Many traders woke up this morning in utter dismay when they saw the DOW futures trade down by more than 740 points. The fear of coronavirus cutting into corporate revenues across the globe is now becoming a reality.

Companies like Apple, FedEx, and Starbucks have revised earnings lower because of the coronavirus pandemic.

When stocks experience a sell-off of this magnitude, it’s important for you to know which are the key levels of support and resistance.

And while the charts below were put together last night, the analysis I’m about to share with you—still rings true.

The higher they climb the harder they fall. Technology-led the bulls last year. So it’s no surprise the QQQ crashed out harder than the other indices last week. 

QQQ Hourly Chart

When I step back and take an expansive view of the market, I don’t think the pain is over. Financials flashed warning signs long before Friday. Gold and bonds clearly said there were issues.

Rather than focus on what we already know, this week’s Intermarket analysis looks at what sectors will provide us the answers we need. Relying on the wrong charts for your forecasts could wipe out all your gains.

Everyone is focusing on the headline-grabbing markets – the S&P 500, the Dow, the Nasdaq 100. That’s all fine and well. Most investors have money tied up with them in some way or another. But those only tell you where you are, not where you’re going.

For that, we need to dive into the tech wreck.

 

The tech wreck

I can’t say for certain what it was that woke up investors to the real dangers in tech valuations. But it appears they all got the message at once. Semiconductors became the first casualties.

With the Coronavirus hitting supply chains as well as Chinese economic growth, semiconductors held on as long as they could. Last week investors decided that between the Apple announcement of a revenue miss and an increase in infections, it was time to pull back.

SMH Hourly Chart

I’m actually amazed this area held up as long as it did. Semiconductors are notorious for boom and bust cycles. The one-time innovation matured into a commoditized space. With so much of the supply chain flowing through China, this index should have fallen weeks ago.

In fact, I think this area holds more risk than most other sectors in the coming months. Don’t be surprised to see violent swings in names like AMD or INTC.

 

Substantial outperformance from the little guys

If you wanted to make money in 2019, you dropped cash into the major indices. Small caps lagged for the majority of the year, only breaking out of their range on the final end-of-year ramp. That put indexes like the QQQs in unsustainable territory.

Normally, small caps outperform during booming economic cycles, powered by global expansion. Their diverse customer base relies on revenue growth to push prices higher. Our current rise has been marked by bottom line improvements driven by cheap money. Business lending remains tight for smaller companies.

So why would the IWM only be down 0.77% compared to 2.83% for the QQQ and 1.44% for the SPY?

IWM Hourly Charts

It comes down to risky money. Last year, money took risk by flooding into the QQQs, driving it up 42.10% compared to 21.06% for the IWM. Normally, money that seeks risk spreads out more evenly. Even the high yield debt market (HYG) didn’t make it up double digits last year.

This leads to two conclusions. First, there isn’t as much money to flow out of small caps as tech. Second, from a relative value standpoint, if risky money needs to find a new home, small caps make the most sense. No one wants to dump risk money into the debt market when yields are this low. They want to get more for their investments.

So, if we see the small caps start to crack along with the rest of the market, that is a signal things are about to get very bad.


Safety trades not all in sync

Most of us are aware of the outperformance of bonds and gold last week. Gold certainly took the prize, breaking out past old highs and starting another leg of its bull market. Bonds didn’t come out as strong, but still managed to break through their recent highs.

Yet, the oddball out there was the US Dollar. Normally, money hides in the US Dollar for safety when stocks sell off. This doesn’t always happen since higher bond prices can lead to a lower dollar. However, it’s decline last week was notable.

UUP Hourly Chart

This could just be a pullback before the dollar index reaches $100 (par value) on a basket of currencies. However, this could also be the first warning sign the Fed is losing control.

Yes, the central bank wants to weaken the US dollar. However, all they’ve managed to do is make bonds more expensive. With treasuries getting more overvalued by the day, we could be setting up for a crash in bonds. This could spike yields and the dollar at the same time.

Gradual moves don’t always hurt the market. Fierce swings in a short period of time can create a cascade failure across markets.


The VIX and VVIX will tell you everything

Equities and the VIX have an inverse relationship. When equities rise, the VIX tends to fall. If you see the VIX rising, it usually means equities are heading lower. The VVIX measures option demand on the VIX.

VIX Hourly Chart

Right now both are up a good amount compared to last year. The main levels we need to pay attention to are $20 in the VIX and $115 in the VVIX. Once we start to get to those areas, we should start looking for a bottom. 

