Pro Perspectives 1/27/20


January 27, 2020

On Friday we talked about the rising pandemic scare, and the related bearish technical signal that formed on stocks, as we headed into the weekend.

With that, the likelihood of more coronavirus headlines going into the weekend was high, and therefore the likelihood of a tough to start to the week for global markets was high.  Indeed, global stocks open the week down big.  U.S. stocks have now given back the gains on the year (up 3% at one point).  And the VIX (the fear gauge) is rising, albeit fairly modestly so far (from 14 to 19).  Gold, same thing (rising but fairly modestly).

This market behavior suggests what’s probably a rational response to the coronavirus risk to the global economy (i.e. a risk, but a low risk).  Remember, back in 2014, when fear spiked about Ebola, the stock market got hit for about seven percent in six days.  The VIX spiked from 14 to 31.  But stocks recovered the losses in just seven days.  The VIX returned to “pre-scare” levels within days too.  For more insight into stock market behavior and historic pandemics and pandemic threats, here’s some interesting 2006 research from Fidelity when bird flu was spreading (link).

So, in this current case, stocks are again being sold for non-company specific (non-fundamental) reasons.   That typically is a gift to buy at cheaper prices (i.e. to fade the risk-aversion move in markets).  But how much cheaper?

Let’s take a look at some charts …

We have some interesting technical levels already developing in key stock markets.

U.S. stocks end the day on this big trendline that represents the recovery that has been driven by 1) the handshake on a U.S./China trade deal back in October, and 2) the Fed and ECB’s return to balance sheet expansion.

German stocks sit on a similar trendline …

What could overwhelm the coronavirus theme?  Earnings.  And we have a big earnings week ahead – 35% of the S&P report this week.  Apple reports tomorrow after the close.  And then Wednesday, we get Microsoft, Amazon, Facebook and Visa, to name a few heavyweights.