April 12 Market Update | Technical, Fundamental, News

Description:

An analysis for the week ahead.

Points of Interest:

Measured Move at 2886; 50.0% and 61.8% Retracements; 50 Moving Average; Choppy Profile Distributions.

Technical:

On 4/6, the market successfully broke higher with last Monday’s open being followed by an open-drive to the upside. Monday’s session put in a p-shape profile distribution, indicative of short-covering.

On 4/7, the market opened high and closed low, while establishing value higher. When a market trades away from value, lower prices aren’t supported. A full retracement of Tuesday’s down-move happened Wednesday.

On 4/9, the open was followed by a poor high (intraday double-top) and gap fill. Lower prices failed to generate interest and value established higher. Typically, poor highs occur on range balancing days and the odds of taking out the poor high in following sessions are rather high. Thursday’s session closed just below the 50.0% retracement after trading above, earlier in the day.

Due to the relative strength in broad market indices over the past week, the market has potential to travel higher. However, due to the choppy profile structures (indicative of news-driven, emotional trade and participation by large, powerful traders), it is probable that the market reverses, repairing past distributions and balancing somewhere below 2730.

In case of higher prices, targets include the 61.8% retracement (higher blue line) and measured move from 3/23 low (red line). In case of lower prices, immediate targets include 2730 and 2633.

Scroll to bottom of document for non-profile charts.

Fundamental:

Key Events: Initial Claims, Retail Sales, Housing Starts, Industrial Production, Earnings, as well as Philadelphia and Empire State Manufacturing Surveys.

Groundhog Day: Analysts were slow to revise Q1 earnings forecasts. According to Credit Suisse, if “we use only estimates that have been revised in the last week, then prospective earnings multiples are already back to their Feb. 19 peak” (bit.ly/2XsJNsA).

Banking Sector: Price-to-book multiples low, underperformance since GFC, and long-term earnings appear not challenged; “They are priced very cheaply when they shouldn’t be in existential danger, and when other sectors seem wildly overextended” (bit.ly/2JZFhtz). Adding, JPMorgan Chase () will raise borrowing standards, mitigate lending risks going forward; “From Tuesday, customers applying for a new mortgage will need a Credit Score of at least 700, and will be required to make a down payment equal to 20% of the home’s value” (bit.ly/2y5A6FZ).

‘The Rising Tide Lifts All The Boats’: Survey respondents “overwhelmingly positive about the present economic situation, with many feeling undeterred in their ability to repay debts and travel over the next year” (bit.ly/3byOtRm). Update: Job security confidence up after CARES Act passage (bit.ly/2xRuzSZ).

Though initial unemployment claims totaled 16.78 million, it's important to remember that these jobs have not been destroyed. Overall, in the near term, 57 million jobs are vulnerable, with most of those jobs requiring less skill (bit.ly/2K16exa).

Junk Bonds V. Index Volatility: High-yield bond spreads show less anxiety than the VIX. Historic episodes of “a surprisingly narrow high-yield bond spread given an elevated , financial markets tended to improve” (bit.ly/2Rx4xMa).

Fed Moves: The Federal Reserve previously introduced a rescue plan delivering 2.3T to cash-hungry cities, states, and businesses. Adding, Moody’s believes recent actions (e.g., PPPLF for SME lending, 500B to states and municipalities, expanded TALF eligibility, as well as high yield purchases) will put a floor under markets (bit.ly/3cdDfSN).

‘We Shall Overcome’: Fiscal stimulus introduced to “prevent mass homelessness, starvation and a wave of business closures not seen since the height of the Great Depression” (bit.ly/3bzgmJb). This comes on after the Fed compiled savings data showing that “40% of U.S. households would not be able to come up with $400 for an emergency expense" (bit.ly/2JjQ0i3). The stimulus would ideally produce a “V-shaped recovery.” A CivicScience poll shows respondents “would spend a government stimulus payment on bills, necessities, and treats, rather than saving or investing the money” (bit.ly/33QeLvZ).

Note On Distributions: IRS will begin depositing payments in April, but paper checks won't be mailed until the week of May 4, with final distributions occurring August 17 (bit.ly/2RdoPKh). Also, recent boosts to unemployment benefits may have the unintended effect of incentivizing companies to choose layoffs (bit.ly/39J4yCA). However, a PwC survey suggests businesses are confident in their ability to keep employees (bit.ly/2XdjxlN).

‘Hold Tight’: Unwind of globalization due to tightening supply chains will push up manufacturing costs and prices (yhoo.it/3dDuNO4). Adding money into the system to aid spending will increase inflationary pressures, pushing yields lower. The expected sharp drop in earnings “coupled with increasing costs could trigger a wave of defaults.” Note that anti-inflationary weapons include rate hikes which could trigger defaults in the face of “a heavily indebted environment.”