VVIX Hourly Chart

That doesn’t mean that we can’t bottom before then. Look for an intraday reversal on the VVIX with confirmation on the VIX to tell you when things are changing.


The best trade for next week

Every Monday I release my highest conviction trade idea aimed at hitting 100%. There’s still time to get yours before the market opens Monday morning.

Click here to learn more.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Is the market starting to crack or is this just one of those legendary buy the dip opportunities?

Here’s my take—despite a frothy market propped up by easy money, equities aren’t as overvalued as you might think. With the current price to earnings ratio at 23.77x, it fits within a historical trend that started back in the 1980’s.

Long before the Great Recession, valuations climbed steadily through the 80’s and 90’s. We only got in trouble when clear bubbles formed, and even then it could take years to play out.

Our recent growth has been shallow but predictable. Sure it’s exacerbated by low interest rates. However, most estimates show they boosted stocks by 20%.

The real danger lies in government debt. That’s where we start the jump this week; not on the obvious equity decline, but the lack of a bond breakout.

 

Bonds steal your money

Most of us know that with higher bond prices and lower yields, savers hurt the most. But here’s something you probably weren’t aware of. Right now, the 10-year real interest rate is -0.15%.

Yes my friends, investing in U.S. government debt actually costs you money if you hold it until maturity.

So why would people keep at it? Central bank policy. Governments around the world continue their race to the bottom in hopes of devaluing their currencies. While many claim victory, the recent distribution of wealth has favored a smaller percentage of the wealthy than the broad economic indicators would suggest.

Last year, the Federal Reserve published data that noted how the top 1% share of wealth continues to increase at the expense of the next 9%, as well as the acceleration lower of the next 90%. That becomes somewhat evident when you look at the political environment juxtaposed against the increasing wealth of Jeff Bezos or Mark Zuckerberg.

And yet, the Federal Reserve wants to continue to push rates even lower. But their influence may be waning. Compare the breakouts of the TLT to GLD.

TLT Daily Chart

Bonds barely broke out above their previous highs and certainly had trouble sustaining that momentum throughout the day. Compare that to the GLD performance.

GLD Daily Chart

Not only did gold break out, it did so with a vengeance.

This can best be summed up through the outlook for politics in the coming weeks.

 

Election mayhem

By the time you read this, the Nevada primary will already have finished. While the winner may be obvious, the likelihood of a contested convention frightens markets. Traders and investors want certainty.  A protracted fight that fractures one of the major political parties won’t soothe their fears.

Initially, markets discounted Bernie Sanders as a real contender given he didn’t win 2016. However, the closer we get to the convention, the more worried they become. Even if you like Sanders’ policies, the enormous lift they ask will take years to implement, much further than market participants are willing to look. That means the more likely a left-wing candidate comes to the presidency, the more likely markets will spook.

Super Tuesday adds a wrinkle into the mix as Michael Bloomberg jumps into the race, betting on data science to beat out his rivals. While he may do just that, I guarantee there will be sore feelings if he pulls one out through maneuvering through the system.

As candidates drop out of the race, we’ll likely see markets stabilize a bit more. But as we get into the summer months, volatility will start to expand if history has any say in the matter.

 

Coronavirus updates & market flash movements

Two black swans fly on the horizon. The first is the somewhat known Coronavirus epidemic. History says that it’s likely to flame out. But we have no way to know for certain. Companies from Apple to Tesla are already warning of supply chain issues.

We’ll likely get drips of information week after week. Most of it won’t do much unless it increases the likelihood of spreading globally or further disrupting the Chinese economy.

That’s likely more of the reason behind the QQQ hard declines relative to the SPY or IWM last week. Many of the companies that make up the Nasdaq 100 will feel some impact from Coronavirus related issues.

The second concern takes us back to Thursday. We saw a decent swing in the market. And yet, even the pundits couldn’t come up with an excuse as to why that happened. Most of them blamed the algos.

What worries me is the lack of any storyline behind the move. We all know that markets are organic systems run by vast networks of computer interactions. Not everything will be apparent all the time. But when you have an intraday decline of that magnitude, and no one can even point to a cause with even limited certainty, that should put up a red flag.

I’ll be keeping an eye on the market these next few weeks, looking for any technical issues that could arise. And you can bet I’ll point them out to you.

