New month, new direction as the relief rally ended with a thud. It wasn't too much of a surprise as it seems everyone has been anticipating a possible test of the lows, but it's always interesting to see the switch from bullish behavior to bearish in such a short amount of time. The Dow lost 974-points yesterday, or 4.44%, with the S&P 500 and Nasdaq losing about the same percentage. The Transports, financials, and small caps lagged with 5% to 6% losses.
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The small caps S-fund has a lot of small oil related companies, as well as regional banks, and with the price of oil still down near 20 year lows and clinging to stay above $20 a barrel, and bank stocks getting hammered yesterday with the bank index losing 6.4%, the small caps took the full brunt of yesterday's losses.
Back in our March 27 commentary, I wrote about how we saw rallies toward the end of the month during the 2008 - 2009 bear market, only to see stocks head back down when the new month started, or there about. It seems like that is happening again, but there was one interesting development that happened in December 2008 marked "interesting" in the chart below.
The pattern looks similar to what we've seen over the last few weeks. That is, a sharp decline, followed by a rally into the end of November 2008, which failed big time on the 1st of December, but stocks reversed higher again right after that one-day decline. The action remained quite choppy but it took about 6 - 7 weeks before that December 1 low was hit again.
The fear levels are rising as the coronavirus numbers rise, but also as we get closer to the highly anticipated March jobs report on Friday. Estimates are looking for a loss of 150,000 jobs and an unemployment rate of 4.0%. I can tell in that 2008 chart that stocks fell again on the day before the jobs report (Dec. 4), only to see a positive outside reversal day on December 5th, the day of that jobs report.
Who knows how it will play out, but if you're looking for some possible scenarios for the rest of this week, and after, that December 2008 action may be helpful. One major difference is the the market was well off the highs time-wise back then, where the top was put in a year earlier, where now it's been just 6 weeks since the all-time highs.
I'm clearly just speculating as we try to figure out how this will play out. So far, as difficult as it has been to watch, we've plummeted to the recent lows, got a relief rally, and now it is pointing toward testing those lows. It's not that out of the ordinary. What has been out of the ordinary is the speed at which the market declined about 30%.
We saw some big one-day rallies after major sell-offs in March, and I see the futures are bouncing some after hours on Wednesday evening so that could happen again, but how many investors are going to want to be long (in stocks) before the jobs report on Friday? Also, in hindsight, all of those rallies would have been good selling opportunities, except for the one on March 23. Please don't act on this, but I have a suspicion that we could end up getting a rally after the jobs report is released on Friday, if it is anywhere inline with estimates. Of course if it comes in with a loss of a million jobs, that would be a different story.
The S&P 500 (C-fund) was trying to form a small bullish flag in the recent days but in the end the double dose of resistance from the 20-day EMA (green line) and the descending resistance line off the highs, was too much in this bear market for a sustained rally. There are now open gaps on both sides of the current levels so in the short-term either can get filled, and with the jobs report coming up on Friday, I'm guessing one will get filled by the end of the week.
The DWCPF (S-fund) took a 6% hit on Wednesday as it also failed at its resistance line off the highs. The triple bottom low we saw in the middle of March looks like a fairly stable low, but you never know, especially with the economic data that we are all dreading, coming out in the coming weeks.
The EFA (I-fund) broke below its relief rally's support line, and like the U.S. indices, it is point toward its open gap near the prior lows.
The High Yield Corporate Bond Fund has been the canary in the coalmine for this market and as credit deteriorates, so do stocks. It looks like a "V" bottom was forming so that was encouraging, but what a different a day makes.
The yield on the 10-year Treasury is holding above 0.60%, and it is still tough to believe we're talking about a yield under 1%. It appears to want to test the March lows again, but hopefully those were some panic lows and any test will hold. I don't think it will do anyone any good to see a negative yield on the 10-year.
The AGG (bonds / F-fund) pulled back but it paid a dividend yesterday so that is why the F-fund was positive. Technically, the chart peaked at the old support line that it broke in early March. Now it seems to be acting as resistance, although that resistance is rising. The chart looks OK, but the jobs report could shake thing sup here, as well as the stock market.
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