Written by Jim Welsh
In the March 12 Weekly Technical Review Special Update I discussed how the fatality rate of COVID-19 compared to the Swine Flu (H1N1) in 2009 and South Korea’s COVID-19 experience:
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“South Korea has done more testing than any other country and its COVID-19 fatality rate is 0.68%. This is way below the World Health Organization’s projection of 3.4% and Italy’s rate of 6.1%, undoubtedly driven by its older population.
In 2009 almost 61 million Americans contracted the Swine Flu (H1N1) and COVID-19 appears to be more infectious. If 61 million Americans contract COVID-19 and South Korea’s fatality is realistic, especially when compared to the WHO’s estimate of 3.4%, more than 400,000 in the U.S. will perish. Since no one’s immune system has ever been exposed to COVID-19 the number of those infected could rise to 100 million or more, with a commensurate number of deaths.”
As of March 30, 2020, South Korea has identified 9,661 people who have been infected including 158 deaths, which has increased its fatality rate to 1.63%. The fatality rate in the U.S. is 1.71% as of March 30 according to the CDC. In comparison Italy’s fatality rate is 11.4%, while the global fatality rate is 4.8%.
These numbers make clear that the number of deaths from COVID-19 will be determined by the number of infections, which is why social distancing can be a significant mitigating factor.
In a press conference with President Trump on March 29 Dr. Fauci estimated that 100,000 to 200,000 Americans could die from COVID-19. In order for the ‘best’ outcome to develop the number of infections must be held to less than 6,000,000 based on the current fatality rate of 1.7%, and less than 12,000,000 for the number of deaths to be near 200,000. For this outcome to become reality, of the 330 million Americans, 96% must not become infected. As Dr. Fauci and Dr. Birx explained numerous models indicate that 1.6 million to 2.0 million could die, if no mitigating actions were taken. This is why President Trump extended the social distancing rule until April 30. If this numerical analysis doesn’t motivate you to exert positive social distancing this short video will help you understand what is expected.
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There is a significant likelihood that President Trump will be forced to extend the social distancing rule to May 15 and more likely Memorial Day on May 25. However, as Dr. Fauci cautioned:
“You don’t make the timeline, the virus does.”
As I discuss in the April issue of Macro Tides (which will go out by April 3), too many investors are expecting the virus to adhere to the new deadline of April 30, and expect the economy to mount a Vshaped recovery in the second half of 2020. This expectation may be too optimistic.
It seems more likely that the recovery will be stretched out in time and look more like an L with a modest upward curl, rather than a V or a U.
The size of the Coronavirus Aid, Relief, and Economic Security Act (CARES) is much larger (9.3%) than the post financial stimulus program (5.5%), which is one reason why expectations for a strong rebound are high. But in the next few months the unemployment rate could easily exceed the high of 9.9% in 2010 in the wake of the financial crisis. If correct, a second stimulus program can be expected.
Stocks In the March 26 WTR Special Update I showed how a high closing Tick had identified a number of highs in the S&P 500 since March 3, after the Tick indicator recorded another high reading on March 26:
“The chart below shows the high and low range for the daily Tick since February 28. The dash to the left is the opening level of the Tick and the right dash is the closing level. What is noteworthy is that the closing Tick finished the day on March 26 above +900. (red arrows) That has occurred on 3 prior days – March 4 +918, March 10 +1010, March 13 +1038, March 26 +1129. This is interesting since on the 3 other occasions that the closing Tick was above +900 the S&P 500 topped.”
On Friday March 27 the S&P 500 fell -3.4% before recovering almost all of the lost ground on March 30. Although the Tick didn’t close above +900 on March 30, it closed at +836 which is elevated albeit under +900.
Tomorrow is March 31 and a huge rebalancing out of bonds and into stocks is expected as discussed in the March 26 WTR Special Update:
“On March 31 the end of quarter rebalancing of allocations to bonds and stocks is expected to shift as much as $150 billion out of bonds into stocks, according to an estimate I heard on CNBC. If anything approaching this amount of money flows into stocks, the S&P 500 could 3 rally up to 2800 in a spike.”
It is unlikely that large institutions have waited until March 31 to execute the total amount they need to rebalance on March 31. Instead, some of the strength in the S&P 500 in the past few days is likely the result of many institutions scaling out of bonds and into stocks so they can meet their target allocation at the close on March 31. It will be instructive to see if the S&P 500 continues to have upside legs once the rebalancing lift has past. The first few days of a new quarter usually experiences some additional inflows into equities. These two factors could help the S&P 500 rally or hold up until the end of this week.
The Volatility Index (VIX) is closely watched and most people believe that a peak in the VIX is a signal of a market bottom. When the VIX has spiked above 30.0 and then dropped back below 30.0, the S&P 500 has recorded a trading low. This occurred in October 2014, September 2015, February 2016, March 2018, and in January 2019. In recent years this view point has thus been reinforced by how the VIX and S&P 500 has performed and is now pretty much taken as gospel. Over looked is that the economic environment from 2012 through February 2020 was stable with decent growth and historically low unemployment, so the economy provided the VIX a calming influence after any spurt of volatility.