Expected earnings dates listed in (…)

Stocks I want to bet against…

NFLX (April 21), AMZN (Apr 23), AMD (May 5), UBER (Jun 4), GOOGL (May 4), CVNA (Feb 26), COST (Mar 5), CMG (Apr 22)

Stocks I want to buy…

DIS (May 13), MJ (none), UNG (none), XLE (none), WDAY (Feb 27), LK (??), PTON (May 6), TWLO (May 3), TLT (none), UVXY (none), BYND (Feb 17), PBR (Feb 26), OLED (Feb 20), V (Apr 22), PINS (May 21), IRBT (Apr 28), SHAK (Feb 24), CVM (May 12), DPZ (May 20)

 

This Week’s Calendar

 

Monday, February 24th 

  •  8:30 AM EST – Chicago Fed National Activity Index January
  • 10:30 AM EST – Dallas Fed Manufacturing Activity for February
  • Major Earnings: Carter’s Inc (CRI), Epizyme Inc (EPZM), Kosmos Energy Ltd (KOS), Merit Medical Systems (MMSI), Sabra Healthcare REIT, Inc. (SBRA), iStar Inc (STAR), Apple Hospitality REIT Inc (APLE), Apergy Corp W/I (APY), Arlo Technologies Inc (ARLO), Centennial Res Dev Inc Cl A (CDEV), Clovis Oncology Inc (CLVS), Guardant Health Inc (GH), Halozyme Therapy Inc (HALO), HP Inc (HPQ), Hertz Global Hldgs (HTZ), Intuit Inc (INTU), Keysight Tech Inc (KEYS), Kratos Defense & Security Sol (KTOS), New York Mortgage Trust Inc (NYMT), Oceaneering Intl Inc (OII), Oneok Inc (OKE), Palo Alto Networks Inc (PANW), Rent-A-Center (RCII), SailPoint Tech Hldg Inc (SAIL), Shake Shack Inc (SHAK), Tenet Healthcare (THC), Tandem Diabetes Care Inc (TNDM), Xenia Hotels & Resorts Inc (XHR)

Tuesday, February 25th  

  • 7:45 AM EST – ICSC Weekly Retail Sales
  • 9:00 AM EST – House Price Purchase Index for 4th Quarter & S&P CoreLogic Case Shiller December
  • 10:00 AM EST – Consumer Confidence for February
  • 4:30 PM EST – API Weekly Inventory Data
  • Major earnings: American Tower Corp (AMT), Chimerix Inc (CMRX), Mr. Cooper Group Inc (COOP), Denbury Resources (DNR), Evolus Inc (EOLS), Entercom Communications Corp A (ETM), Home Depot Inc (HD), Intercept Pharmaceuticals Inc (ICPT), Iridium Communications Inc (IRDM), Lumber Liquidators Hldgs Inc (LL), Cheniere Energy (LNG), Mallinckrodt Pub Ltd Co (MNK), MannKind Corporation (MNKD), Realogy Hldg Corp (RLGY), US Silica Hldg Inc (SLCA), Starwood Ppty Trust Inc (STWD), Tupperware Brands Corp (TUP), Welbilt Inc (WBT), Wolverine World Wide (WWW), B&G Foods Inc (BGS), salesforce.com Inc (CRM), Caesars Entertainment Corp (CZR), Easterly Gov Pptys Inc (DEA), Delek US Holdco Inc (DK), Enlink Midstream LLC (ENLC), Evolent Health Inc (EVH), Exelixis Inc (EXEL), Infinera Corp (INFN), Iovance Biotherapeutics Inc (IOVA), MoneyGram Intl (MGI), MacroGenics Inc (MGNX), Matador Resources Co (MTDR), Outfront Media Inc (OUT), Pennsylvania Real Es Inv Trust (PEI), Planet Fitness Inc (PLNT), Insulet Corporation (PODD), Pub Storage (PSA), The RealReal Inc (REAL), Rayonier Advanced Mats Inc (RYAM), SmileDirectClub Inc (SDC), Virgin Galactic (SPCE), Supernus Pharmaceuticals Inc (SUPN), Toll Brothers (TOL), Unisys Corp (UIS), Weingarten Rlty Invst (WRI), WW International Inc (WW)

