foxex: The Swing

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. US markets rally close to 5% on stimulus optimism

2. Oil prices snap back 11% on OPEC talk hopes

3. Bounce backs from steep losses are the norm

4. The velocity of the sell-off has been historic

Markets Closed

Dow
25,018.16
+1,167.14 (+4.89%)

S&P
2,882.23
+135.67 (+4.94%)

Nasdaq
8,344.25
+393.58 (+4.95%)

VIX
47.86
−6.60 (-12.12%)

Bitcoin
$7,976.53
+$106.33 (+1.35%)

US 10-Yr Yield
0.748
+0.249 (+49.9%)

Markets Today

U.S. markets swung from fat to skinny gains and eventually closed at session highs, making up some of Monday's steep losses. Bounce backs are normal after days of heavy losses, but the market's moves over the past two weeks have been nothing but dizzying. Volatility is in season and it has spread to nearly every tradable asset class on the planet. Oil prices, which were hammered on Monday, bounced back more than 10% today on hopes that OPEC and OPEC+ will come back to the table. The yield on the U.S. 10-year Treasury more than doubled in the past 24 hours, closing today at close to 0.8%.

The White House has been teasing some form of fiscal stimulus over the past two days. That stimulus could include paid sick leave, aid to struggling industries like airlines, and potentially eliminating payroll taxes for businesses for the rest of the year. That would be a very big deal for large public companies, but also for small businesses, which generate about 44% of U.S. economic activity. Granted, none of these measures actually attack the problem at hand, which is the continuing spread of the coronavirus through major U.S. metropolitan areas and around the world. However, they could ease the pain of a broader economic slowdown that has already started.

As for today's bounce back, history shows us that we should expect it most of the time. Our friends at YCharts looked at previous 5% sell-offs and what happened the following day. Had you invested a dollar every morning after a 5% sell-off the prior day, your average return would be about $0.15.

chart courtesy YCharts

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Headlines:

The Trump administration suspended a planned sale of 12 million barrels of oil from the nation's emergency reserves after world crude prices plunged the most since 1991. "Given current oil markets, this is not the optimal time for the sale," Jess Szymanski, a spokeswoman for the Energy Department, said in a statement on Tuesday.
New York State officials are deploying the National Guard and creating a containment zone around a city in Westchester County as the coronavirus outbreak spreads, New York Governor, Andrew Cuomo, announced Tuesday. Westchester County has 108 of the state's 173 confirmed COVID-19 cases. New York City has 36 confirmed cases of the virus.
The Mortgage Bankers Association (MBA) is now forecasting total mortgage originations of approximately $2.61 trillion this year. That's a 20.3% gain over 2019′s volume ($2.17 trillion) and up from last month's forecast of $1.99 trillion. Refinance originations are driving the change, jumping 36.7% from last year to about $1.23 trillion, more than double the MBA's predictions. Purchase originations are now forecast to rise 8.3% to $1.38 trillion, up from the $1.32 trillion last forecast.
Occidental Petroleum (OXY) cut its dividend for the first time in 30 years as the oil producer opted to conserve cash to cover debt incurred from its $37 billion takeover of Anadarko Petroleum Corp. Like many oil companies, Occidental's stock has been crushed by the decline in oil prices. Shares are down 67% from recent highs.
Japan has announced a second coronavirus relief package worth $4.1 billion. According to Reuters, it's focused on supporting small and mid-sized firms impacted by the outbreak. Some of the money will also go toward medical facilities and subsidies for working parents who have to take time off.
American Airlines (AAL) is slashing international and domestic routes as coronavirus concerns squeeze bookings. Shares are up 14% today, but down 41% so far this year.
Delta Airlines (DAL) is also reducing its international flights by as much as 25%, and domestic capacity by between 10% and 15%. These are among some of the deepest cuts announced in the U.S. so far. With so much uncertainty, the airline suspended its financial outlook for this year, which other U.S. carriers have also done.
Facebook (FB) has added Nancy Killefer and Tracey Travis to its board of directors. Killefer worked 30 years at McKinsey, and Travis is currently CFO at The Estée Lauder Companies. Women now make up 40% of the company's board, meaning it's the most gender-balanced it's ever been.

chart courtesy TheIrrelevantInvestor

Speedy Decline

The velocity of the recent sell-off in stocks has been vexing, to say the least. On the one hand, we should not have been surprised to see a sell-off given the current and potential impacts of the spread of COVID-19. Stocks were pricey, the global economy was slowing, corporate profit growth was expected to decline, and we were one Black Swan crisis away from trouble. Money had been moving out of stocks all year, even though U.S. markets were reaching record highs just three weeks ago.

But, given the uncertainties around the economic impact of a global virus that could soon become a pandemic, coupled with the slow U.S. government response, risky assets like stocks have been selling like hotcakes. Michael Batnick, one of our favorite finance bloggers, charted drawdowns over the past 10 bear markets to show just how fast stocks went from record highs to bear territory (down 20%).

As Batnick explains, the average number of days from peak-to-bear market territory is 255, the median is 156. The Dow is currently 15% off its high after 17 sessions, so assuming it falls another 5% over the next few days, this would be, by far, the fastest swing from high to bear market ever. The second fastest was 1929, which took 36 sessions. The chart below is the same one as above, only zoomed in to get a better sense of what's going on.

The takeaway is that software algorithms powered by the biggest financial institutions in the world are so powerful and sophisticated that they amplify volatility and cause huge price swings that individual investors have no hope of keeping up with. We have no shot at timing the market. We never did and we definitely don't now.

Play the long game.

More News:

Tesla Rebounds as Analysts Weigh Oil and Virus Impact

Agriculture Investments Could Pay Off in This Market

General Motors Stock Could Bounce 30% in Coming Weeks

(chart courtesy YCHARTS)

The biggest winners today were energy companies that recouped some, though not all, of yesterday's losses after oil prices somewhat rebounded from yesterday's crash. The other big winner was Cypress Semiconductor after the Committee on Foreign Investment in the United States approved its acquisition by German semiconductor firm, Infineon Technologies.

Moderna, a biotech firm currently developing a coronavirus vaccine, fell today even as the coronavirus continued to spread throughout the world. Range resources, a natural gas company, fell today. It was pushed down by the fact that higher oil prices may keep more shale-oil producers drilling. Shale-oil producers also make natural gas as a by-product, and so more shale production would lower natural gas prices and hurt gas producers.

Word of the Day

Liquidity

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words: the ease of converting it to cash.

Cash is universally considered the most liquid asset, while tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum.

Image source: Hulton Deutsch / Contributor

Today in History

March 10, 1876

Today in 1876, Alexander Graham Bell made the first telephone call. The call was to his assistant, Thomas Watson, and consisted of the sentence "Mr. Watson--come here--I want to see you." Bell first discovered the possibility of sending sound over a wire after hearing a twang sound when working on a device to send multiple telegraph signals over a wire. This call was repeated over the first transcontinental telephone line in 1915. Bell, sitting in New York, repeated his request to his assistant who said that it would take him a week, as he was in San Francisco.

Source: http://www.americaslibrary.gov/jb/recon/jb_recon_telephone_1.html