Pessimists are a dime a dozen right now. If you want to make alpha, be contrarian.
The easy money already has been made shorting the market. Shorts may well have their Waterloo this week or next. Me, I’m going to look for entry points for upside movement. Yes the S&P closed down hard -4.34%, interestingly the Nasdaq close down less -3.79%, and the Dow a little lower than the S&P. Why is that important? Well first none were down 5% or more which is a change from earlier in the week, yes it’s a bit better, but still. Back to the original question. The reason why the different levels are a cause for optimism is that this was not a panicked flush where everything was sold. Also, the Nasdaq being best means that while there’s a consensus forming that we are going into a recession, it means a certain clarity of what’s next is forming. The stock market abhors a lack of visibility, it’s the original sin, the prime directive, and the ring that rules them all. It’s what the market craves the most, so even if it’s bad news, the fact that there’s some kind of consensus means that the market is building a base. Personally I think it’s the wrong conclusion but that’s not important now. Growth is certainly slowing – for now. So where’s the place to be? That’s right, the secular growers, which are the tech names in the Nasdaq. If the market decides to be bearish, secular growth plays into the hands of those who understand growth and the technology space. More reasons for optimism.
This is not a financial or business cycle crisis, this is a health crisis.
Much of the market movement has been driven by news of the disease. So far it has been mostly negative, and so it has pressured the market. Interestingly the recovery in the Chinese economy has not been a strong countervailing theme thus far. Perhaps because the Chinese Communist Party has been less than truthful about what was going on when things were worse. More puzzling is the lack of solace the market takes in the news that Korea has managed the epidemic very expeditiously. It seems to me that market participants are gripped by the impact that COVID-19 has had with Italy, and now Spain. If the arc of mortality begins to level off in Italy then I think the market will be less alarmed that Spain will continue to get worse. I expect that to happen this week, and if so that will be one less negative weighing on the market. Market participants could then model the toll for the US which might be six times the number of dead in Italy. I believe our mortality rate will be much lower than Italy, by as much as half. However, right now the goal is visibility if we can get an idea of what to expect the market can then discount that result. Market participants might just decide that it already discounted the worst news since we are lower by 30% from the highs.
$2 Trillion Bailout Package
Thankfully you won’t have “shovel ready” projects in this package. Yet, we are hoping Congress and the administration will come up with the right funding mechanisms to inhibit massive layoffs and bankruptcies. Various schemes have been mooted, like “helicopter money,” bridge loans with forgiveness clauses as long as you don’t lay off workers. There are a lot of ways to get money into the hands of ordinary citizens and to healthcare workers. The point is they better come up with a bill that can be signed this week, hopefully before Thursday. More on that later. We are hearing that Pelosi wants to push forward an additional House bill. I think that the market could react negatively, As testing will shoot up this week the number of infected will shoot up sharply. If there’s no bill then the week will start off poorly. I expect that we will see progress by Tuesday and a signed bill by Wednesday because they want to keep their jobs.
Treasuries Picked Up Strength This Week
Jim Paulsen, the Leuthold Group’s chief investment officer, sees the upturn in longer-term Treasury yields as a glass-half-full story. The history of market crashes since 1987 shows that the 10-year note’s yield turns upward as a bear market is close to running its course. The 10-year was below .50% not too long ago, was above 1% nearly all week but on Friday closed just below at 0.938%. I’ll take that as a win. WTI oil also closed up nearly 5% at the end of the week after being hammered down below the mid-20s. Oil closing up while the dollar is sky high might finally mean that oil is stabilizing, or maybe the selling has exhausted itself. Saying selling has exhausted itself is another way of saying that the bad news has finally been discounted
The Vix actually fell as the market gave up strong gains in a reversal action
This week the VIX hit a historic level of more than 85 this week. I have been exhorting you to watch the VIX. I have hoped that it would turn around from what I assumed was an unsustainable level. The VIX has defied my imagination, I readily admit that. Finally, we have seen a decided retreat from that lofty level, and I take heart in that. The VIX fell to 57.55 before closing down 5.96 to 66.04. That means the VIX has fallen 23% this week. That also means that as the VIX falls it’s predicting the daily volatility will fall as well. Remember this fall is a counter-trend. Ever since the market tumble, the VIX rose and stayed elevated even when the indexes popped. Friday, something new and encouraging happened, the VIX broke lower down 33% when the indexes started up, and even as the market slammed down it still closed at substantially lower level. That’s a win.