Wednesday, February 26th 

  • 7:00 AM EST – MBA Mortgage Applications Data
  • 10:00 AM EST – New Home Sales January
  • 10:30 AM EST – Weekly DOE Inventory Data
  • Major earnings: Ameren Corp (AEE), AMC Networks Inc Cl A (AMCX), Box, Inc (BOX), Cars.com Inc (CARS), Chesapeake Energy Corp (CHK), Physicians Realty Trust (DOC), Element Solutions Inc (ESI), Natl Vision Hldgs Inc (EYE), Horizon Therapeutics PLC (HZNP), Lowe’s Cos, Inc (LOW), Liberty Media Corp A SiriusXM (LSXMA), Momenta Pharmaceuticals (MNTA), Moderna Inc (MRNA), Nisource Inc (NI), Oasis Petro Inc (OAS), Office Depot (ODP), Papa John’s Intl (PZZA), Sabre Corp (SABR), Sinclair Broadcast Grp’A’ (SBGI), SeaWorld Entertainment Inc (SEAS), Smucker (J.M.) (SJM), Stratasys Ltd (SSYS), TJX Companies (TJX), VEREIT Inc (VER), The Wendy’s Co (WEN), Wyndham Destinations Inc (WYND), ACADIA Pharmaceuticals Inc (ACAD), Adaptive Biotech Corp (ADPT), Apache Corp (APA), Biomarin Pharmaceutical (BMRN), Crown Castle Intl Corp (REIT) (CCI), CoreLogic Inc (CLGX), Mack-Cali Realty (CLI), Callon Petro (CPE), Carvana Co Cl A (CVNA), Editas Medicine Inc (EDIT), Equitable Holdings Inc (EQH), Etsy Inc (ETSY), L Brands, Inc. (LB), Marriott Int’l Cl A (MAR), MEDNAX Inc (MD), Nutanix Inc Cl A (NTNX), Natera Inc (NTRA), Portola Pharmaceuticals Inc (PTLA), The Rubicon Project Inc (RUBI), Square Inc (SQ), Sarepta Therapeutics Inc (SRPT), Extended Stay America Inc (STAY), Teladoc Health Inc (TDOC), Tutor Perini Corporation (TPC), Universal Health Svcs (UHS), Upwork Inc (UPWK), Viking Therapeutics Inc (VKTX)

Thursday, February 27th 

  • 8:30 AM EST – Weekly Jobless & Continuing Claims
  • 8:30 AM EST – GDP, Personal Consumption, Core PCE Q4, and Durable Goods January
  • 10:30 AM EST – EIA Natural Gas Inventory Data
  • 11:00 AM EST – Kansas City Fed Manufacturing Activity February
  • Major earnings: Atara Biotherapeutics Inc (ATRA), Best Buy (BBY), Clear Channel Outdoor Hldgs (CCO), Chico’s Fas (CHS), Centerpoint Energy (CNP), Crocs Inc (CROX), Dell Tech Inc (DELL), Discovery Inc Ser A (DISCA), Equitable Resources (EQT), Equitrans Midstream Corp W/I (ETRN), Flir Systems (FLIR), Gannett Co Inc (GCI), Keurig Dr Pepper Inc (KDP), Laureate Education Inc (LAUR), Nielsen Hldgs Plc (NLSN), NRG Energy Inc (NRG), Intellia Therapeutics Inc (NTLA), OGE Energy Corp (OGE), Quanta Svcs (PWR), ServiceMaster Glbl Hldgs Inc (SERV), Stericycle Inc (SRCL), Sempra Energy (SRE), Whiting Petrol Corp (WLL), Washington Prime Grp Inc (WPG), Applied Optoelectronice Inc (AAOI), Axon Enterprise Inc (AAXN), Acadia Healthcare Co, Inc (ACHC), Autodesk, Inc (ADSK), AMC Entertainment Hldg Inc (AMC), American Homes 4 Rent (AMH), Beyond Meat Inc (BYND), CareDx Inc (CDNA), Continental Resources Inc (CLR), Edison Intl (EIX), Live Nation Entertainment, Inc (LYV), MBIA Inc (MBI), Monster Beverage Corporation (MNST), MasTec Inc (MTZ), Mylan NV (MYL), Nektar Therapeutics (NKTR), NeoPhotonics Corporation (NPTN), Occidental Petro Corp (OXY), Pure Storage Inc Cl A (PSTG), RealPage Inc (RP), Range Resources (RRC), Sunrun Inc (RUN), comScore Inc (SCOR), Switch Inc (SWCH), The Trade Desk Inc Cl A (TTD), VMWARE Inc (VMW), Workday Inc (WDAY), Western Midstream Partners LP (WES), WPX Energy Inc (WPX)

Friday, February 28th

  • 8:30 AM EST – Personal Income & Spending, PCE for January
  • 9:45 AM EST – Chicago PMI for February
  • 10:00 AM EST – University of Michigan Confidence Survey February
  • 1:00 PM EST – Baker Hughes Rig Count
  • Major earnings: AES Corp (AES), Colony NorthStar Inc (CLNY), EOG Resources (EOG), Foot Locker (FL), Vistra Energy Corp (VST), Wayfair Inc (W) 
Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Hello Trader,

Humans, in general, are uncomfortable with uncertainty. Instead of accepting the fact that we don’t know everything, we’d rather be spoon-fed an explanation (whether it makes sense or not).

