Nice Friday Rally (Week Still Down)
This wasn’t as big of a rally as some of the ones we’ve seen in previous weeks, but it was very nice as it ended the week on a solid note. The stock market was down slightly this week as expected. Specifically, it rose 1.39% on Friday and fell 1.32% on the week. This was the first weekly decline in 3 weeks. The market is only down 12.2% year to date. There’s a lot of time for this to turn into a positive year.
Investors focused on the economy are completely flummoxed. Unemployment rate is in the 20s, if you use jobless claims, and many economic reports are expected to be worse than the trough of the last recession. However, you have to consider that COVID-19 is making workers want to stay home and collect unemployment.
With the extra benefits, it’s a no brainer to stay home. If most businesses survive this shutdown, they will want to hire the same workers they let go in March and April. We could have the fastest jobs recovery ever.
Recently, many have gotten more bearish, but yet still not calling for new lows. A rally has been logical. We will likely have a modest pullback in the next few days and a stable market in the next month. Especially since we’ve priced in a recovery before the economy has been reopened. There are still numerous uncertainties such as when the economy will open, when life will get back to normal, and when a cure/vaccine is coming.
Lately, we’ve seen a plateauing of cases in America rather than a decline. Even though states such as Oklahoma and Georgia have moved towards reopening, there won’t be a reopening of all the states where life goes back to normal until we get a vaccine or treatment. By June we will likely see more states reopen with strict social distancing rules.
Mild Retest Coming?
Part of the reason stocks retest lows is because people take quick profits. Many investors have profits if they bought stocks this month. Considering the fact that there are still a lot of unknowns, selling stocks traders have doubled their money on doesn’t sound that crazy.
As you can see from the table below, when the rallies off the low have retraced a large part of the bear market, the retests haven’t been severe. 3 of the 4 mildest retests have occurred after big retracements. For example, in 2002 51% of the bear market was retraced and the retest ended 5.4% lower than the waterfall trough. This year’s waterfall trough obviously was on March 23rd. This table implies the retest will be just 1.8% below the March 23rd low.
Frankly, many are not that pessimistic. We just see a drop of a few percentage points coming as people take profits and fear what will happen when the economy reopens. The virus could come back, consumers could be very cautious, or employers could not rehire their workers. Personally, I’m optimistic about this recovery, but very open to being incorrect.
Review Of Friday’s Action In Markets
Nasdaq rallied 1.56% even though Intel disappointed investors. Intel stock actually was up 0.37% probably because any guidance is good news. Original predictions 2 weeks ago that earnings season wouldn’t be a negative catalyst for stocks have been proven true. Although, we still have 2 weeks left of the main part of it.
Next week is the biggest weak of Q1 earnings season. Eearnings will unlikely be the catalyst for a decline. It's more concerning about COVID-19 and the states reopening. As of today, the northeastern states won’t reopen until at least May 15th. If that’s pushed back to June 1st, stocks will decline. We will hear a decision on that either this coming week or next week.
Russell 2000 was up 1.56%. As predicted, VIX finally fell below 40. It fell 5.45 points to 35.93. It's not considered way too high anymore. If there’s a correction in the next couple weeks, the VIX will rise. CNN fear and greed index actually fell 1 point to 39 which is fear. Every sector was up. Best sectors were tech and healthcare which rose 2.11% and 1.44%.
Zoom stock fell 6.09%. Facebook announced it would do free video calling with up to 50 people. Zoom has no moat. This stock is still overvalued. Shopify was up 3.66% as the bubble grew larger. This stock is beyond belief. It’s up nearly 58% year to date. I’m curious if it reaches a higher market cap than the Royal Bank of Canada (the biggest company in Canada). Royal Bank of Canada has a market cap of $84.55 billion and Shopify has a market cap of $75.4 billion.
COVID-19 Update
There is a 50% chance NY and the other northeastern states reopen on May 15th. Net new hospitalizations because of COVID-19 have fallen for 11 straight days. Frankly, I find it very unlikely that the state will wait any longer than the start of June. If not by then, when will it be safe enough?
As you can see from the chart below, New York City tested its most people ever, yet there wasn’t close to a new high in the number of new cases. We are going to see many more states than just Oklahoma and Georgia start to reopen in May. Many states such as Montana were hardly affected by this virus. They shutdown as a precautionary measure because this virus spreads quickly.
Number of new cases in America hit a new high of 38,958 on Friday. Many bet that is the highest it gets. Good news is the number of new deaths fell. There were 1,959 deaths which was the lowest since April 20th. It looks like Massachusetts and Pennsylvania are the new hotspots as there were 4,946 new cases in Massachusetts and 3,096 new cases in Pennsylvania.