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Chart Advisor | Focus on the Price

By James Chen, CMT

Friday, April 17, 2020

1. Large Caps Recover Half of Plunge

2. Small Caps Struggle

3. 10-Year Yield: Dead Cat Bounce?

Market Moves

U.S. large-cap equities ended the week significantly higher, but trading throughout the week was choppy and highly volatile. On Friday, the rally that boosted the S&P 500 2.68% was driven in large part by an initial report that a drug developed by Gilead Sciences showed some promise in treating coronavirus patients. Shares of GILD jumped nearly 10% on Friday. On top of this hopeful sign, President Trump announced a day earlier that Federal guidelines had been introduced that would potentially begin to loosen up state-imposed restrictions which were meant to slow the spread of the virus.

Also helping to boost stocks, shares of Boeing (BA) surged nearly 15% after the company announced that it would resume airplane production this month. Meanwhile, "stay-at-home" stocks like Amazon (AMZN) and Netflix (NFLX) pulled back after both reached all-time highs just a day earlier.

From a broader perspective, as new cases of the coronavirus appear to be plateauing and hope looms on the horizon for an eventual emergence from economic disaster, forward-looking equity markets have responded very positively. As the chart below of the S&P 500 shows, the benchmark large-cap index has recovered more than half of the plunge that occurred in February and March. For those of you who are technical traders, this is more than a 50% Fibonacci retracement. The next major stop to the upside in the event of a continued recovery, for all of you Fibonacci enthusiasts out there, is the 61.8% retracement, which is around the 2945 level.

Also worthy of note on the chart, the Feb-Mar collapse was around a 34% drop in the index. Though it's managed to recover only a little more than half of the drop, it took a rise of a full 29% to do so. This is a clear reminder that when a market or your portfolio is down a lot, it takes a much larger percentage to recover. Case in point, a hypothetical climb from the March low all the way back up to February's record highs would constitute nearly +53%.

Small Caps Struggle

Though equity markets have suffered massively as a result of the pandemic spread, it's clear and understandable that smaller companies have suffered a substantially worse fate thus far. The chart below tells the story. Year to date, while the large-cap S&P 500 is down 11%, the small-cap Russell 2000 has fared much worse at -26%. Small caps have been underperforming their larger brethren for quite a long time, long before the pandemic began weighing on markets and economies as a whole. Why does this matter? The harsh consequences of the coronavirus pandemic have highlighted and exacerbated the particular vulnerability of smaller stocks to economic shocks and downturns. It would be wise to tread even more carefully than usual when investing in small caps, especially during times like this.

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10-Year Yield: Dead Cat Bounce?

The benchmark 10-year U.S. Treasury yield has also been pummeled by the pandemic spread and the Federal Reserve's recent efforts to inject monetary stimulus into the economy. Unlike stocks, however, yields have had a much harder time recovering. Now down around a disturbingly low 0.645%, the 10-year yield popped at one point in March back above 1% before crashing back down. In fact, the chart, as shown below, is looking much like a "dead cat bounce." Read our definition here if you're not sure what that means. In a nutshell, there could well be more downside ahead for yields, which could push bond prices even higher.

The Bottom Line

Stocks continued to recover this past week, and there could be more upside if fears surrounding the dire economic impact of the coronavirus pandemic continue to decline. Large-cap stocks have recovered sharply since the late-March lows, but small-cap stocks continue to struggle. Finally, bond yields are looking even worse with all of the monetary stimulus that has been and may yet be implemented by the Fed.