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MARCH 12, 2020
STOCKS: SHOP, AVGO, FB, AMZN
MACRO: SPY, GOLD, TLT, IWM
Reading The Markets Premium Content form 3.12.20
It is no longer fun for any of us, and to be truthful, having lived through every episode of market tantrums since the mid-1990’s I have never seen anything like this. This is something that one day we will look back and say I lived through this, much like some generations reflect 1987.
This price action, I believe, is a reflection of Algo’s, ETF’s, Leverage, and the absence of an actual market making system, one where the broker could take on risk. I know many people feel that Algo’s and High-Frequency trading have replaced the role of the market maker, but I think it is clear that may not entirely be the case.
People well say but you never blame the algo’s when the market is going higher. Yeah, sure, but when was the last time the market rose 25%+ in two weeks besides never.
S&P 500 (SPY)
The S&P 500 fell by another 9.5% today, and there are no words to describe any longer what is happening. Today was very much a sell everything not nailed down to the floor type of day. Everything I looked at was down, every sector, every safe-haven sectors like utilities and staples were down, and in some cases much more so than the S&P 500. Again, I am not trying to call a bottom, but I am merely giving you my observations.
It suggests to me force selling; people are just selling whatever they can get their risk exposure lower and to met margin requirements. Stocks that have held up relatively well throughout this time are now cracking. Even Clorox was down 6%, and they something that kills the damn virus called bleach.
The S&P 500 blew right through 2 significant levels of support today at 2,634 and 2,570. It makes the next levels at 2,470, and then basically the December 2018 lows.
Russell 2000 (IWM)
The Russell 2000 has not fallen already to its 2018 lows; it has now fallen to its lowest level since Brexit in June of 2016.
To give you a sense of what the S&P 500 had for earnings in 2016, they were $106.26. In 2017 earnings were $124.51 and $151.60 in 2018. It seems at this point the market is assuming about an 11% decline in earnings in 2020, and just a 10% rebound in growth in 2021. It would value the S&P 500 at its current level using a 16 PE. Another scenario is a 5% decline in earnings in 2020, and no growth in 2021. So I guess you have to ask yourself if that is the scenario that plays out. If yes, then the sell-off makes complete sense, if not, well, then…
My current model is projecting earnings for 2021 of $186.27, with a one standard deviation downside risk to $174.88, which gives the S&P 500 a low-end valuation PE ratio of about 14.2. My model updates every day, as earnings estimates come in from my data provider.
Somewhere in, there lies the truth.
VIX
The VIX finished the day around 75.5, which is insane.
Meanwhile, the S&P 500 on the monthly chart has fallen to its lower Bollinger band. Usually, the mark of an oversold market, but not always.
Gold also broke down today, and I think it may still have further to fall. Inflation expectations have plunged, and that is not good for gold.
10-Year
I noted today in one of my two live webcasts that now the biggest problem for the market is there may not even be any safety trades left because yields are now rising, and if they continue to increase, that is a problem. I still think yields are going higher from here.
Did I mention that Fed is going to be injecting about $1.5 trillion in their repo operation to try to insure that liquity is ample and the credit markets are working properly, it could even be more than amount over the rest of the month.
I think it has become pretty clear, and this feels like the fall of 2008. The markets wants a massive fiscal package from the Federal Government, something that acts as backstop for the economy, much like TARP did back then. I think the market will likely continue punish us all until it gets its wish. Perhaps that comes tonight, tomrorow, or next week. I do not know, but until then I think we can all continue to suffer. It also wants more from the Fed, that seems clear.
Shopify (SHOP)
I’m still amazed that stocks like SHOP haven’t fallen more. You probably think I’m crazy to say that, but this stock was up almost 110% from November 8, 2019, through February 12, but it has only fallen 38% from that peak. It gets a little tricky, but a break of $360 triggers a decline to $317. Why shouldn’t it go back to $285? Everything else has erased its fourth quarter gains, but this one.
Broadcom (AVGO)
Broadcom has fallen to $200 after withdrawing its full-year revenue guidance for 2020. I guess that means $179 is potentially next.
Amazon (AMZN)
Amazon could be looking at a decline to $1519.
Facebook (FB)
I guess all gaps really can get filled, and Facebook’s gap gets filled at $148.75
Get some rest; tomorrow is Friday the 13th. I can only imagine the horror that comes with it.
-Mike
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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