foxex: Gone Gains

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. US markets give up early rally as virus concerns mount

2. Microsoft reins in revenue forecast

3. Investor anxiety is peaking

4. US markets are still pricey despite recent losses

Markets Closed

Dow
26,957.59
−123.77 (-0.46%)

S&P
3,116.39
−11.82 (-0.38%)

Nasdaq
8,980.77
+15.16 (+0.17%)

VIX
27.56
−0.29 (-1.04%)

Bitcoin
$8,793.92
−$556.04 (-5.96%)

US 10-Yr Yield
1.31
−0.02 (-1.50%)

Markets Today

What looked like a resurrection rally this morning quickly evaporated by midday as investors fled from stocks on mounting coronavirus concerns. The DJIA swung 650 points throughout the trading session and closed near its lows for the day. The Nasdaq did manage to close in positive territory as stocks like Gilead Sciences and Netflix posted strong gains. But the drumbeat of worry proved to be too loud as more reports of the spread of the coronavirus around the world made headlines.

New infections were diagnosed in countries from Pakistan to Brazil. The latter reported the first case in Latin America, while Italy and Iran confirmed additional patients with the disease. Germany said it was likely at the start of an epidemic. On these shores, Nassau County health officials in New York said that they have placed 83 Americans in self-quarantine after returning to New York from China amid concerns they were exposed to the virus.

After a week of heavy selling, global markets, as measured through the MSCI All-Country World Index, are down 5%. But individual countries, like the U.S. and Italy, have fared much worse. The S&P 500 is down 8.4%, its steepest decline since the end of 2018, and the Italian stock market is down 9%.

Headlines:

Microsoft (MSFT) is the latest high-profile company to lower its revenue forecasts due to uncertainty surrounding the coronavirus and its impact on the company's supply chain. The company said in a statement that its More Personal Computing segment, which includes Windows, will fall short of its earlier guidance.
The yield on the benchmark U.S. 10-year Treasury note fell to another record low of 1.307% as investors continue to seek the perceived safety of government bonds.
Average home prices in major U.S. metropolitan areas rose 3.8% in December 2019, accelerating from 3.5% the prior month and 3.3% in October, according to the S&P CoreLogic Case-Shiller National Home Price Index. The 20-city index posted a 2.9% annual gain in December, up from 2.5% the month prior. All 20 cities saw price increases.
Hong Kong will spend $15 billion to support an economy reeling from the coronavirus outbreak and months of protests. Every permanent resident above the age of 18 will receive $1200 in cash.
Tesla (TSLA) and Panasonic are ending their solar cell partnership in New York, according to Nikkei Asian Review. The electric car maker has said that Panasonic's withdrawal "has no bearing on Tesla's current operations."
Investors shorting Square (SQ) have been actively covering their positions ahead of Q4 earnings, which were reported this afternoon. Since February 5, short sellers have reduced their exposure by $201 million (2.5 million shares), according to S3 Partners. They were smart to do so, as the digital payments company exceeded analysts' forecasts leading to a 7% rise in shares after hours.

High Anxiety

Investor anxiety can manifest in many ways. We are seeing it in the exodus from global equity markets, the rush of money into government bonds, and the spike in volatility that is triggering massive intra-day swings in stock prices.

At Investopedia, we track anxiety by looking at the spike in search traffic around keywords that are associated with anxiety. These are words like "correction", "volatility", "Bear market", "liquidity"... you get the point. We call it the Investopedia Anxiety Index, because we are clever like that.

As you can see from the chart above, anxiety, as measured by our index, is nearing levels it hasn't reached since the end of 2018 when U.S. markets fell into a correction. It spiked at the beginning of the year over U.S.-Iran tensions, and then spiked nearly two weeks ago as news of the spread of the coronavirus dominated headlines. While investors did not really start selling until about a week ago, tensions were high, and it didn't take much to push markets into this steep sell-off.

chart courtesy Bloomberg

When Will it End?

That's the $2 trillion question, and if I knew, I would happily share that information with all of you. What we do know is that even though U.S. stocks have been hit hard in the past week, they are still relatively expensive from a price-to-earnings perspective compared to their global counterparts. Investors were happy to pay the premium before the coronavirus became a global threat, sending U.S. indexes to record highs. However, now that investors are scared and anxious, those hefty price tags might keep the same investors away when they start buying stocks again.

More News:

Traders Are Likely to Buy Tech Stocks on Market Weakness

Boeing Stock Nears Critical Support After Year-Long Decline

Macy's Stock Could Drop Into Single Digits

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(chart courtesy YCHARTS)

Shares of Moderna, the biotech firm which has developed a coronavirus vaccine that will soon undergo testing, continued to climb. Fellow biotech firm, Gilead Sciences, also continued to rise after the National Institute of Health began further testing of its drug remdesivir for use against the coronavirus. Retailer TJX rose after reporting strong profits and raising its dividend.

Chesapeake Energy dropped substantially after it reported disappointing revenue numbers, adding to its woes in the face of low gas and oil prices. Television company Sinclair Broadcast fell after reporting worse-than-expected profits for the last quarter.

Word of the Day

Rogue Trader

A rogue trader is a trader who acts recklessly and independently of others, usually to the detriment of the institution that employs the trader as well as its clients. Rogue traders typically make high-risk investments that can produce huge losses or gains. Rogue traders, though, are only labeled as such if they lose. If their trades are enormously profitable, no one calls them "rogue." They are more likely to receive a huge bonus.

Today in History

February 26, 1995
Today in 1995, the British investment bank, Barings Banks, ceased operations after over 200 years in operations. The bank, founded in 1762, was brought down by the actions of a single person, Nick Leeson (pictured above), nicknamed the "Rogue Trader." Leeson was stationed in Singapore to arbitrage the slight price differences in futures contracts between the Singaporean and Japanese markets. This was a low-risk trading strategy that involved making a number of small, short-term trades to exploit small price differences. Because of the supposedly low risk of his trading strategy, he was authorized to settle his own trades and run his own accounting operations. He delivered significant profits for a time, making up 10% of the bank's profits one year. However, instead of following this strategy, he held huge futures contracts for a significant amount of time, betting that the Nikkei would stay within a certain range. After an earthquake hit Japan in January 1995, the Nikkei declined, and he lost over $1 billion, more than twice the bank's entire available capital. He'd been able to hide the losses for a time because he was allowed to do his own accounting. The losses caused the bank to declare bankruptcy and Barings was bought by Dutch bank, ING Group later that year. Leeson served a jail sentence during which he wrote an autobiography titled "Rogue Trader" which was later dramatized in a film starring Ewan McGregor as Leeson.

Sources: https://www.investopedia.com/terms/b/baringsbank.asp and https://www.investopedia.com/ask/answers/08/nick-leeson-barings-bank.asp