And if you follow the stock market… you’ll see it every day. One day the market takes off because the economy looks strong… the next it sells off due to fears of the coronavirus spreading…  

But the global markets are complex, there are several moving pieces at work… do you really think we can sum up the reasons why it moves the way it does? 

It almost feels like the narrative is written after the fact…

That’s why today’s lesson is so important.

I want to explain to you how to tell the difference between real news and fake. It’s not as easy as you might think. 

There’s a lot of noise you must sift through in order to find the truth. 

That’s not to say that news events don’t drive the market. Michael Bloomberg made billions delivering timely information to traders and investors.

He knew what was tradeable news and what was garbage. And if you can’t tell the difference, it’s costing you a lot of money!

First things first, let’s start off by categorizing the types of news.

 

News categories

 

Not all news is created equal. Some stories have lasting impacts, while others just stir the pot. I look at news in a few different segments.

 

Data – This includes Fed policy decisions, labor statistics, or any other measures that help us get a picture of what’s going on in an industry or the economy. Data points themselves don’t do much. Instead, analysts look at trends, which occur over longer periods.

Earnings (or other company announcements) – These are company-specific. However, some companies may give outlooks or commentary that looks at a bigger segment of the market.

Emotional – I lump in things like Trump tweets, Fed commentary, or anything that doesn’t contain much substance, but drives emotional decisions of investors.

Black swans – These unexpected events happen from time to time and throw the market for a loop. Coronavirus would be a good example, as well as the temporary Iran/U.S. conflict last year. Sometimes, they’re catastrophic like 9/11.

 

You would think that the ‘hard’ information from data and earnings would drive stock price movement immediately. Most of us don’t realize how long it actually takes to work. We see the reactions to earnings announcements and think that the two are tied together. In fact, most investors take weeks to digest and parse through the release.

The same thing goes with data. Outside of complete surprises, one data point won’t change investors’ minds. It takes months or longer before the boat finally turns.

 

Could one man prop up the market?

 

In 2016, markets were in freefall during early February. During one of the drops, Morgan Stanley CEO and Chairman Jaimie Dimon came out and bought a whole bunch of stock. Pundits were quick to point out that this news ‘bottomed’ the market….except the market bottomed several minutes before that news first hit the wire anywhere. 

Now, you could argue that someone had insider information. I would buy that. But let’s bet clear about something – Jaimie Dimon buying stock in his company didn’t stop the multi-week decline. It doesn’t work like that.

Newsworthy events like a Trump tweet or a Jaimie Dimon bottom only create impacts intraday. Rarely do they cover anything so expansive that it changes the way people think about investing. However, it certainly can influence intraday action.

In fact, most pieces of news will create some temporary impact intraday. Whether it lasts any longer is a function of two things.

First, the timing of the news in relation to the market. Jaimie Dimon’s call may have served as a catalyst for the market to bottom. But, it also occurred in a very oversold market that likely was getting ready to turn. If he made that same announcement after a rally, it probably wouldn’t have had the same impact.

Second, whether it actually changes anything. Initially, President Trump’s tweets could agitate the market by creating uncertainty. Now, traders look past it until they see any actions take place. 

The taper tantrum is a perfect example of real news that’s masked in emotions. When Ben Bernanke hinted that easy money might be going away, markets took it very badly. The same thing happened when the Fed raised rates in December 2018. On the flip side, markets rallied on interest-rate cuts.

 

Which news matters

 

News that presents new data or new ideas will have a longer impact directly tied to that news. However, both nonsensical news and hard news can swivel the market intraday. That can create a cascading effect that drives long-term change.

You won’t know ahead of time how it all plays out. But, hard news has a higher probability of creating a lasting impact.

As traders, we need to be aware of both. That means creating a calendar of important data releases and thinking about how that impacts different stocks and markets. A great place to start is my weekly Jump on the Week newsletter. I point out the key data releases, earnings, as well as potential market-moving events.

In fact, I combine that information with chart analysis to deliver my Bullseye Trade of the week. How else do you think I could come up with one trade that has my highest conviction for the upcoming week?

See what I mean in this short video where I explain how I come up with my Bullseye Trades.

Click here to watch.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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