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Apr 21, 2020
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Pivotal Week Ahead for the Stock Market, Oil, and Bonds

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The market climbs upward against all odds. What happens next?

Photo by Charles Deluvio on Unsplash

Everything that happened last week:

The United States stands at 740,000 cases of new coronavirus infections, 38,000 deaths, and 46,000 recoveries.

The S&P 500 is approaching the “golden pocket’ 61.8% Fibonacci level, which historically across most assets is a respected price level. A sell-off from here wouldn’t necessarily mean the market has to make a lower low, but it would suggest that a V-shaped recovery is too hopeful.

Based on technicals, the market has reached a level of strong resistance where it could pull back. My initial target was between 2900 and 3000, and now 2850 may be the point of contention. The market closed above that key resistance, but all eyes are on Monday’s price action to determine whether or not the market is ready to pivot.

For the sake of having a positive note, Texas is set to reopen in stages next week, and other states are undoubtedly doing the same. All eyes will be on the states and municipalities that begin to ease regulations brought about by COVID-19, and if the result is not a second wave of new cases or the situation proves to be a fair trade-off for getting people back to work, we may see a rapid re-opening of the country.

Before we wave goodbye to coronavirus, consider the lessons learned.

In his article It’s Time To Build, Marc Andreessen wrote about how woefully underprepared America was for the COVID-19 pandemic. It’s striking how society buckles after only a month of the pandemic’s inception. Once the world moves past the pandemic, America must reorganize itself.

Larger companies such as publicly traded restaurant chains have received the bulk of the government’s lending program, while smaller businesses like neighborhood eateries and hair salons are mostly unable to access that relief.

It speaks volumes when the government is able to shoulder a multi-trillion-dollar stimulus and several bailouts in every sense but the word, all while the country’s infrastructure is crumbling. How much of the stimulus plan would we need to maintain a reasonable healthcare system? It took the equivalent of Godzilla landing in New York to stir the Fed to lend a hand to people who needed it most.

Consider how America has some of the best universities in the world, yet we have failed in delivering high-quality education to the average citizen. In the same nation as Harvard, the high school dropout rate is 15%. Harvard thrives on its endowments, what stops them from taking another 100,000 students per year? There could be accredited online courses for students of a wider demographic, at a price people can live with.

Did America become too complacent?

The world is facing a threat large enough to shut down international trade, and it’s brought all of the underlying problems with our economy to the surface.

“Capitalism is how we take care of people we don’t know.” -Nicholas Stern

The people we don’t know, in this case, are the janitors, your plumber, the person who delivered your pizza, or an Uber driver. These are the people who would benefit from a more accessible education system, improved infrastructure, and reliable healthcare. How America decides to treat all those unknowns will determine the fate of the country.

So what’s priced in?

  • Unemployment rates, even as high as 30%.
  • Bankruptcies across the board, to a degree
  • A wave of loan defaults from the company down to the individual, with mortgages in the spotlight.

The Fed announced two weeks ago that they would purchase investment-grade bonds and some high-yield (junk) bonds if necessary. The Fed put a floor on those assets, and the market responded positively.

Regardless of what the raw numbers imply, there’s a chance that the market’s already priced at unemployment levels of 20 to 30%. But at the ground level, that means unemployment remains low compared to where it could be going.

Neiman Marcus is on the edge of bankruptcy, which reflects where the economy was headed before Coronavirus shoved us into the future by five years. Ecommerce will be king, younger generations don’t shop as much in retail brick and mortar stores, at least, not in their current incarnation.

Who survives, who thrives, and who’s crushed?

Every crisis runs society through an economic cleansing, whether that’s over-leveraged hedge funds, companies that hold enormous debt, or lack of a competitive edge in a crisis or post-crisis environment.

My initial prediction was that small businesses would be affected the most, marked by a sharp and drastic rise in bankruptcies. But the news of Neiman Marcus came as a surprise considering its extensive online presence. If not even E-commerce can save you, it brings into question just how radically different the whole retail landscape will change.

