Has the world gone crazy? I have never experienced such panic and confusion in everyday life as I have seen recently. The police are in Costco to control the toilet paper hoarders! Really?
Financial markets are freaked out, panicky and totally confused as well. Panic selling. Panic buying. Prices collapsing. Prices spiking more in one day than they move in a year. It’s Mad Max out there.
Maybe it’s all justified. I don’t know.
It was sure a week to remember (or try and forget) with the broader market collapsing 15% then moving up 9% on Friday, including a 6% move higher in the final 15 minutes of trading. Crazy!
Energy has collapsed 50% with XLE now paying over a 12% dividend. You would think the Green New Deal just passed.
Gold has cratered. Store of value? NOT
Bonds reversed 15% lower last week from their overbought highs. Will interest rates begin to reverse higher?
Financials were up almost 15% on Friday! Crazy.
Apple was up 12% on Friday! Now they are closing all retail stores outside Greater China until March 27th. So, the stores in China have reopened..hmmm..that’s a good sign cases have peaked there.
Intel was up 20% Friday.
Microsoft up over 14%.
Morgan Stanley up 20%.
Every day last week the broader market was either up or down over 4%. Mad Max for sure.
So, have we bottomed? Let’s take a look.
Broader Market Review
Last week I wrote about the importance of 24,250 on the Dow and what would happen if it was breached..
“The two strongest support levels on the Dow are currently 24,250 and 21,000. If we break 24,250 on a weekly close we are likely going to 21,000 which is the primary ascending support from the bottom in 2009 that has been a consistent, rising floor for the market during the corrective periods of 2011, 2015 and 2018. I don’t know if we are going that deep but those are the levels that should provide a floor if current levels give way.
If the Dow does get down near 21,000 that would be a screaming buy; a screaming buy for most anything. I still like 24,250 as a floor but I’m not adding anything until we get some stability. We would have to get some really bad news to get down to 21,000 but we can’t rule out anything at this point. If you’ve got dry powder watch for these long and strong support levels.”
Well, the Dow did break below 24,250. What did it do next? It went directly to 21,133 (actually got lower in overnight trading). What did it do when it got there? It rallied 9.5%. How did I know that would happen?
First of all, I didn’t know if 24,250 would hold. No one ever knows for sure. But, I did know that if 24,250 failed to support price there was a high probability it would cascade all the way down to 21,000 (the next and most important support level) and at that price there would be a high probability reversal higher. Well, that’s exactly what happened.
On Friday, this primary, eleven year rising support (currently 21,000) provided a massive springboard floor that resulted in a 9.5% surge. This is good. We know this is an extremely important level that has been a consistent, rising floor for the broader market during the corrective periods of 2011, 2015 and 2018. We don’t want to see this level fail.
SPDR Dow Jones Industrial Average ETF (DIA)
If it does fail, I expect the Dow will cascade to its next big support level of 18,000. This is represented by the ascending yellow line.
The good news is that the Dow and S&P 500 have both aligned and bounced from their primary ascending support level. They are both positioned at the same level and this is important for a bottom to occur. So, there is the possibility we have put in a bottom. Also, we know there is an end to the economic damage that should coincide with the end of the virus. It’s not like we are facing an event that has no foreseeable end.
The bad news is I would expect the news to get worse before it gets better and we can count on the media to exploit this with their love of sensationalism. So, 18,000 is still a possibility.
Wherever the broader market does finally bottom I would expect a quick recovery. If this does put us in a recession I would expect it to be short with a quick “V” shaped recovery with tremendous buying opportunities.
So, I choose to ride out the storm. These events are so fluid and markets are so volatile I think the best course of action is no action.
Late Breaking News…Sunday afternoon:
The Fed just lowered rates by 100 basis points. Think 2009. We might get a short term negative reaction but looking out weeks and months this move by the Fed will be a gigantic boost and should limit the depth and length of any recession this virus is causing. This is great news.
While the Dow still might drop into the 18,000 area due to the market viewing this rate lowering as a crisis move by the Federal Reserve it should add fuel to the recovery, once it begins.
These are just my opinions.
Stay healthy,
Don