On Monday, I was buying the market with leverage because I was looking for a strong bounce at certain levels in the S&P 500 under 2800.
Here's what I told my TAZR Trader group on Sunday night...
Black Monday Bearing Gifts
Posted on 3/8/20
Here's a late Sunday night glance at the charts as S&P futures are currently locked limit down at -5% on the first circuit breaker at 2819.
First we'll look at the SPX with big buying bands between 2600 and 2800.
I plan to scale into positions starting in the morning and evaluating as we go.
SPX 2750 is the 62% retrace of the move from Dec '18 at 2350 up to 3400.
SPX 2720 will be a 20% correction. Here's a 3-year weekly chart with 20 & 40 MAs...
(end of Sunday alert)
We ended up buying the ProShares UltraPro QQQ 3X Bull ETF (TQQQ - Free Report) near the lows at $62.
In the video that accompanies this article, I show that chart and also my favorite "breadth capitulation" measure that marked an extreme low on Monday -- a sign of panic we have never seen before in this bull market.
This strategy has worked for me many times and so I was perfectly ready and willing to take the calculated risk/reward bet. By Tuesday's close after a nearly 5% rally in the indexes, we were staring at 15%+ profits in the trade.
I also added to my favorite big-data analytics company Alteryx (AYX - Free Report) near $115.
But this morning, Wednesday March 11, found me selling both and then some. I also sold two more favorites Square (SQ - Free Report) and The Trade Desk (TTD - Free Report) , the "CME of advertising."
Why the sudden change of heart?
Because the bull market just got kicked in the teeth by confirmation of a worse-than-unexpected earnings recession. It's not just the economic contraction happening because of COVID-19.
It's also the potential oil bankruptcies that Pioneer Natural Resources (PXD - Free Report) CEO Scott Sheffield talked about on Monday. Sheffield said Pioneer is secure, but other shale companies in places such as North Dakota, Oklahoma and Texas will face difficulties.
“We are preparing for two years of low prices and will make the necessary adjustments to maintain our great balance sheet,” he said. "But there will be many bankruptcies in our industries and tens of thousands of layoffs over the next 12 months.”
That has shades of the damage we were expecting during the 2015-16 oil-driven earnings recession. PXD dropped a stunning 37% on Monday.
And that is one of three reasons why I am much more on the watch for a potential economic recession.
Here is another: if the US follows the path of a country like Italy, the COVID-19 spread gets worse medically and economically in the next few weeks.
Here is the third reason that I described to my group on the afternoon of Black Monday...
Recall that during the Q4 meltdown of 2018, one of the market dynamics that had me concerned was the status of high yield and junk bonds -- especially after my favorite "bond king," Scott Minerd of Guggenheim, said that $1 trillion of issues could drop into junk status.
At the time, the Fed realized the error of their ways and reversed Quantitative Tightening (QT) in both language and deed.
Well, Scott is sounding the alarm again on credit markets re-rating bonds and risk. I don't have his exact quote but it's very similar to the 2018 and 2019 warnings.
The problem now is that the Fed has already come to the rescue.
While they certainly have the tools to hold off a credit crisis, they can't stop an economic recession from unfolding if that contraction momentum is already in progress.
And the newest level of feedback for that quickly emerging slowdown is that consumer and investor confidence will take a big hit, exacerbating the retrenchments in spending, to say nothing of the new Saudi-Russian oil war's impact.
A mild recession would be fully discounted if the S&P 500 falls 30% to 40%, or to 2380 to 2040.
That's a long way down from here, and it's certainly not inevitable. There will be lots of bounces and trading action between here and whatever fear takes over to escape recession pain. I'm playing for the bounces and buying the panics right now.
(end of Black Monday commentary)
So how did I shift completely into the earnings recession camp?
Blame it on David Kostin.
Here's what I wrote this morning as I sold half my stocks...
Kostin Pulls the Plug
Posted on 3/11/20
Technically, the market is broken and we were waiting for a cessation of over-done fear. Now the economic and earnings metrics are sending a fundaental warning that may justify the fear of being in stocks.
This morning, the market is breaking fundamentally with Goldman's Kostin lowering his EPS estimates, again, to -5% growth for this year. Consensus is still looking for +3%.
Large investors will be unloading into every rally. A fiscal stimulus could result in a temporary rally, but it won't save the economy in Q2. A summary of Kostin's note is below and here's his appearance on CNBC this morning.
The S&P just bounced off of 2760 as it reacts to the Goldman call (which a lot of hedge funds probably knew was coming last night). But new targets for this kind of institutional liquidation will be SPX 2500 and lower.
So here are the other actions I'm taking today as there will soon be little mercy for stocks...
(end of Wednesday morning alert)
In the video, I go over the crucial way you need to look at Kostin's call in terms of what institutional investors will model and discount over the next few months.
And here is a summary of Kostin's call, adapted from TheFly.com...
Goldman Sachs believes the S&P 500 bull market will soon end after 11 years
It was quite a ride with 13% annualized earnings growth and 16% annualized trough-to-peak appreciation
The S&P 500 bull market will soon end, Goldman Sachs equity strategist David Kostin told investors in a research note. After reducing Goldman's S&P 500 earnings per estimate to $165 on February 27, the analyst today lowered it further to $157, which represents a decline of 5% relative to 2019. On a quarterly basis, earnings will likely collapse by roughly 15% in Q2 and 12% in Q3, before rising by 12% in Q4 and 11% in 2021, Kostin estimates.
The strategist attributes lower crude oil prices and interest rates, which he notes diminish energy and financial company profits, for the earnings reduction. Kostin's new mid-year S&P 500 target of 2,450 represents 15% downside from current levels and 28% below the market peak. The strategist expects falling growth expectations and consumer confidence, along with elevated policy uncertainty, to widen the yield gap to 665 basis points.
This, when coupled with a forward price-to-earnings multiple of 14 times, yields a mid-year S&P 500 level of 2,450. Kostin, however, expects the impct of the coronavirus to likely wane later in 2020. The corresponding recovery in earnings and sentiment will reduce the yield gap to 450 basis points and lift the S&P 500 to 3,200 by year-end, he writes.
(end of TheFly.com summary notes of Kostin's research report)
Is Kostin right about both 2450 soon and then 3200 later? Maybe. But in an earnings recession, large investors will err on the Q2 forecast being more urgent than the Q4 one. I’m following the big money and getting ready to buy deeper panic, looking for more sustainable relief bounces.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click "Follow Author" above to receive his latest stock research and macro analysis.
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