Add to the power shift the fact that people’s spending habits have had more than a month to shift, and whatever that looks like will remain in people’s psyche for several years. Companies like 24-Hour Fitness are weighing bankruptcy as well, so even if the public returned to their old habits, it may be too little too late for many companies to benefit from that slim possibility.

Businesses that stand to dominate in the new market will be Amazon and other online retailers that have low overhead, less reliance on debt, a finger on the pulse of innovation, and enough cash in their reserves for a rainy day. Companies like that will crush their competition, especially the ones that fail to innovate, have more debt than cash reserves, expensive infrastructure that requires maintenance, and too little exposure to the internet.

While signs are pointing to the first inning of a post-corona world, COVID-19 cascaded the global economy into transformation and an upheaval that was long overdue.

How much worse can it get?

The market hasn’t fully priced an incoming collapse of the oil industry. Oil prices are hovering beneath $20. About 61% of oil companies can remain solvent under $30, which means 39% of those companies are currently underwater.

Banking institutions with heavy exposure to oil companies such as Citigroup and Wells Fargo are standing over a cliff at this stage, or perhaps they’ve already lost their footing.

We may also experience a Euro crisis 2.0 as Italy risks default while Germany and the Netherlands take a financial hit.

Based on the chart below, emerging markets show substantial money outflowing into America. We are currently in a risk-off environment in which people are not inclined to invest in high-yield but risky assets. This is reflected in the vast outflows of capital from developing countries.

Nearly $100 billion has been withdrawn from emerging-markets stocks & bonds in less than three months | IIF data via @SoberLook

We should consider how an almost 50% drop in BZX (Home Construction ETF) may indicate the virus’s effect on real estate has been priced in. The curveball here is if a crash in the oil industry and a string of bankruptcies isn’t already factored into the market, the result will be a feedback loop of unemployment and all the rest that’s been mentioned here.

Caption: Mortgage Demand #Crashing (alongside Jobless Claims Ramping) @HedgeyeUSA

Oil plays an enormous role in global economics, contributing about 8% of American GDP, and the industry employs around 8.5 to 9 million people in America alone. Now pivot to last week, when total unemployment reached 22 million for the month of April. If global trade doesn’t reach some level of normalcy quickly, companies that compose the oil industry will continue to send employees home.

Canaries in the coal mine: A pullback is due.

Semiconductors remain a bellwether sector, their performance must be factored into determining whether or not the market is regaining health. Semiconductor companies will play a vital role in the future growth cycle of the United States, these are the companies that develop world-changing technologies such as 5G, AI, and VR. Consider AMD, which has been the strongest semiconductor company for a few years now. AMD is struggling with the overall economy, and if its price begins to stall or falter while the rest of the market is rising, that would be a leading indication that the markets could pull back.

Amazon’s (AMZN) one of the core businesses in this economy, it makes sense that the top eCommerce company in the world would be leading the charge of economic recovery. But companies like Chewy (CHWY), an online-based pet food delivery company, are also up by nearly 30%. Considering Amazon has stated they’ll be moving into the pet food delivery business, and the current market environment, the fact that hype stocks like Chewy are over-performing is a warning sign that the market is overheated.

The mid-term shift to value assets

As the world begins to open up again, money may begin to rotate out of high-growth sectors that maintained value, and in some cases, broke all-time highs, and into value-oriented sectors like finance and energy, which have been disproportionately gutted by the effects of COVID-19.

The areas where the most value will stream in the midterm will not be AMD (a value play) or AMZN (high-growth play), rather it’ll be in the finance and energy sectors, which are in fact tied to one another through debt and investments. That will last for a short period, then the industrial sector will begin to shine, such as XLE (industrial ETF), and Parker Hannifin (a highly diversified industrial conglomerate).

Takeaway: If growth sectors such as tech and currently high-necessity names like Zoom or the healthcare sector take a break, look for money to flow into energy, industrials, and financials.

Disclaimer

Information provided by Alpha Trades, LLC is not intended to be utilized in making any financial decisions and is not a solicitation, nor recommendation to buy, hold, and/or sell a particular product, digital asset, or ICO.

The Capital


Pivotal Week Ahead for the Stock Market, Oil, and Bonds was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Article Categories:
Coronavirus · finance · investing · stock-market · Trading
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