‘99 Problems’ And Liquidity Is One: Investors observed disruptions in the U.S. Treasury market evidenced by wide spreads, difficult fills (bit.ly/3adlQZY). The Fed announced its intentions to enhance liquidity swap line arrangements alongside 5 other major central banks, helping ease stress as institutions scrambled to service dollar-denominated debts, which sent dollar-funding costs spiraling (reut.rs/2xfoMXn). Update: Prior tightening has seen alleviation (bit.ly/39Fi9uN).

‘The Walls Is Gray, The Clothes Is Orange’: Bill to address the virus shutdown and mitigate the economic impact adds to deficit and tilts outlook down, worsened by a lack in “mandated paid sick leave and universal healthcare, which may necessitate” further fiscal stimulus (t.co/oFGQRXqN1f?amp=1). Adding, if fiscal stimulus is successful, higher GDP growth would alleviate an intense “upward trajectory of the federal debt burden.” Debt would remain affordable in the face of low rates, “a key pillar of … fiscal strength.” Additionally, liquidity and functioning credit markets -- alone -- are insufficient in stopping bank asset declines; also, bank credit cost increases will ding profits, but equity, funding cushions are strong.

Second Quarter GDP Change Forecasts: -7% Congressional Budget Office, -9% Bloomberg, -25% Citi, -34% Goldman, -38% Morgan, -40% Capital Economics. Comparison: “Between Q3 2008 and Q2 2009, the economy contracted 4.3% on an annual basis.” Read More Here: bit.ly/2UJePuz.

‘I’m Back’: China and other economic centers in the region are returning to work. That said, data shows the recovery is slow as people avoid social contact. Adding, supply chain activity, energy consumption, traffic congestion remain below normal levels (bit.ly/2J2arAd). Also, China’s PMI shot higher, but important to note is that the index monitors the proportion of firms saying activity was higher/lower versus prior month (bit.ly/3dWAHdi).

Unintended Consequences: As the Fed called for use of capital and liquidity buffers to support lending and distribute liquidity, banks acted as if they are or could become constrained. “The big banks faced a dual squeeze – from drawdown of loan facilities / increased financial market intermediation and from the growth in central bank reserves [] – all of which count towards the supplementary leverage ratio in normal times.” Though banks are not the cause of the imminent slowdown, when the economy weakens, they're not counter cyclical either. Example: While let "mortgage borrowers skip payments, it's also aggressively tightening standards for homeowners looking to raise funds via home equity lines of credit."

Talk Of Credit Crisis: The fear that a coronavirus slowdown may cause a credit crisis was ignited after financial conditions tightened despite the Federal Reserve’s emergency rate cut (bloom.bg/2TydohN). Adding, Bloomberg suggests that signs of stress in the credit market are apparent through multiple channels; credit card and loan delinquencies are appearing on the consumer lending front, while across the world, “Non-bank companies have drastically upped their leverage since the last crisis, as treasurers have taken advantage of historically low interest rates” (bloom.bg/2TydohN). The same article alleges that this increase in debt and leverage is a problem, even in a low rate environment, due to the “profitability drought that is making it harder for companies to service debts.” Highly leveraged banks include JPM (22x leverage), Citi (35x leverage), Goldman (232x leverage), and BoA (12x leverage). See Post Here: bit.ly/39q3UtN.

Refinance, purchase demand higher according to Better.com, a mortgage fintech (bit.ly/3bPmMnr).

80% of Asia-Pacific companies don’t have high exposure to coronavirus disruptions (bit.ly/3aUx5H7).

Money Market Flows: Sophisticated investors super cautious, while retail less bearish. (bit.ly/3498ADa).

Dividend Futures: Point to massive slump, but the same markets braced for “far worse slumps in dividends after the 2007-09 recession than” realized (bit.ly/349drnY). Adding, Goldman dividend per share forecasts price a 25% drop, then breakeven by 2024.

Oil Update: OPEC agrees to largest oil output cut of 9.7 million barrels (reut.rs/2XweFZk). Funds are beginning to relieve hedges, shorts (reut.rs/2RwNFoE). Recap On U.S. Impact: Firms not properly hedged (reut.rs/2TNGCJQ). Basically, producers bought protective put spreads and collars which only hedged from normal (expected) declines. Here are break-even prices for oil producing countries (tmsnrt.rs/2QbTAyI). Adding, if there was a supply-war truce, two things would happen; first, prices would not return to pre-OPEC levels as demand has deteriorated; second, higher prices would help backstop energy and financial markets, allowing efforts to be diverted to fighting a global financial crisis (reut.rs/2xRjOjE).

