2020-02-26

Market Still Under Coronavirus Pressure

When will the bottom be reached? It seems that today, Wednesday, February 26, one month after China shut Wuhan down in the midst of Spring Festival, is the first day the average American is really paying attention to this story.

Three charts make the case for a rebound if this is a normal correction. The USDAUD cross looks stretched to the upside as SPDR Energy (XLE) is stretched to the downside. The VIX Index did not make a new intraday high on Wednesday.
If this was a normal correction, I'd be more confident in taking some long positions here, but I believe the bottom will be reached when the news-cycle hits peak fear. For the market, earnings revisions are only beginning today. After hours, Microsoft (MSFT) cut guidance: Microsoft update on Q3 FY20 guidance
On Jan. 29, as part of our second quarter of fiscal year 2020 earnings call, we issued quarterly revenue guidance for our More Personal Computing segment between $10.75 and $11.15 billion, which included a wider than usual range to reflect uncertainty related to the public health situation in China. Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.
I still think an outbreak in the U.S. is likely. My hunch is at some point there will be far to pessimistic economic assumptions. Yesterday, I discussed a few positions I had. I'm out of Boeing today, but added shorts on Disney (DIS) and Expedia (EXPE), plus increased my TLT short as mentioned in the update to that post.

As long as the U.S. doesn't experience a widespread outbreak, the core of the economy should do well. Leisure will bear the brunt of a less severe outbreak because airlines, hotels, theme parks and movie theaters could be shut by government order. Even if there's no official quarantine, individuals may avoid these places because they fear contracting the virus. The market sold these stocks today. Below is a list of stocks I plucked out of the travel, hotels, airlines and leisure categories with good volume, market capitalization and poor performance over the past month (with a few others tossed in). These stocks have been heavily sold, making them the most likely to rally hard if fear lifts, but could also see much further downside if the U.S. situation deteriorates.
Bitcoin is taking a hit and likely to test $8,000. BSV (my favorite in the cryptocurrency space) will likely see sub-$200 price if that happens.
Barring a bad pandemic, I think the market is approaching the bottom in time. Prices could still plunge in a waterfall decline because of bad news, but I lean towards there not being an uncontrolled pandemic. Central banks are printing money. Fiscal stimulus is coming out of Hong Kong and Germany. If the U.S. somehow ends up relatively well-off because it acted in time, the onshoring of supply chains will accelerate. The rebound growth for the U.S. could be surprisingly strong. The Y2K comparison looks less similar right now because coronavirus is more serious threat, but if the fear lifts, the sense of relief will be stronger.

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