foxex: Fear Itself

Chart Advisor | Focus on the Price

Thursday, March 12, 2020

1. Investors appear afraid of the fear of the Coronavirus

2. The sustainable investing bubble bursts

3. Where the market may find support

Market Moves

The index futures hit their five-percent trading curbs before the market open for the second time in a week, and stock markets halted briefly to open today's session. However, unlike Monday's halt, the session that followed led to significantly lower prices by the close. There seemed to be no safe asset today as real estate indexes, bonds, gold, oil, and even palladium, closed sharply lower on the day. About the only asset class closing higher was cash. In the forex markets the U.S. dollar traded higher against the Euro (USDEUR), Pound (USDGBP), and Yen (USDJPY).

While recent days' COVID-19 headlines (Chart Advisor's included) may have seemed a bit hyperbolic, the market's continued unrest has matched them and then some! Meanwhile, the number of daily new cases in China are at single digits (if those reports can be believed), and the number of new cases in South Korean dropped by 50 percent fewer from the previous day. This is also the fifth sequential daily decrease in a row, so there is already a real reason to believe this pandemic is containable to a small portion of the population in the world.

The markets, however, do not appear to be worried about the containment. They seem to be pricing in the cost of containment. That cost (in the form of lost revenues over cancelled events, travel and purchases) keeps climbing and has no cap in sight. From the market's perspective, this could mean that the cure (impact on the economy) may end up being worse than the disease. The thing the market seems to fear, to modernize Franklin D. Roosevelt's axiom, is literally fear itself.

The chart below demonstrates that the current level of hysteria may not have reached its ultimate fever pitch just yet. This chart is a weekly time-framed measure of the Total Put-Call Ratio Composite (USI-PC). It shows that put options made up 40 to 60 percent more of the option purchases being made this week than all of the call options purchased in that same time frame. That is not surprising. What IS surprising is that this level was higher at the end of 2018 just before the massive drop that led to an even more massive Santa Claus rally. Though the market may find a bottom soon, this chart seems to suggest that it hasn't found one yet.

The Sustainable Investing Bubble Bursts

Recently it seemed that investors had found the secret sauce to beating the market. Fashioning ETFs that focus on stocks with sustainable technologies and socially responsible management practices could, despite what the late Jack Bogle had to say about such a practice, help investors outperform the market averages. Up until February 20, plenty of evidence seemed to exist to support that notion.

The chart below shows that on that day, iShares Global Clean Energy ETF (ICLN) hit its peak and along with the rest of the market began to fall. However, the fall proved to be more serious than what the benchmark S&P 500 index (SPX) experienced. Why should this be?

The answer is found in the second chart below. The leading two stocks of that fund were Enphase (ENPH), which clocked in as over 8% of the fund, and SolarEdge Technologies (SEDG) taking up over 5% by itself. Both of these stocks dropped dramatically over the past two weeks, giving up half or more of the previous year's gains. In a comparison between State Street's S&P 500 index ETF (SPY) and shares of Virgin Galactic (SPCE), these two stocks traded much more similarly to the latter than the former. With this in mind, labeling these two as bubble stocks seems appropriate.

Read more:

A Stock Sell-Off Vocabulary Guide

The Economic Impact of the U.S. Travel Ban on Europe

Dow Slips into Bear Market Territory on Coronavirus Concerns

GameStop Stock Price Falls After Activist Letter

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Where the Market May Find Support

Today's final chart is a triple-method study of where the market could land. Among the three major indexes, the Nasdaq 100, as tracked by Invesco's ETF (QQQ), seems to be faring noticeably better than the Dow Jones Industrial (DJI) or S&P 500 (SPX) indexes. So I've chosen to analyze it as a baseline. You'll want to click on the chart for a bigger view.

The summary of what the chart shows is this price: 169.50. That's the price level where three studies intersect. In this case, a Fibonacci extension, a Keltner-Channel volatility-trough projection, and a six-month low price, all cluster around that price level. This price may not be the ultimate low of the current market panic, but it should at least pause there and may touch off a short-term rally. Keep an eye out for how the market responds if it hits that point.

The Bottom Line

More furious selling leaves indexes lower and volatility at levels not seen since 2008 despite evidence that the Coronavirus may be containable. ESG mandates for fund managers may have contributed to an overvaluation of some ETFs and stocks. If the selling continues, we could easily see the Nasdaq 100 reach its six-month lows.