Morning Comment: It's About the Credit Markets Now.

Well, we just got a true shock to the stock market. As we said over the weekend, stock investors had several weeks to react to the outbreak of the coronavirus. The moves in other asset prices (like gold and especially Treasuries) were staring people right in the face…and telling them that a correction in stocks was in the offing……In the case of the price of oil, however, almost nobody could have seen that it would drop over 20% overnight (down more than 30% at one point). (We say, “almost nobody”….because somebody spent $2.6 million to put-on the June $34/29 put-spread last week. So somebody knew something.)

The double-whammy of the continued problems from the coronavirus…and the new (major) oil price-war induced by the Saudis…has caused stock markets around the globe to fall out of bed. The domestic futures are “down limit” (down 5%) as we write…and the broad U.S. stock index ETF’s are indicating that they’ll open down 6% or so in pre-market trading as we write. So things are obviously looking quite ugly this morning.

This newest development has wide-ranging implications. If crude oil stays in the low-to-mid $30s for any period of time, it’s going to lead to bankruptcies and significant layoffs in the oil patch. It’s also going to have a substantial impact on the high yield market…just like it did during the crash in oil that took place in 2015 (into early 2016).

In other words, as we have been saying for a while now, the REAL problems facing the markets today have to do with stresses in credit markets…and the rate at which these stresses will accelerate just rose DRAMATICALLY. Not only has the stress level risen dramatically, but it has done so OVERNIGHT!

Therefore, the issue of “forced selling” will come to the forefront immediately. This will be an issue for several markets (stocks, high yield, etc.). The biggest problem this morning is that we’re going to see “gap-down” openings in these markets. (Significant “gaps” in crude oil…and in the case of energy stocks and energy company corporate bonds.) So even though all of these assets have been falling lately, the big gap-down move this morning will means some investors will almost certainly be “forced” to sell at even lower prices. Therefore, it’s not a big surprise that the markets are reacting in such a violent way in pre-market trading so far.

We don’t mean to imply that this will turn into a repeat of the crash of 1987 (when the stock market crashed more than 20% in one day), but things are looking quite dicey…at the very least. For the next few days, the market is going to continue to trade on things that have nothing to do with the fundamentals. (Let’s face it, nobody has a clue what the fundamentals will look like over the rest of this year…because we don’t know how long the coronavirus will be a problem or how much of a problem it will create.) Thus the technicals will mean even more this week. However, we do need to acknowledge that some of the first support levels might not provide the kind of support as would normally be the case. If people HAVE to meet a margin call (in either the stock or credit markets), they will sell what they can to meet those margin calls. They’re not going to hold-off selling that asset just because it’s about to test a near-term support level.

That said, these technical support levels should still be very helpful…especially as any “forced selling” subsides. The levels were watching on the S&P 500 index are as follows. The first one is the 2845-2855 level. 2845 is the lows from August (that held three different times that month) and 2855 is the intraday lows from February 28th (when we the initial “mini-panic” took place)……Below that, the next very important support level is 2750. That is the closing low from last June…and a Fibonacci 61.8% retracement of the entire rally from the lows in Q4 2018 to the February all-time highs.

Some people might think that the “line-in-the-sand” support level is the late 2018 lows…way down at 2350. Yes, a break below that level will be incredibly negative. However, the more important level to consider right now is the 200 week moving average of 2636. That moving average provided ROCK-SOLID support at those 2018 lows…at the lows in early 2016…and again in 2011 (during the European crisis). Therefore, any break meaningful break below the 200 week MA (which will also put us into bear market territory) will be very, very bearish on a technical basis.

That 200 week MA is still 10% below where it closed on Friday, so it’s not going to be threatened on the opening of today’s trading based on what we’re seeing in the pre-market. However, when “forced selling” comes into play, you never know what can happen. So even if it doesn’t happen today, it could still test that all-important support level at some point in the near future. (Three S&P charts attached below.)

Given the increased odds that at least some “forced selling” will take place, we would like to go back to the strategy we highlighted last week (and then again over the weekend). “Lining the book” with limit orders on a “scale-down” basis at prices below the market can be a great way to pick up the shares of high quality companies at fire-sale levels. It is all but impossible to pick a bottom…and it’s very, very difficult to react to the markets when they’re falling out of bed during market hours. Therefore, “lining the book” is a good way to passively pick-up at least a portion of what you’d like to buy in your favorite names…in times of momentous volatility.

Finally, we’ll just say that we agree with those who say that the Fed and the other global central banks…and the global fiscal authorities…will step to the plate to add liquidity and stimulus to the system. It’s one thing for the stock market to get hit hard, but when the credit markets start to see some significant stress, THAT is when the Fed tends to step to the plate. (Remember, in the deep correction of Q4 2018…when the stock market was down about 11%-12% in mid-December, the Fed STILL raised interest rates at their December meeting. It wasn’t until the credit markets started breaking down later that month…that the Fed decided to “pivot.”) Therefore, there should be a great opportunity to buy the market in the near future, but using the “line-the-book” strategy is a good way to nibble at the market as it is falling.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Mar 09, 2020 — 8:03 AM
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