I could describe trading over the last month in a more calming way but we all know it has felt more like bungee jumping on a very long cord with wild swings up and down. We knew that a tiny handful of momentum stocks like Apple, Microsoft, Nvidia, Facebook and Amazon were responsible for an unprecedented percentage of the latest move to higher prices. Many folks were observing that a handful of stocks were responsible for more than 22% of the gains.
However, nobody really rang a bell at the top of the market as measured by the Dow Jones Industrials on Feb. 12 when prices peaked at 29,551. Instead the talking heads were touting this as the great new high and you better get on board. The investing public wasn’t exactly "buying it." Volume that day was only 309 million shares.
Compare that with volume on Friday, Feb. 28. As we fell rapidly into correction territory, the Dow dropped to a recent low of 25,409. Volume that day was triple that at the top with 915,990,000 shares traded. On that day, the percentage of stocks above their 200-day moving average fell below 25%, a very sharp drop from its high of just under 70% only two weeks prior. Triple the volume seems like a pretty good dose of capitulation and it continued as the market bounced up and down early this week.
The economy is surely softening. My expectation for this year was a gain of 5-6% for stocks for the full year. That was based on economic growth slowing to 1-2%. In fact, many economists have lowered expectations to 0-1% as a result of the unknown impact of the COVID-19 virus.
We know that the impact in China from which the virus emanated was swift and dramatic. China reported its worst economic numbers last week as it closed plants and schools and told everyone to stay at home. The leadership recognized the threat and tried to rapidly shut it down. Unfortunately, top leadership in the U.S. was slower to react to its arrival in the continental U.S. Now, efforts are being coordinated at the national level by Vice President Mike Pence.
The good news is that cases appear to have peaked in China and some factories are already resuming operation. The number of cases in the U.S. is still on the rise and apparently spooked the Federal Reserve Board into cutting interest rates by 0.5% on Tuesday. I cannot figure out how cutting interest rates in any way solves a disease problem. The view early in the year was that stocks were zooming because the Fed has already made Federal Funds too readily available. That money was seeking its own level in the stock market because it had no other place to go.
Once reported cases peaks in the U.S. it should provide an all-clear to investors but I believe the bottom may already be in. Panic continued into this week with heavy volume at twice the normal level. This is how bottoms form. For sure, many stocks have been repriced to attractive levels. By the time it is obvious to all that all danger is past, you will have missed your chance to buy the things you like on your shopping list at bargain prices. I’ve had mine ready for weeks.
Joan Lappin CFA has been called an "investment guru" by Business Week and a "top manager" by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email her at firstname.lastname@example.org. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.