Monday, March 30, 2020

Two Charts That Concern Me Right Now

I encourage readers to take a look at the most recent Forbes article.  I've identified several excellent sources of information for the evolving coronavirus/COVID-19 situation, and I've also linked to excellent sites and services that track quantitative patterns in the markets.  Both of these sources of information can help us navigate risk and reward going forward, so that we focus on what we *know* and don't get carried away with emotional headlines and politicized commentaries in the media.

OK, let's talk about the market.

It indeed appears that we have put in a momentum low in stocks.  On March 16th, across all exchanges, we registered 3421 stocks making fresh 3-month lows against only 11 highs.  (Data from  When we made a closing price low on the 23rd, we saw 9 new highs against 1272 fresh lows.  That divergence preceded the rally of last week.  If we look only at the Standard and Poor's 500 Index, we see new 52-week highs outnumber new highs by an amazing 437 issues on March 12th.  (Data from Index Indicators).  That spread narrowed to 310 issues at the price low on the 23rd prior to the recent rally.  

That seeming momentum low in stocks has a number of traders looking for (successful) tests of the lows in future price action.  Such a scenario may well unfold, particularly if news regarding the virus (and successful therapeutics) turns positive.  A caveat to that view is that such bottoming processes can take a while.  When we made momentum lows in October, 2008, for example, it wasn't until March of 2009 that we saw price lows.  There is considerable variability from cycle to cycle in the timing between momentum lows and ultimate price lows, with months often intervening between the two.

There are a couple of factors in the current market that have me cautious regarding the future and the scenario of an imminent bottom.  The first is the course of the viral outbreak, as we can see below:

Here we see a chart of COVID-19 cases per day in the U.S. (Data from the COVID Tracking Project and YCharts).  Note that the curve is not flattening and, indeed, seems to be in its exponential rise.  Similarly, new cases in Italy and Spain have been on the increase.  It is not at all clear to me that the social distancing efforts to this point will stop this curve from getting quite scary, with exponential strains on the economy and the healthcare system.

The second chart tracks credit spreads between the highest and lowest rated investment-grade corporate bonds through March 26th.  (Data from Federal Reserve and YCharts).

Note that, even with the stock market rally last week (blue line), the yield spreads between lowest and highest rated investment grade bonds (red line) continued to rise.  Quite simply, the corporate fixed income market is continuing to warn us of possible defaults as part of business failures.  That is not what we want to be seeing in markets anticipating recovery.

The theme of the Forbes article is that we want to be as evidence-based as possible in handicapping the odds of future market moves.  The two charts above are among the variables I'll be tracking going forward to see if we're seeing light at the end of the bear market tunnel or just the headlights of an oncoming train.