Why Buy the Dip Investors Ran for the Exits

Wednesday, 26 February 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Move over dotcom bubble

Whatever the catalyst for a crash is, history shows it’s coming.’

Nickolai Hubble, Jim Rickards’ Strategic Intelligence

So much for the wisdom of futures traders.

As I penned yesterday’s instalment of Port Phillip Insider, futures markets in the US and Europe were up some 0.3%. With US$1.3 trillion wiped from markets over the previous two days, traders were primed to ‘buy the dip’.

For the first 15 minutes after the opening bell rang, the S&P 500 did nudge higher.

As blindly optimistic as that might be, it looked like it was game on for a mini-rebound.

And then…

The US Centers for Disease Control and Prevention (CDC) threw cold water on Donald Trump’s reassurances that the virus is ‘a problem that’s going to go away’. And that the stock market is ‘starting to look very good’.

The director of the CDC’s National Center for Immunization and Respiratory Diseases, Nancy Messonnier, didn’t mince words:

We expect we will see community spread in this country… It’s not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen and how many people in this country will have severe illness.

And if investors needed more reasons to panic, they only had to tune into the news coming out of Europe and Iran.

Italy confirmed 322 cases of the virus and 11 deaths. And it’s spreading across the continent, with cases now confirmed in Croatia, Switzerland and Austria.

Then there’s Iran, with 15 deaths and 95 confirmed cases. But the true number is likely 10 times higher.

According to The Australian deputy health minister Iraj Harirchi ‘warned there were as many as 900 suspected people infected with the virus before confirming his own diagnosis.

That’s right.

Harirchi himself tested positive for COVID-19. That came shortly after a TV interview where he claimed the government had everything under control.

More, after a look at the markets.

Markets

Overnight, the Dow Jones Industrial Average closed down 879.44 points, or 3.15%.

The S&P 500 closed down 97.68 points, or 3.03%.

In Europe the Euro Stoxx 50 index closed down 75.47 points, or 2.07%. Meanwhile, the FTSE 100 lost 1.94%, and Germany’s DAX closed down 244.75 points, or 1.88%.

In Asian markets Japan’s Nikkei 225 is down 248.02 points, or 1.10%. China’s CSI 300 is down 0.29%.

The S&P/ASX 200 is down 140.90 points, or 2.05%.

West Texas Intermediate crude oil is US$50.21 per barrel. Brent crude is US$54.95 per barrel.

Turning to gold, the yellow metal is trading for US$1,639.86 (AU$2,484.64) per troy ounce. Silver is US$18.03 (AU$27.32) per troy ounce.

One bitcoin is worth US$9,396.07.

The Aussie dollar is worth 66.00 US cents.

Move over dotcom bubble

By the time the smoke cleared from the latest bombshell revelations related to the virus the S&P 500 closed down 3.0%. That brings the index’s losses to 7.3% since last Thursday’s close.

Worse, according to Bloomberg:

In the 33 trading sessions ending last Wednesday, the S&P 500 fell on successive days only once. Now it’s had four straight down sessions, the first time since at least 1927 that the index fell so fast in the days after hitting a record.

There was plenty of pain…and unwanted new records…to go around.

The tech-heavy NASDAQ lost 2.8%. That’s no record loss. But have a look at the graph below. It shows the NASDAQ 100’s 14-day relative strength index. During intraday trading it recorded its worst four-day period ever.

Move over dotcom bubble:


Money Morning

Source: Bloomberg

[Click to open in a new window]

Here in Australia the ASX 200 closed down 1.6% yesterday.

And it’s on track for even heavier losses today, down 2.2% in intraday trading.

Of course, it’s important to remember the stock market is just that. A market of stocks. While the wider index is selling off, some companies are still posting gains.

Funeral services provider InvoCare Limited [ASX:IVC], for example, is up 9.8% at time of writing. While I wish the company and its shareholders well, I do hope the funeral industry doesn’t see any noticeable uptick in business over the coming months.

But as the spectre of a global pandemic grows, US government bond holders are also benefiting from a rush to perceived safe assets.

Yesterday I mentioned the US 10-year Treasury yield was within a whisker of record lows. (Yields fall when the price of bonds go up.)

Today the 10-year yield dipped to 1.32%, dropping below its previous record low from July 2016 in the wake of the Brexit paranoia.

So have investors lost their once unshakeable faith that central banks will do whatever it takes to prop up share prices?

For that answer we turn to our editorial director, Greg Canavan:

This time, central bankers can’t avert a cyclical slowdown. They will try, but the impact on earnings from this virus fear will be real and perhaps much larger than expected.

This uncertainty is manifesting in lower stock prices, as it should. There will be rallies here and there, but investors will use them to get out of positions.

I think you’re seeing the overall trend of the market starting to change. The top of this great bull market is in.

Greg makes a good point. And offers a good tip here. Consider using any upcoming rallies as an opportunity to exit your riskier positions. Or perhaps all of them.

The coronavirus is a growing threat. And it comes at time of massive corporate, government and household debt. The likes of which the developed world has never witnessed before.

The virus will certainly take a bite out of global trade and economic growth. The only question is how big. But even if things take a turn for the better, gods willing, any slowdown will make it more difficult for companies to meet their debt obligations.

And if supply chain disruptions and relocations stir inflation — which, as mentioned yesterday, some of our editors believe it will — interest rates will rise. In which case…look out below.

Not the most uplifting outlook, I know.

Even our most bearish analysts and editors will tell you they hope they’re wrong. But they don’t think they are. And they believe you shouldn’t waste another day to prepare for the foundation rattling market crash they see ahead.

How do you go about that?

Market veteran Vern Gowdie’s new report is a great place to start. You can find that here.

And our friends over at Fat Tail Media are offering an unbeatable deal on global strategist Jim Rickard’s new book. It’s called Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos.

As we’re fast approaching our publication deadline, we’ll let the title speak for itself.

To get your hands on a limited edition hard copy, click here.

Before clicking away, we’d love to hear how…if at all…the coronavirus is reshaping your investment plans. Drop us a line at letters@portphillipinsider.com.au.

Cheers,
Bernd