Supply Risks: Supply shocks to roll from Asia, to Europe and then North America, "with the worst impact for businesses to come in April and May” (bit.ly/3cV15nD). Additionally, an ISM survey indicates that the virus caused supply disruptions for 75% of U.S. companies, leading to a hit in revenues (bit.ly/2IOsp9b).

Cash Is Not Trash: World is fleeing to dollars, pushing up its value relative to other currencies. “This could help the U.S. consumer by making imports cheaper, if imports weren’t disrupted by supply chain constrictions. But with a stronger dollar, U.S. manufacturing will become uncompetitive, and foreign holders of dollar-denominated debt could get pushed into default. Other countries’ import and debt service costs will skyrocket, weakening their currencies and pushing up the dollar even further. The ballooning demand for dollars could lead to a currency liquidity crunch – the swap lines extended to foreign central banks in last Sunday’s Fed intervention were expanded even further on Thursday, a worrying sign that the initial measure wasn’t enough to relieve the strain on the FX markets” (yhoo.it/3dDuNO4).

Margin Called: The holders of MBSs are fielding redemption requests, margin calls (on valuation dips) (bloom.bg/2UoEcBy). “Invesco Mortgage Capital, a real estate investment trust that invests in mortgage-backed securities, also saying it’s no longer able to fund margin calls. If forced sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell ... holdings." "Real estate investor Tom Barrack said Monday that the U.S. commercial-mortgage market is on the brink of collapse and predicted a ‘domino effect’ of consequences if banks and the government don’t take prompt action to keep borrowers from defaulting." Adding, the Mortgage Bankers Association issued warnings on margin calls (cnb.cx/2JEVJzf).

Delinquencies: Chinese residential mortgage-backed securities experienced heightened delinquency rates. Despite the jump, delinquencies remain low in absolute terms (bit.ly/34zRw9F).

Auto Credit: Increases in unemployment, declines in vehicle prices to push auto credit losses higher. CARES Act as well as lender forbearance will help cushion blows to credit. Capital One (), Ally (), Wells Fargo () are more exposed to subprime losses (bit.ly/2Vq2Wsj).

‘Money Printer Go Brrrr’: The Fed will buy unlimited amounts of treasury and mortgage-backed securities (wapo.st/2wJGmmm). The tagged article also discusses a countrywide finance crunch (e.g., Rhode Island to run out of money in weeks) and mass layoffs.

Before Market Crash: "Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash … Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now” (bit.ly/3cJ7phV). Adding, firm’s have reduced spending (bit.ly/2TTo5fj) which may weaken the economy.

‘V-Shaped Recovery’: "While real GDP could be hit through mid-year by cancelled flights and conferences and other business disruptions causing another round of inventory and capital spending cuts, the rubber band associated with a global rebound has been stretching for more than a year now” (bit.ly/3d1vpg2). Also, see why innovation always wins out during dark times (bit.ly/2xOcxBn).

Survey of Chinese companies showed ⅔ of respondents only had the ability to cover fixed expenses for two months. While China “has cut interest rates, ordered banks to boost lending and loosened criteria for companies to restart operations, many of the nation’s private businesses say they’ve been unable to access the funding they need to meet upcoming deadlines for debt and salary payments” (bloom.bg/39DjNxK).

Carry Forward: In 2019, airlines and auto were expecting their worst year (bit.ly/39mGXYx). This came alongside a trade-war induced slowing in factory activity across the G20 economies (reut.rs/2JjCknm). Nevertheless, freight and passenger shipments were slowing in 2019 with orders for consumer good hauling trucks dropping 52% year over year and air shipments solidly negative with April 2019 being the first month in which “every region on Earth, without exception, showed lower outgoing and incoming changes in weight, year over year” (bit.ly/39mGXYx). Still, in the summer of 2019, the probability of a downturn was “at least 40% due to a falloff in auto sales, an increase in unsold inventory and weakness in government spending” (bit.ly/39mGXYx). Important note, however, is the improved liquidity and reduced leverage present in the automotive sector (bit.ly/2VrbJKE). By some estimates, if the auto industry gets back to work in early May, “most suppliers should be able to turn the lights back on” (bit.ly/3b36XtD).

‘Climbing Mental And Emotional Stress’: Virus Impact On Work/Life Environment (bit.ly/2wRsDKp).

Sentiment: 36.6% Bullish, 18.7% Neutral, 44.7% Bearish as of 4/12/2020 (bit.ly/330VhEp).

Gamma Exposure: 2,608,412,646 as of 4/12/2020 (bit.ly/2UpgtRE).

Dark Pool Index: 48.9% as of 4/12/2020 (bit.ly/2UpgtRE).

Index Analysis:

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Futures Analysis:

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Disclaimer:

This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve, especially me.

In no way should this post be construed as investment advice.

Physik

This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve (myself especially), so if you see something wrong, speak up.