Risk assets are crashing on news that the Coronavirus is spreading substantially, reports Bill Baruch.
E-mini S&P (ESH)
Last week’s close: Settled at 3339.25, down 30.00 on Friday and 41.75 on the week
Fundamentals: Risk-assets across the board are sharply lower this morning. U.S benchmarks are all down 2.5% or more as some panic begins to set in. Ultimately, we find this a very healthy correction and one we have been able to capitalize on through the Russell 2000. Fears are mounting as to the impact of the Coronavirus, now known as Covid-19. The number of infections has topped 80,000 and the death toll is stretching towards 3000. However, today’s panic is due to the rise in cases outside of China. Particularly, South Korea and Italy. South Korea has shut down a Samsung factory after an infected employee was reported; there are 833 cases and seven deaths in the country. Italy’s numbers are rising this morning to 200 cases and five deaths. They have restricted travel and Austria has halted trains coming from Italy.
The economic data last week was very mixed, but Friday’s massive whiff on U.S Services PMI sparked strong waves of selling. We have been saying since last summer that the stock market must make a transition from Fed easing dependence to relying on better data. The read of 49.4 on Friday was the worst since January 2013 and the first contraction since February 2016. Looking back at the stock market’s bottom in February 2016 and how the Manufacturing reads from New York and Philadelphia last week surprisingly beat (Manufacturing PMI as a whole missed 50.8 vs 51.5 exp), we certainly find the economy at an inflection point.
One of our base cases for being negative on the Russell 2000 was the expectation that although sentiment turned broadly positive since Feb. 2, the hard data displaying the impact of Coronavirus has yet to come. Additionally, the small caps have lagged the breakout to new highs.
Chicago Fed National Activity is due at 7:30 am CST and Dallas Fed Manufacturing is out at 9:30 am CST. Also, the U.S Treasury will auction three- and six-month Bills at 10:30 am CST. The yield on the 10-year Note has cracked through 1.50% while the three-month yield is higher at 1.54%. Cleveland Fed President Mester, a 2020 voter, speaks at 2:00 pm CT.
Technicals: The S&P 500 and Nasdaq 100 are both sharply lower but neither has taken out the lows from end of January. Remember, the NQ laid extremely constructive groundwork at that time, putting in a low of 8925.50 on Jan. 27 and ultimately making higher lows into the Jan. 31 session, whereas the S&P traded to a new low on Jan. 31. These areas bring tremendous technical support starting with their Feb. 3 closes at 3245.50 and 9114.75; a level that price action gapped higher from the following morning.
Although the S&P has several levels of strong support even below that Jan. 31 low given the lower lows that were made at that time, the NQ has a larger line in the sand at 8925.50-8954.50. For the S&P, we see significance at 3195.75; at this level we believe enough of the longs would have hit the panic button.
Bias: Neutral
Resistance: 3272.75**, 3299.50-3303.50***, 3312**, 3328**, 3339.25***
Support: 3245.50***, 3234.25***, 3224**, 3212.75**, 3195.75***, 3181**
NQ (March)
Resistance: 9275.50**, 9330.75-9368.75***, 9458***
Support: 9138-9158.75**, 9114.25***, 8925.50-8954.50***, 8900**
Crude Oil (CLJ)
Last week’s close: Settled at $53.38, down 50¢ on Friday and up $1.06 on the week
Fundamentals: Crude oil is sharply lower along with all other risk-assets. As we discussed in the S&P section, panic is spreading due to the mounting number of Coronavirus cases outside of China, particularly in South Korea and Italy. Now that travel bans are being more widely used, it sheds light on the demand structure for the energy complex. There were rumors that Saudi Arabia along with the UAE and Kuwait would cut 300,000 barrels-per-day in order to help stave off a fall below $49, however, those rumors were denied, and price action remains heavy. Crude’s mid-January fallout of more than 15% immediately priced in some demand destruction. Now that the broader risk-environment is beginning to do the same, stocks, it could encourage an overshoot for the energy sector.
Technicals: We find the tape bearish if it can stay below $51.80. However, we will not increase our bearish bias given that crude oil is already down more than 4.5% on the session and we want avoid encourage traders to chase the move given that there are strong levels of support that come in at $50 and below.
Bias: Neutral/Bearish
Resistance: 52.29-52.64**, 53.15-53.38***, 54.20***
Pivot: 51.80
Support: 51.07**, 50.00-50.20**, 49.00-49.50***
Gold (GCJ)
Last week’s close: Settled at $1,648.8, up $28.30 on Friday and up $62.40 on the week
Fundamentals: Gold matched its best week since June, gaining nearly 4%. We pointed heavily last week to the three-month Bill and 10-year note yields inverting and this being a key factor paving a bullish road for the metal. Now, risk-assets are starting to catch up to some of the underlying signals such as the yield inversion and Friday’s whiff on Services PMI data was the last straw. The most amazing part is that gold has been able to rally with such ferocity despite U.S Dollar strength.
Technicals: Gold is very bullish out above our momentum indicator which comes in this morning at $1,662, however, just as we said in the crude section, we are not increasing our bias in order to exude patience in strategy and not to encourage chasing a move. There is strong support below the market adding to the bull case. Major three-star support comes in at $1,645.90 to $1,648.80 aligning Friday’s close with a previous level.
Bias: Neutral/Bullish
Resistance: 1687**, 1716***
Pivot: 1662
Support: 1645.9-1648.8***, 1615-1619.6***
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com. Sign up for a complimentary two-week trial of 1 or all 6 of our daily Blue Line Express commodity reports!Please sign up at Blue Line Futures to have our research emailed to you each morning.
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