The stock markets gave back five months of gains in five days this week. As you can see in the long-term chart below, the S&P tagged a trend line from the 2009 low (blue line) which was was rejected and then caused stock prices to crash down to the October 2019 low. One of the worst weeks on record for the stock market and I think this is just the first leg down in a much larger correction that will play out over the next several months.

S&P 500 Long-Term Chart

The bond market also reacted as yields plunged signaling that a rate cut from the Fed is likely in 2020. The chart below shows how the divergence between bonds and stocks re-connected in swift fashion.

S&P 500 vs Bons Yields

If you have been reading my posts, you have seen this chart before in Signs of Divergence. You can also review the negative technical indicators in my post on Warning Signals from January 19th. This type of price correction was in the cards and finally came to fruition this week. What is happening?

The media has attached the coronavirus to the cause of this correction but the Fed is responsible for pushing stocks into an unsustainable position. The emergency REPO overnight lending program to financial instittuions began in October of 2019 where the Fed began increasing their balance sheet by $450B+ to near $4Trillion.

This was the fastest increase on record as the REPO program involved the Fed buying massive amounts of T-Bills. This program began slowly in August and accelerated in early October which pushed stocks higher unabated until February – see chart below.

One more notable, an Island Top (Reversal) formed in February which you can see in the upper right hand corner in the chart below. So, the S&P 500 was overbought, tagged the 2009 trend line resistance and now has an island top. I wouldn’t bet on tagging that trend line again anytime soon.

S&P 500 1 Year Chart

As you can see from the technicals, the collapse in equities was not a surprise nor is it totally caused by the coronavirus. However, a slowdown in global trade (very likely) could initiate a credit cycle if revenues are interrupted because their supply chains are frozen. Let’s also keep in mind that corporate earnings growth was flat in 2019 while stock buybacks continued uninterrupted so many balance sheets out there are not prepared for a disruption in cash flows. Too early to say this will happen but there is a lot of leverage in the system and corporate America may have been caught swimming naked as the tide goes out.

Chart of the Week!

Flight activity in China before and after the coronavirus.

From NYT/

Economic & Central Banking Snippets 

  • New home sales in January totaled 764k, 46k more than expected and December was revised up by 14k to 708k. With only a modest rise in the number of homes for sale, months’ supply fell to 5.1 from 5.5. The median home price increased 14% y/o/y pressured by the number of homes priced above $500k. (Boock Report)
  • Average home prices in major U.S. metropolitan areas rose 3.8% in December 2019 according to the S&P CoreLogic Case-Shiller National Home Price Index. The 20-city index posted a 2.9% annual gain in December, up from 2.5% the month prior. All 20 cities saw price increases. (Investopedia)
  • Core durable goods orders for January surprised to the upside with a 1.1% m/o/m gain vs the estimate of up .1% and December was revised up by 3 tenths. (Boock Report)
  • Hong Kong’s exports in January plummeted by 22.7% y/o/y, well worse than the estimate of down 3.7%. Imports dropped by 16.4% y/o/y vs the forecast of down 2.5%. A government spokesperson said “Looking ahead, despite some easing in US-Mainland trade tensions lately, the global economic recovery is still fragile and fraught with uncertainties. Of particular concern is the threat of the novel coronavirus infection, which will heavily weigh on regional production and trading activities. Hong Kong’s merchandise exports will face a very austere external trading environment in the coming few months.” (Boock Report)

Macro Snippets

  • Marriott International, the world’s largest hotel company, said it could have about $25 million less in fee revenue a month this year, compared with its outlook, assuming current low occupancy rates in the Asia-Pacific region continue. (WSJ)
  • Nestlé told more than 290,000 employees to suspend all international business travel until March 15, and requested that all domestic trips be skipped whenever possible for now. Other companies trying to navigate the epidemic are adding new restrictions. (WSJ)
  • Of course, not even the housing market is immune to the coronavirus. Toll Brothers Chairman and CEO Douglas Yearley told analysts this week that production constraints in China are affecting the supply of lighting and some small appliances. “Longer-term, there’s some chatter about whether steel will become an issue, but we’re not feeling that yet.” (WSJ)
  • Microsoft warned that supply-chain disruptions would dent this quarter’s sales, the second major tech company after Apple to lower expectations because of the public-health crisis in China. (WSJ)
  • China has lifted restrictions on importing agricultural products from the US as it implements the first phase of a trade deal, US officials say. The action eases concern that the coronavirus outbreak might slow Chinese purchases of US goods. (WSJ)
  • Hong Kong will spend $15 billion to support an economy reeling from the coronavirus outbreak and months of protests. Every permanent resident above the age of 18 will receive $1,200 in cash. (Investopedia)
  • Cisco has begun a new round of job cuts. The company, which predicts revenue will fall this quarter, told The Wall Street Journal the layoffs are “part of an ongoing process of aligning our investments and resources to meet the evolving needs of our customers and partners.” (Investopedia)

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.