- Stocks will look for stability this week after last week's plunge.
- The S&P 500 hit a low of 2,855 on Feb. 28.
- That may be the most important level to watch at this point.
- Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »
It was billed as the rematch of the century, with the market and the current FOMC administration facing off for the second time in less than two years. The first time these two heavyweights met was during December 2018 in Las Vegas, Nev. It was a grueling fight, going 20 rounds, with the market finally winning via knockout. However, the rematch didn't last nearly as long.
The rematch this time took place in the market's backyard, New York City. Already the FOMC was at a disadvantage. The crowd was contentious, chanting for the market. After all, the market was on a tear, looking lean and healthy, and the heavyweight champ. However, the market had more than something to prove after being accused of juicing and using the rising balance sheet for its recent hot streak, although there was never enough evidence prove it was the case.
Meanwhile, the FOMC had a string of victories, which included cutting rates three times calming the repo markets, and reflating the balance sheet. The FOMC appeared to have the wind at its back and wanted revenge on the market for taking away its title as the champ back in that remarkable night in December 2018.
The fight started slow with a series of back and forth jabs during the first two rounds. But then, in the third round, the FOMC struck hard, with the first hard blow sending the market to its knees. The FOMC turned to the crowd, with its hands held high, taunting them, and screaming "you want rate cuts," "you want rate cuts," and turned to the market, pointing "you're not getting them, no more."
After three more rounds of the FOMC pounding on the market, suddenly, it stumbled, and the market got in a clean body shot, stunning the FOMC, and that ignited the crowd, bringing it to its feet. The FOMC never recovered, and in an instant, the tide turned. The market went on a tear, and by the 16th round, the FOMC could take no more, standing in their corner dazed and confused, the referee called a TKO. It was over - the market defeated the FOMC for the second time, in what could be their last major face-off for some time.
The recent downturn in the equity market may have more to do with rate cuts than the coronavirus. It may be more than a coincidence that the market started to worry about coronavirus on the same day that Vice-Chair Richard Clarida and the Fed minutes on the previous day indicated no more rate cuts. It also does not seem to be a coincidence that on the same day of what I believe to be a market bottom was when the Fed "hinted" at a rate cut.
Pricing in Cuts
The market was pricing in two rate cuts in 2020 - the Fed minutes made it clear that wasn't going to happen. The next day, Clarida reiterated that message, and the market let loose. On Feb. 28, the Fed caved and gave its passphrase for rate cuts: "will act as appropriate," which in the past has served as the code word for 25 bps cuts.
Now, I know some you will say, but the market rally didn't last following the statement. Well, look at the time of day the statement was issued, 2:30 PM, thirty minutes before the most brutal time of the trading. This is when liquidators and traders try to meet margin requirements, selling everything not nailed to the floor. But by day's end, it was a different story, with the S&P 500 rising out of the abyss by more than 2.5% or a stunning 75 points in 15 minutes. Fifteen minutes that's unreal, it was like all the sellers had evaporated.
Friday, Feb. 28, was an amazing day from so many perspectives. The unruly open, the massive spike in volatility, the wild close. But the one thing I'll bet a lot of people didn't notice was the importance of that day's low on the S&P 500 of 2,855.84. Why is that amazing? Well, because, by chance, of course, it was almost precisely the low on Oct. 3 of 2,855.94, which, of course, was the very start of the massive uptrend that we have been tracking, and which is something we covered in our Marketplace service.
Fear Very High
Meanwhile, the VIX hit almost 50 on Friday, suggesting extreme fear in the market place. Also, the number of stocks below their 50 day-moving average fell to around 1%, its lowest level since Dec. 24, 2018.
The most important thing to pay attention to going forward is that low on Friday at 2,855. If that low is tested and holds repeatedly, it would be a very positive indication that the low is in the short term. It could even result in the S&P 500 rebounding to a level of around 3,100.
However, should that level of support break, the index could fall even lower toward 2,730 and a further decline of almost 5% from 2,855, creating a total drop from a peak of nearly 20%.
The S&P 500 is likely to remain in a period of a very high level of volatility as it looks to stabilize over the next couple of weeks. It means the most critical level to watch in the S&P 500 until further notice is 2,855.
Nothing else matters.
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About The Author
I first fell in love with the stock market when I was 16 years. Now, 25 years later and after a long career as a buy-side trader, I share all of my experience with you daily with timely thoughts throughout the day in Reading The Markets. I use fundamental, technical, and options market analysis to identify individual stock ideas for you.
This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
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