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REPO-20: The Real Virus That Stock Market Investors Should Fear

Kevin George profile picture
Kevin George


  • Why Covid-19 is not the only virus that threatens stock investors.
  • Are the central bank gurus losing control?
  • What does it mean for stock markets?

I posted the following Dow Jones chart on another platform for the week of 17th February 2020 with the following comment:

(Source: Trading View/author)

If the market fails to hold above the support line marked, then a 7% fall is possible to the 50ma and previous support.

A bearish weekly close for the week led to the Coronavirus panic week, and we retraced over 7% on the Dow to the 50 ma. The market has managed to retrace some of the losses with a move above 26,000 and optimism is returning following coordinated central bank action. An expected rate cut in Australia was met with an "emergency" rate cut of 50 basis points by the Federal Reserve, and analysts expect the European and English central banks to follow suit as early as this week. Goldman Sachs has also predicted that the Fed will cut twice more next month.

Why Covid-19 is not the only virus that threatens stock investors

The real virus that traders should be concerned about is the one that has infected the overnight repo market since September.

Back in September, the Federal Reserve announced its first move in a decade to inject liquidity into U.S. money markets after a spike in the overnight repo market. The key short-term rates that are seen as the "plumbing" of the financial system jumped to 10% and threatened Treasury bonds and bank lending. The repo market was the scene of Bear Stearns and Lehman Brothers' downfall, and this market was flashing a warning that liquidity was tight and banks were not lending to each other with the same ease.

To address the short-term crunch, the New York Fed announced that it would supply liquidity by buying up to $75 billion in repurchase agreements, in which the bank buys up Treasury and federal agency debt

This article was written by

Kevin George profile picture
Author of "The Stock Market is Easy - How to Avoid the Pitfalls of the Average Investor".I am an active trader in stocks, FX and commodities with over 15 years' market experience. I hold a master's degree in finance and have developed a strong skill base in technical analysis.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (16)

Kevin George profile picture
Some thought this article was too fear-based but then the FED piled into the REPO market with a potential $3 trillion support. Stocks won't go to zero but there is volatility and a real credit crunch risk.
Investing time frame is the key variable. Different metrics for "day traders" vs. long term investors. Planning for fear of the known is fairly simplistic, fear of the unknown is a fools errand. Monetary and fiscal policies have been so distorted to accommodate immediate gratification that far more time an effort in due diligence is now mandatory to uncover "true" value. In general, the gloom and the all is great crowds are self serving. There are many serious threats to the bond and equity markets, if your horizon planning is five years or longer, do yourself a favor and ignore extreme articles. Just an observation, personal responsibility requires the willingness to adapt, improvise, and enjoy the challenge. After all, nobody has the answers or the correct timing, if you can't pay - don't play!
Fear is everywhere. Everyone including FED thinks economy will crash and stocks go to zero. It maybe the right time to buy dirt cheap stocks and watch it to take off soon.
ANG Traders profile picture
The knife is still falling. Wait for it to bounce off the floor. Nobody knows where the floor is. The longer the Western government hold off on fiscal support, the further the knife has to fall.

Having said that, the primary trend line is still quite a distance below where we are now.
KennethY profile picture
Dirt cheap stocks? We are 12-15% off the ALL TIME HIGH for the S&P NASDAQ and Dow that was set 2 weeks ago. What "cheap" stocks are you referring to?
Kevin George profile picture
I think there will be real value after this sell-off. Valuations and earnings will be key.
ANG Traders profile picture
Monetary policy isn’t enough. We need fiscal support. It looks like the CBs are waiting for the flames to come through the roof before they turn on the fiscal hose. Too late, of course.
Wez profile picture
@ANG Traders
"Monetary policy isn’t enough. We need fiscal support."

Cocaine isn't enough, we need heroin too!
ANG Traders profile picture
If this was a military threat, would you say to the individuals and businesses that they need to fund the defence out of existing resources?
Wez profile picture
@ANG Traders

What does that have to do with a CB action? If we need to fight it, Congress can move money toward it. CBs should act once a year, not in response to every headline.
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