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S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

2020-02-25 03:47:00
John Kicklighter, Chief Strategist
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S&P 500, USDJPY, Gold Talking Points:

  • This past Friday's slip led to the biggest bearish gap to open a week for the Dow since August 1998 and since August 1981 for the SPX
  • Risk aversion overwhelmed the global markets Monday, showing a correlation and intensity across bounds that threatens the systemic
  • The coronavirus is reviving growth, monetary policy and trade fears; but ultimately, it is sentiment itself that may dictate the future

After an Extended Bout of Quiet, A Volatility Explosion for the S&P 500 and Dow

Global investors were dealt quite the shock to start the new trading week. Risk aversion hit hard following what otherwise seemed like a mere slip before the weekend. While the fear-based selling was broad, the benchmarks I referred to during the mass deleveraging were the benchmark US indices. The blue-chip Dow Jones Industrial Average suffered a hefty 2.0percent loss of altitude on the open Monday, which was the worst start to a week since August 1998. As severe as that may have been, it was outdone by the favorite among those looking for representation of the ‘the market’ – the SPY, emini futures, options, etc – as the S&P 500 recorded its worst jump lower after a week since August 1981 with the 2.7 percentpercent plunge before pricing began. That is extreme, but it is not exactly unexpected.

US 500 MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 9% -4% 0%
Weekly 12% 16% 14%
Are retail CFD traders pushing the drop or easing up?
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Chart of S&P 500 with Opening Gaps (Weekly)

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

Chart Created on Tradingview Platform

I am a firm believer that extreme volatility begets more extreme volatility. Yet, rather than referencing a sudden surge in activity providing the foundation for more intense movement; I mean that extreme quiet often resolves with a contrasting detonation. When looking at the S&P 500’s activity levels, the VIX volatility index was remarkably low, but had edged up from the 12-14 range we had frequented over the closing months of 2019 and opening weeks of this year. More remarkable is the realized activity measure from the same index’s ATR (average true range). The 20-day ATR – equivalent to one trading month – was hovering around the 20 mark for two months. That is the most consistent deflation since the second half of 2017, an even more extreme reference for sudden activity changes.

Chart of S&P 500 with 50-Day Moving Average and 20-Day Average True Range (Daily)

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

Chart Created on Tradingview Platform

Coronavirus Fear Starts to Bring the Attention Back to Systemic Issues

What makes the risk aversion registered through this past session even more impressive than the historical precedence of the lead US indices is the breadth of the tumble. The pain was registered through region and asset type. In addition to the Dow’s tumble, there were severe losses felt with the German DAX, UK’s FTSE 100 and Japanese Nikkei 225 among others. The ACWI all-world equity ETF was as painful as the VEU ‘rest of world’ (excluding US) performance. Emerging markets, high-yield and carry trade were all similar victims. Returning to the more traditional, there was also a serious spell of pain in the growth-sensitive markets. Crude oil and copper eased lower, but it was the US Treasury 10-year to 3-month yield curve which some economists refer to as a recession signal that was of greatest interest. The G20’s weekend discussion of the coronavirus impact on the outlook for the global economy that could offer the unflattering path to such interpretation. This section of the curve dove more aggressively into inversion – mirroring the situation in August whereby ‘recession’ fears soared according to Google searches.

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

Chart Created on Tradingview Platform

The economic implications aren’t the only traditional troubles brewing in the turbulence of the coronavirus. A clear critique was issued by some members of the weekend summit for the appeal of globalization and global trade. With China’s delegation absent at the meeting, the questions of being exposed to this or any other single country for supply chain needs were given serious weight. The risk that another quarrel erupts among other trade partners during this difficulty is not difficult to imagine given the strain already present. And, then there is the dependency cast upon monetary policy. US Treasury Secretary Steve Mnuchin said central banks would maintain support and could step in with more should the demand arise. In my estimation, should they be seriously called to task to provide stability, it is just as likely that they fall short of the task.

Chart of the S&P 500 Overlaid with Fed Fund Futures Contract for Dec 2020 as Rate Cut Views (Daily)

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

Chart Created on Tradingview Platform

Keep Tabs on the Dollar, USDJPY and Gold During the Tumult

In technical analysis, a ‘break’ is the potential for a more significant move in a market. Yet, just because there is a strong move does not mean that there must be follow through. That same gap between potential and realization exists on the fundamental side. Just because there has been a strong reaction throughout sentiment with a lightning rod in the coronavirus does not mean that underlying troubles are going to prompt a steady breakdown in all the optimism that has adorned the capital markets these past years. For that reason, I will watching some of the uniquely tuned assets that can speak to certain angles of risk trends. The US Dollar is one such measure. The benchmark currency wears many hats, but it isn’t exactly clear which it had donned during the 2020 and February climb specifically. A reversion to safe haven over something like relative growth potential would be a serious development. Further adding the Yen to that equation for USDJPY adds a unique dimension on priorities.

USD/JPY MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -6% 16% 6%
Weekly 31% 8% 16%
What does it mean for price action?
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Chart of DXY Dollar Index with the VIX Volatility Index (Daily)

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

Chart Created on Tradingview Platform

Another favorite, unique measure of market health in my book this past year has been the course traversed by gold. The precious metal does have safe haven qualities, but its appeal is a little more unique. That perhaps comes through in the commodities climb alongside the typical risk pace-setting US indices. This market perhaps shows the skepticism that underlies the speculative appetite that seems to blind other large swaths of the financial system to the risks so readily at hand. In particular, the appeal of the precious metal as an alternative to fiat currency is particularly as the question of monetary policy’s effectiveness is raised even further. Watch this market closely.

USD/JPY MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -6% 16% 6%
Weekly 31% 8% 16%
What does it mean for price action?
Get My Guide

Chart of Gold and FX Volatility Index Averaging CME Measures (Daily)

S&P 500 Suffers Its Worst Weekly Open Since 1981 as Coronavirus Fears Evolve

Chart Created on Tradingview Platform

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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