The Dow Jones futures are plunging today, and the coronavirus stock market rally has come under a significant threat after the S&P500 and Dow broke through some major levels last week. Investors are increasingly becoming anxious after China reported a sizable increase of coronavirus cases for the first time in nearly 50 days. The infection rate is spiking in the US, and conversations regarding a second wave have become highly misdirected. But the concerns of a potential lockdown in Beijing remain a chief threat due to new cases.
Riskier assets are entirely out of favour, and volatility is likely to surge once again. Oil prices are down massively today, with WTI Crude oil down over 5 percent today. The safe-haven asset, gold, is failing to attract bids. This is because investors are worried whether we are going to see a repeat of the situation that we experienced during March this year when large institutions had to sell their gold positions to save themselves from margin calls.
However, it is essential to keep in mind; the world is better equipped to deal with a second wave if there is one. The chances of shutting down the whole world economy like before are still minuscule, even though investors are concerned that it may happen.
What we need is good news on the coronavirus vaccine, and the moment we get more positive announcements about a coronavirus vaccine, the stock market is likely to roar once again as the bulls stand ready to take their vengeance.
The stock market breadth, something that filters the noise and provides the actual picture of the stock market rally, shows how the bull momentum has lost its mojo.
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NEW YORK, NEW YORK – MAY 26: A trader walks by the New York Stock Exchange (NYSE) on the first day … [+]
Dow Jones Futures Today
The Dow Jones futures have tanked over 750 points. This is nothing unexpected because the weekly price action for the Dow Jones Industrial average last week confirmed that there was more pain ahead for the US stock market rally because it set a new low. Yet, there was also a new high (on the weekly candle) for the Dow Jones, and this keeps trader hopes alive for the possibility of a re-bounce in the stock market.
On the weekly chart, the Dow Jones stocks dropped below their 50 and 100-week smooth moving averages (SMA); this indicates extreme weakness in the Dow Jones’ price. The only hope for the bulls now is if the Dow Jones’ price remains above the 200-week SMA. Otherwise, the odds are stacked in favor of the Dow to retest its Covid-19 low.
The bottom line is that the Dow index has become a lot more vulnerable, and bulls need to show some strength, which could happen near the 200-week SMA.
Dow Jones falls below key level and this threatens the stock market rally. The Dow Jones futures … [+]
Stock Market Rally
The stock market rally had a roller-coaster day on Friday, and after rising as much as 3%, bulls lost the battle for a short period before claiming the victory by finishing the day on a positive note. But for the week, the S&P500 stocks and Dow Jones stocks snapped their three-week rally and posted a loss. Both stock indices hit a lower floor than the previous week, indicating that more pain could be on the doorstep for the coronavirus stock market rally.
The S&P500 index gained 39 points and jumped by 1.31%, and the Dow Jones industrial average soared by 477 points or by 1.90% on Friday. United Airlines mainly led the gains and had the most substantial move in the airline industry. Norwegian Cruise Lines also soared over 18%. The energy sector mostly led the gains, with 7 of 9 sectors scored gains. 30-day price volatility dropped to 27.45 against the average of 26.08. The tech index, NASDAQ, closed below its 10,00 mark but gained 0.79%.
The surge in the new coronavirus infection rate in the US has become the biggest concern for investors, and this is denting the sentiment. For speculators, this is like Christmas coming early, and they have been labeling the stock market rally as one of the most underrated rallies in the history of trading.
Yes, valuations and S&P multiples didn’t make much sense with respect to the economic growth, but the hope among optimistic investors was that as the US economy begins to open up, multiples and valuations will adjust. But perhaps, what investors forgot to factor in what we are experiencing now: surge in coronavirus cases as the economy reopens.
As discussed previously, the fact is that the US never had complete control of the coronavirus in the first place. This is especially true if we compare the US management of the virus with other countries.
The concern is that what will happen if these coronavirus cases continue to rise, and the US has to shut down the country again? Steven Mnuchin, the Treasury secretary, has already said that the US isn’t ready to shut down the economy. Still, the reality is that if the health situation begins to get out of control, the US will have no other choice but to slam on the breaks. This particular scenario could bring the stocks down to their coronavirus lows.
But, again, I do not think that it will come to that point. I think it was natural for Coronavirus numbers to tick higher as the economy begins to reopen, and as long as the situation remains under control, the current sell-off in the S&P500 stocks and the Dow Jones industrial could be an opportunity for investors who sat on the sidelines during the coronavirus stock market rally.
The reason that I am saying this remains the same: the world is in a much better position today than a few months ago, a large number of countries have got the coronavirus situation under control, and the ones that have reopened their economies, coronavirus situation is firmly under control.
The chart below shows the worst one-week percentage drop for the S&P500 stocks and Dow Jones stocks since March.
S&P 500 stocks and Dow Jones stocks post worst weekly losses since March when the stock market … [+]
Stock Market Breadth
Measuring the market breadth is an important function as it provides a lot more detail about the strength of the stock market rally and it also helps traders to filter out the noise.
he S&P stocks breadth
- 6% stocks trading above the 10-day smooth moving average- difference from yesterday +4%
- 81% stocks trading above the 50-day smooth moving average- difference from yesterday +3%
- 36% stocks trading above the 200-day smooth moving average- difference from yesterday +3%
The Dow Jones stocks breadth
- 10% stocks trading above the 10-day smooth moving average- difference from yesterday +7%
- 67% stocks trading above the 50-day smooth moving average- difference from yesterday +4%
- 27% stocks trading above the 200-day smooth moving average- difference from yesterday -3%
The NASDAQ NDAQ stocks breadth
- 25% stocks trading above the 100-day smooth moving average-difference from yesterday +11%
- 75% stocks trading above the 50-day smooth moving average-difference from yesterday +5%
- 37% stocks trading above the 200-day smooth moving average- difference from yesterday +2%
Bottom line: There has been a massive shift in momentum and it is in still in favour of bears because a considerable percentage of stocks are below their 200-day moving average
Coronavirus Cases Spike
Coronavirus cases have started to surge once again. The most worrying element is a considerable surge in numbers in China, which had not reported any new cases for the past 50 days until now. 80 new coronavirus cases have been reported in Beijing the weekend. Many of these were linked with fresh seafood and vegetable wholesale markets. This has raised the odds of another lockdown in China. Coronavirus cases also jumped more than 25,000 in the US. States such as Texas and Florida have recorded the biggest surge in numbers after reopening their economies. Overall, there have been over 2 million positive cases for Covid-19 in America—a bigger number than any other country—and over 100,000 people have lost their lives because of this virus.
On a global basis, Latin America, Brasil, and parts of the Middle East like Libya are facing their worst days of coronavirus. Additionally, the infection rate has started to go through the roof in India once again, a heavily populated country.
Oil Prices: Crude And Brent
Crude oil prices are under major pressure because of demand fear and surge in supply. Crude oil is down over 12% from its recent high of $40.41 formed on June 8th and Brent over 14%. The recent crude oil inventory data for the past two weeks confirmed an increase in supply. The fact is that the US oil industry has become so efficient, that the break-even for some of the shale oil companies is between $30 to $33 (approx). Thus, the moment the price starts to recover, it is easier for these shale oil producers to resume their production. Given the fact that the demand is still immensely weak, any increase in production remains a threat.