Last weekend I could sense a notable shift in attitudes towards the virus outbreak, but it became much more than a just a shift. The virus fear has gone viral (pun intended).It has turned into mass hysteria and paranoia which is being fueled by the media and the draconian actions taken by governments and corporations. Despite only what is a small number of cases reported outside of China, we're seeing country wide school shutdowns (Japan and northern Italy), cancelled business trips world wide and raids at Costco in the US and Canada. The raids at Costco is laughable. In the US and Canada there's only about 100 or so reported cases of COVID-19 which by the way isn't anywhere close to being as deadly as SARS given the 2% death rate mainly to those who are elderly. I am in the Toronto area where there are only 10 known cases of COVID-19 in our province. I play soccer with members of a Korean church and they have shut down the church and all activities for a month as a preventative measure. They claim that because some church members may have traveled to and from Korea, they want to take precautions. There's about 4000 South Koreans who are infected. South Korea has over 50 Million people. I would have a better chance getting struck by lightening twice in a week than catching COVID-19 from one of these church members. Talk about overkill.
As far as the markets go, the parabolic rise in fear translated into a parabolic pounding. The market has not had this much of a weekly decline since the 2008 meltdown. It was unreal. We went from a market that was ramping relentlessly to one that got pounded just as badly but in a much shorter period of time. The 10 year bond has plummeted and is just barely above 1%. This is madness.
Because of all the shutdowns, cancellations and hystaria, there will almost certainly be a sharp drop in global activity in Q1, As I've said before though, once this has blown over we will see an equally sharp rebound, maybe not quite as equal as some demand has been lost for good but clearly, there will be pent up demand. But will this crisis which at first appeared rather trivial in the grand scheme of things, create some sort of unforeseen spill over or domino effect that sparks an even larger crisis? It doesn't appear likely but we can't rule that out. In 2008 the subprime meltdown was the first domino which tipped over the broader mortgage market and then the broad economy. At first it was dismissed as being "a small part of the market which will be contained".Everyone is aware that there's going to be an economic fallout now, but if appropriate responses are not taken, i.e. people are encouraged stay hunkered down for too long, the fallout could gather momentum and feed on itself and we'll get a recession that could have been avoided.
The market was extremely oversold Friday and so the bounce we're seeing isn't too surprising. At the depths of the lows last week, the VIX hit 49 which has historically indicated severe panic/fear and accordingly has led to great medium/long term buying opportunities. The only time that didn't really apply was the 2008 meltdown, when the VIX hit 90. But be advised that even when the VIX did hit the 50 level it didn't always lead to the V shaped rallies like we saw in December 2018. More often than not there was a period of base building that was required whereby the market tested or even broke the lows. This was especially true when the decline seemingly came out of nowhere whereby the market was trending higher prior to it. Examples include 1987 crash, 1998 meltdown and 2011 meltdown.
The market is screaming for a rate cut. The bond market implies that it's a shoe-in that we'll get a rate cut. The 10 year yield is over 50bps below the fed funds rate...it's pretty much a guarantee they will cut at least 50bps at some point this year. Just like in early December, Powell and the Fed are like deers in the headlights, but they'll come around at some point. The economic data is going to be ugly in the coming weeks.
I can guarantee you that the vast majority of bears did NOT even come close to fully capitalizing on this decline given the severe gap down and drop nature of the decline. Bears were conditioned over the past 12 months or so to not hold positions overnight as they have been burned repeatedly doing so. This is also what happened in 2008 by the way. Headline risk will extreme in the coming months. If you're going to make any buys you better be prepared to ensure a lot of noise or you'll get whipsawed.
The main indicators I look at are all heading in the appropriate direction to suggest that most of or all of the damage has been done. I'll get a better feel for things Thursday as more data comes in. My gut says that it's going to take time to get through this but in the meantime it will be a paradise for day traders or should I say a meat grinder for day traders. If you're gonna buy now, don't expect a V shaped rally like December 2018 this time. At that time the market had been rolling over for 2 months prior to the low. This time around the market got hit with an unsuspecting punch to the gut. There are probably deer in the headlights type people out there who are paralyzed with fear and didn't have time or were unwilling to react. They need to be washed out. Bottom line for me is that I need to see certain things to pan out first before pulling the trigger on medium/longer term buys.
Here's a good test to know if you're making the right decision to buy. If it makes you feel sick to your stomach it's probably the right thing to do. If instead you get the "I'm so smart buying when prices are lower" feeling you're probably early or wrong.
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