On Friday, there were plenty of growth names that ended up fairly strong and even the names that fell, closed down a “normal” amount
Great high growth names closed up Friday in a terrible tape – Hubspot (HUBS), Atlassian (TEAM), The Trade Desk (TTD), Smartsheets (SMAR), Docusign (DOCU), ASM Lithography (ASML), Cloudera (CLDR), Shopify (SHOP), Okta (OKTA), Twilio (TWLO), Roku (ROKU), Snapchat (SNAP), Netflix (NFLX), Splunk (SPLK), etc. Many of these names were up more than one point, and the majority closed up multiple percentage points. Yes, there were plenty of names that closed in the red, I get that. But what I am saying is – this was not an emotion-laden “get me outta here” type move selling at any price. Perhaps the margin clerks are running out of players stuck on margin. Maybe the sell-off was due to short selling only and not capitulation. The weak hands already sold. Again, my theory is that the easy money shorting this market has been made. That does not mean we aren’t going to sell-off
Monday might be iffy if there’s no substantial progress made on the bill. Also, the market (this is my opinion) will be very open to good news on the disease front, whether it’s chloroquine, Remdecivir or any antiviral by Regeneron (RGEN), or from anyone else.
The near-term condition of the market depends on Thursday
If we have a strong bill signed or on the way to being signed on Tuesday, or Wednesday it may stanch the coming bloodbath if the weekly jobless number on Thursday turns out to be near of above 1 million. Last week the jobless number jumped to 280,000, so that’s why I’m concerned that there might be strong selling in that data item. If we do rally Tuesday and Wednesday, I want you to trim going into Thursday. I want to be a buyer on Thursday at the close, or perhaps hold off to Friday.
I don’t want to close on a down note so let me summarize:
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This bear market is not a result of a financial or business cycle, therefore progress on the epidemic will cause a very strong rally.
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A strong fiscal policy as embodied by a $2 trillion bill, plus all the liquidity the Fed can muster can counteract the worst result of the business discontinuity we are living through right now.
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There seems to be a lot of evidence that the market is very close to completely discounting the ultimate effects of the coronavirus.
I don’t want you to be a hero tomorrow or Tuesday, continue to trim. I will try to be a buyer after the bad news on jobs gets published.
Insider Corner
Wells Fargo & Co (WFC) CEO Charles W. Scharf purchased 173,000 shares of the business’s stock in a transaction dated Friday, March 13. The stock was bought at an average price of $28.69 per share, with a total value of $4,963,370.00.
My take: This is very heartening. Charlie Scharf is a star banking executive and if you are a long-term investor WFC might be interesting since I can’t imagine them cutting dividends. If you twist my arm I would have to put JPMorgan Chase (JPM) ahead of WFC. Still, I find this news interesting
Interesting Earnings Results
Coupa Software (COUP) announced its quarterly results after the market closed this past Monday. COUP reported $0.21 earnings per share for the previous quarter, beating the Thomson Reuters consensus estimate of $0.05 EPS by $0.16. The company had revenue of $111.45 million for the quarter, compared to the consensus estimate of $102.51 million. During the same quarter in the prior year, the company posted $0.05 earnings per share. The company’s quarterly revenue was up 48.8% on a year-over-year basis.
My take: COUP was down only 0.67% this Friday. COUP should be on your watch list with that kind of growth.
Crowdstrike (CRWD) announced its quarterly results after the market closed this past Thursday. The company reported ($0.02) earnings per share for the previous quarter, beating the Thomson Reuters consensus estimate of ($0.08) EPS by $0.06. The company had revenue of $152.10 million for the quarter, compared to the consensus estimate of $137.80 million. The company’s quarterly revenue was up 88.9% on a year-over-year basis.
My take: I find the whole cybersecurity space very over crowded, that said with everybody working remotely using VPN and other technologies, enterprises will be especially vulnerable. CRWD and Zscaler (ZS) as well should do very well.
My Trades: I continue to manage my Amazon (AMZN) in CALL spreads, I am long ROKU in a CALL spread, and Slack (WORK) CALLs which I have been trying to spread. I still have my eye on Uber (UBER) if it falls back into the teens this week I might get long. I’m equally interested in SHOP, for the same reason I like AMZN. I think they both benefit from online shopping.
That said if you are trading equities and have not written calls against your positions or other hedging you should continue to trim positions to generate cash, especially if we do get some up days this week. Even if Thursday turns out to be benign you should be building back your cash as a matter of discipline.
If you are a long-term investor please don’t sell anything unless any of the companies you own have unsustainable dividends, or are a target of bailouts. You should be very hesitant to sell any company, be mindful that we are close to a bottom. If you are not going to need that money in the next nine to 12 months or longer, think more than once before you sell.
Disclosure: I am/we are long ROKU, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long AMZN, ROKU and WORK via CALLs. I am looking to spread WORK at a decent level, or close it out.
I have my eye on UBER and SHOP
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