to 7219, and then spiking to close at 7875. Trading volume was above average all week but unexpectedly dropped off during the recovery Friday

The source of this severe market correction is not the usual economic cycle downturn or a crashing housing bubble that we saw in 2008. This correction is the result of the coronavirus pandemic. The latest CDC update of March 13th cites a total of 1,629 coronavirus infections and 41 deaths in the U.S. By contrast, the CDC reports over eighteen thousand people have died during this flu season and this year is tracking to be much less lethal than last year’s flu season, which claimed 80,000 lives.
Contrast this current reaction of CDC and the media to the coronavirus epidemic to the H1N1 viral epidemic in 2009. The actions taken by the CDC are very similar, if not identical. That should not be surprising. CDC leads the world in epidemiology and their play book is well established. But the media’s response could not be more different. We were certainly alerted to the problem and advised of proper precautions in 2009. But the media did not create a panic as they have today, resulting in people fighting over toilet paper, sports seasons cancelling their seasons, and even churches closing their doors. In 2009, 61 million H1N1 infections were reported to the CDC, resulting in 12,469 deaths.

By contrast, the fear of this coronavirus epidemic has been greatly overblown as compared to H1N1 in 2009. What is the difference? Allow me to address the elephant in the room. The difference is the occupant of the Oval Office. The media fawned over President Obama. They helped his administration assure the public that appropriate steps were being taken. The majority of the current media hate President Trump and take every opportunity to critique every action taken and promote fear of widespread death and the basic collapse of our society. You think that statement is too strong? How do we explain the run on bottled water and toilet paper? Whether I like President Trump or not is irrelevant to this analysis.

This irresponsible scare mongering has resulted in tangible economic consequences. When Disney closes their U.S. theme parks tomorrow, how many workers will be affected? And that list goes on and on through many industries. My wife and I went to one of our favorite breakfast restaurants this morning. We were the only customers in the dining room. How long before those employees lose their jobs? This will be the first media induced economic recession in history. The citizens of our country who are least able to weather the storm will suffer the most. The talking heads who sound the latest breathless alarms are collecting multi-million dollar salaries.

We can’t control the cause of the market correction or even reverse it at this point. But we can use our normal technical analysis together with some basic common sense to determine our market posture. Recurring price patterns commonly follow market corrections. The most obvious is the retest of the correction lows after we think all is well and the market is recovering. If we had been encouraged by the market’s recovery on the previous Friday (3/6), and entered strong bullish positions, we would have been scrambling on Monday.

Notice the size of the corrections. SPX and NASDAQ are identical at 27% and IWM (our surrogate for the Russell 2000 index) corrected 35%. IWM consists of higher beta stocks. These are the classic “risk on” and “risk off” stocks. When traders are confident in the underlying bull market, they buy these stocks to lock in higher percentage gains. Conversely, these are the first stocks sold when any fear arises, so a larger correction is expected.

The recovery on Friday afternoon tracks the percentage gain from the intraday lows for each index to its close; SPX and NASDAQ recovered 8.8% and IWM recovered 9.1%. The consistency here is encouraging. A possible negative sign would be a smaller recovery in the small to mid-caps stocks typical of IWM and the Russell 2000 index. A consistent recovery suggests a larger market consensus of the correction being at or near its bottom.

Don’t make any bullish moves yet. Let the market's price action recover sufficiently to give you confidence that the retests of the correction are over. In the meantime, build a watch list of solid stocks that recovered well on Friday. This isn’t a time for your favorite biotech with the cure for cancer in clinical trials. Some of the stocks on my list are: APPL, ADBE, COST, INTC, LLY, MSFT, PYPL, REGN, and UNH. All of these stocks made strong recoveries on Friday and some even regained their 50 dma.

Stay calm and be disciplined.