Stocks Are Now Down On The Week
It has been very tough to predict near term price action, but for the first time in a while the week has gone exactly how expected. Many forecasted a week with a lot of up and down action in which the market ended modestly positive. So far, we have had the up and down action as the market was down on Monday, up big on Tuesday, and down on Wednesday.
So far, it is down 0.23% on the week. We still expect a very modest turnaround by the end of the week. Unlike the inundation of negative news in March, we are continuing to see signs the economy will reopen soon.
Cinemark said in an investor presentation that it plans to open its movie theaters in early July. Ultimately, it can’t open them unless the government allows it, but usually it is a conservative firm. That means it came up with a realistic, but conservative assessment of when it can open.
It would look very foolish if it planned to open on a set date and that didn’t happen. It will likely be able to open because Germany is planning to reopen in early May. Schools in Germany are slated to reopen on May 4th. Hairdressers and barbers will also open on that day.
A key for a country to reopen is for there to be a decline in active cases for a couple weeks. Germany’s active cases have been in decline since its peak on April 6th. Active cases in America can peak by the end of this month.
New Low For Oil
We haven’t reached peak negativity in oil, as WTI made a new low as it had a 19 handle again. That was its lowest price since February 2002. It fell because oil demand is the real problem, not supply. OPEC+ price war was a side show. As you can see from the chart below, oil inventories rose 15.18 million barrels to 19.25 million which is a record high by far. No wonder Schlumberger recently hit the same price it was at in 1980 (40 years ago). It was pricing in the inventory glut which will lower demand for oil services.
The idea of the U.S. government paying oil companies not to drill was even floated. Some companies need to drill because of their debt covenants. There will be many oil and gas bankruptcies this year. After a reverse split on Thursday, Chesapeake stock fell 37.58%. The company and Oasis Petroleum could go bust.
Brent fell more than 6% on Wednesday. According to the IEA, oil demand is expected to fall by 29 million barrels per day by April, to the lowest level in 25 years. That’s just below 30% of demand before the coronacrisis. This supply glut is great for the oil tanker stocks.
If oil was solely priced based on marginal demand, we would see oil below $10. However, because almost everyone knows that price won’t hold long term, investors are likely bidding it up. Because so little production is profitable in the single digits, it’s impossible for it to stay that low.
Review Of Wednesday’s Action
S&P 500 fell 2.2% which allowed it to avoid the CNN fear and greed index going into greed for the first time since February. The index fell 4 points to 41 which is fear. Nasdaq fell 1.44%. As you can see from the chart below, the rally in the Nasdaq put its PE multiple near the same place it was at before this bear market (24.85).
However, Amazon continued to rally as it was up 1.07%. This stock has gone hyperbolic which is very bad for the market. In the past month, it is up 36.62%. That pace can’t and won’t continue. It's not a bubble stock, just way overbought. Tesla, which is a bubble, rose 2.81%. It is now up 102.5% from its March 18th bottom.
Russell 2000 was down hugely because of the financials again. It fell 4.31%. The KBW regional bank ETF was down 6.74%. Since it was too high on the 9th, it’s now come down 13.43%. Banks have had a bad week. JP Morgan is now only up 14.88% from its March bottom.
Every sector fell on Wednesday. Worst performers were energy, financials, and materials which fell 4.67%, 4.37%, and 4.51%. Healthcare sector only fell 0.52%. United Health beat earnings estimates and reaffirmed its full year guidance. It’s actually helped by coronavirus because there have been fewer elective surgeries.
COVID-19 Update
President Trump mentioned the number of new cases had peaked. Yet was a bad day for America as there were 30,142 new cases and 2,470 new deaths. There have now been 28,517 deaths in America. Number of new cases has peaked, but it is plateauing rather than falling. It will likely start to fall in the next couple weeks. The economy won’t open in April. It will slowly start to open in May in a few states.
On the other hand, Italy had a really great day as there were only 2,667 new cases which was the lowest since March 13th. Because few people died or got better, the number of active cases still rose. It was up from 14,291 to 105,418. It will likrly peak in the next few days. After that happens, the economy will reopen. There have already been a few shops that have been allowed to reopen.
Lombardy hasn’t reopened yet as it was the hardest hit by the virus. Poland plans to gradually lift restrictions on its economy starting on Sunday. Austria, which was one of the first countries to initiate tough lockdowns, is slowly reopening its economy as well.
As of Tuesday, shops under 400 square meters were allowed to open along with hardware stores and garden centers. It’s compulsory for people in supermarkets and pharmacies to wear masks. Masks are going to mandatory on MTA transit starting on Friday.