During the financial crisis in 2008 the VIX soared above 30.0 and held above 30.0 for many months. It reached a high of 89.53 on October 24, 2008, and a secondary high of 81.41 on November 21. On January 20, 2009 the VIX topped at 57.36 and on March 2 was 53.25. The important point is how the S&P 500 behaved as the VIX was registering lower and lower peaks. On October 24, 2008 the S&P 500 closed at 848.92 but fell to 752.44, even as the VIX posted a lower high on November 21. By January 20, the S&P 500 had bounced to 805.22, but then fell to 676.53 on March 9. After the VIX peaked on October 24, 2008, the S&P 500 dropped -24.0% before bottoming on March 9.
This understanding and analysis is appropriate now. The VIX peaked on March 18 at 85.47 and closed at 57.08 on March 30. On CNBC a number of the Fast Money traders expressed the view that the drop in the VIX was a positive for the market. History suggests that view may be too simplistic, since there is no question the U.S. is in a recession with an historic drop in GDP in the second quarter.
I have updated the table to include all of the large declines since 1929, the number of days the S&P 500 bounced off the initial low, and the number of days it took to retest the low. The percentage gain in the S&P 500 from the closing low on March 23 is 17.5% almost matching the average of 17.9% since 1929.
On average the S&P 500 has rebounded for an average of 20.5 trading days which drops to 16.9 days if the 60 day bounce in 1947 is eliminated. The current rebound has lasted 5 days so it could easily last until the end of this week aided by rebalancing and beginning of the quarter inflows. The average time for a retest to play out has been 52.2 trading days, which would drop to 44.2 days if the 1947 experience is excluded. The retest time period would fall to 38.4 days if 1937 and 1947 are not included. The historical pattern suggests a retest is likely in 6 to 8 weeks after the March 23 closing low.
The S&P 500 was expected to rally after hitting a low on March 23 as noted in the March 24 WTR Special Update:
“If the rally becomes more complex, which seems more likely, the first short term high (2449 or 2505) would be wave A of Wave 4. In that case the S&P 500 could rally up to near 2664 which is the 50% retracement of the 944 point plunge from 3136 on March 3 to 2192 on March 23.”
The S&P 500 traded up to 2637 on March 26. If this high is exceeded this week the S&P 500 could push up to 2711 which is the high reached on March 13. The upcoming high is expected to be Wave 4 from the high of 3393 on February 19. Once the S&P 500 tops, a drop below 2192 is expected for Wave 5.
Investors want to be bullish and news on March 30 that Johnson & Johnson may have a vaccine by mid 2021 and Abbot Labs has developed a test that provides COVID-19 results in 15 minutes spurred the S&P 500 higher on March 30. This is truly good news and could be especially helpful if COVID-19 comes back next year as Dr. Fauci expects. Unfortunately these scientific advancements will not deflect the devastating economic news that is already in the pipeline and about to be quantified in upcoming economic reports in the next two months.
Treasury Bonds
Treasury yields may move higher as institutions rebalance their allocations by selling bonds and buying stocks. Once this technical adjustment is completed Treasury yields are expected to fall again and could approach the lows reached on March 9 as upcoming economic data shows just how deep the economic contraction is.
Gold
As noted last week:
“The 61.8% retracement of the drop from $1700 to $1453 comes in at $1605, so there may be a bit more in the tank. Positioning is still quite negative.”
On March 26 Gold traded up to $1638.60 as investors focused on the size of the stimulus package. The short term pattern suggests Gold can push above the March 26 high before a more protracted decline sets in. The next leg lower could take Gold down to $1400 – $1425 before a more significant trading low is in place.
Gold Stocks
A close below $19.29 may provide the first signs of a low since GDX’s RSI will likely show a meaningful positive divergence.
Dollar
As I noted in the past two weeks:
“It is important that the Dollar weaken in coming weeks as it will signal that liquidity is flowing into the foreign exchange market and it will lower some of the pressure on emerging markets.”
After peaking on March 20 at 102.99 and 102.98 on March 23, the Dollar plunged to 98.29 on March 30 before closing at 99.18. After bottoming on March 23, the S&P 500 has rallied 17.5% and the Emerging Market ETF EEM has rebounded from a low of $30.10 on March 23 to a high of $35.44 on March 26. The Dollar will continue to be a key in coming weeks, as it has been. There is a chance it could rally above 101.00, especially if the S&P 500 rolls over and heads for a retest of the March 23 low. It would be a positive for other markets if the Dollar fell below 97.30.
Emerging Market
EEM traded down to $30.10 intra-day on March 23 and is expected to retest that low and ideally trade below it to complete its Wave 5 decline from the high of 46.32.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
Once the S&P 500 closed beneath 3214 (the intra-day low on January 31 and February 24), which was the expectation discussed in the February 24 WTR, an intermediate peak was confirmed. The unrelenting decline that has followed has caused the MTI to drop sharply. The MTI fell below the blue horizontal line on March 11, confirming the onset of a bear market. A cross above the red moving average would generate a bear market rally buy signal.
Disclosure
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.
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