Technical Analysis of the SPX

Navigating The Reversal

A big news week navigating the Fed, GDP and jobless claims which all indicate a rough year for growth. However, the technical picture in the charts is clear that the rebound wave from the March low is over.

As you can see in this first chart, the S&P 500 peaked with an island top in February and did not find a bottom until March at 2,191. The bounce from that level ended at the 61.8% fibonacci retracement this week – which means the least path of resistance is now lower as we head into May.

Rebound resistance for the S&P 500 at a Fibonacci 61.8%.  @kiscocap

In the next chart below, I applied a fibonacci grid from the high this week to the March low. You can observe that the 61.8% support level coincides with a gap in the chart which may act as a magnet later in May. If we lose the 2,484 price zone in the chart, then a re-test of the March low would be a distinct possibility.

SPX: S&P 500 Chart  @kiscocap  www.kiscocap.com

The market is wrestling with the timing of when the global economy will return to normalcy but there is no clear path to when that will happen. Even a vaccine created tomorrow for COVID-19 would take well into next year to develop, manufacture and administer to the billions of people who want to be protected. This makes identifying a return to normalcy for global trade impossible to predict – it won’t be anytime soon.

In the meantime, there will be sectors that lose (commercial real estate/travel) and new technologies (video conferencing) that will change how people work together and do business with their customers. The central banks will continue to attempt to inflate risk assets like stocks and high-yield bonds in the coming year. However, a paper recovery would just put the market in a terribly overvalued position that would lead to another big fall down the road. A continued price recovery would also highlight that the real inflation over the last ten years was concentrated in the stock market and not the goods and services traditioanlly purchased by consumers.

Chart of the Week!

Just eight weeks after hitting 100 confirmed COVID-19 cases, the United States passed one million official cases on April 28.

COVID-19 Cases in the United States.  @kiscocap  www.kiscocap.com

Economic & Central Banking Snippets 

  • The Bank of Japan said it would nearly triple its maximum holdings of corporate debt to ¥20 trillion ($186 billion), joining other global central banks in trying to prop up companies during the coronavirus pandemic. With many companies seeing a sharp fall in revenue, central banks are concerned that a spiral of bankruptcies could result if borrowers don’t have ready access to funds. (WSJ)
  • The longest U.S. economic expansion on record is over. GDP posted its sharpest drop since 2008 as governments and consumers responded to the new coronavirus. A much lower reading is expected in the second quarter. (WSJ)
U.S. GDP Q1 2020  @kiscocap  www.kiscocap.com
  • Services consumption, from travel to restaurants to doctors’ visits, tumbled 10.2%, annualized, in the first quarter, accounting for roughly all the net decline in quarterly output. Unlike goods, services can’t be stored in inventory and are seldom imported, so almost every dollar not spent on services comes straight out of Americans’ incomes. (WSJ)
Personal Consumption Expenditures Q1 2020.  @kiscocap  www.kiscocap.com
  • U.S. consumer confidence posted its largest monthly decline on record in April. The Conference Board’s index showed consumers especially downbeat about current conditions. But they appear to see the country starting to emerge from the coronavirus pandemic relatively soon—a measure of expectations for the next six months improved.
Consumer Confidence April 2020.  @kiscocap  www.kiscocap.com
  • More than 3.8 million Americans filed for jobless benefits last week as states struggle to keep up with a surge in coronavirus-triggered claims. (WSJ)
U.S. Jobless Claims April 2020.  @kiscocap  www.kiscocap.com
  • A report from McKinsey & Co. says the pandemic shutdown will hurt 57 million U.S. workers once reduced hours and furloughs are taken into account. (Bloomberg)

Macro Snippets

  • Apple is delaying the production ramp-up of its new flagship phones by a month and slashing the number of handsets that it plans to make in the second half of this year by 20%, according to The Wall Street Journal. The tech giant will release four new models, some with 5G connectivity, later this year.
  • British Airways is preparing to cut almost 30% of its 42,000 workforce as the coronavirus crisis decimates the aviation sector. IAG, the airline’s parent, warned that a return to 2019 passenger levels would take “several years”. Other carriers have shifted from furloughs to redundancies as optimism for a fast rebound in the battered sector evaporates. Scandinavian airline SAS on Tuesday announced permanent cuts to half of its workforce, while Germany’s Lufthansa is considering creditor protection (bankruptcy). (FT)
  • The U.S. steel industry has fallen into its most severe downturn since the 2008 financial crisis. U.S. mills are operating at 56% of capacity, down from 80% in 2019, according to the American Iron and Steel Institute, and steel output across the country has fallen by a third in three weeks. Industry executives and analysts expect production to drop further. When orders do pick up, executives expect that businesses will spend less and that high unemployment will weigh on demand for autos, construction materials and energy equipment. (WSJ)
U.S. Weekly Steel production.  @kiscocap
  • Millions of gallons of beer stuck in stadiums, concert halls, restaurants and bars are fast going stale. The pandemic forced U.S. bars to close ahead of two of the country’s biggest drinking occasions: St Patrick’s Day and the “March Madness” basketball tournament. Beer intended for those events is now spoiling in locked establishments, and brewers are trying to get it back so kegs can be refilled before lockdowns are lifted. (WSJ)
  • The largest US meat company has warned of shortages for consumers, saying the country’s complex food chain was “breaking” as Covid-19 spreads to refrigerated packing plants. Tyson Foods has shut three slaughterhouses and partially reopened a fourth in the past week as it tests workers for coronavirus. John Tyson, chairman of Tyson Foods, said American grocery stores would have sparse meat selections until its plants came back. “As pork, beef and chicken plants are forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain,” he wrote in a letter published in three US Sunday newspapers. (FT)
  • The U.S. Supreme Court on Monday ruled that the federal government must make good on its pledge to compensate insurance companies that were hit with losses from selling health coverage in Affordable Care Act exchanges. Payment would honor an obligation the federal government took on as part of its efforts to lower the financial risk to insurers that offered low-premium health plans to patients buying coverage under the Affordable Care Act (ACA). (Knowhere)
  • Detroit’s car companies are targeting May 18 to resume some production at their U.S. factories. Executives from General Motors, Ford and Fiat Chrysler in recent days tentatively settled on the timeline after talks with United Auto Workers leaders and Michigan Gov. Gretchen Whitmer’s office, Mike Colias and Ben Foldy report. (WSJ)
March 2020 Auto Sales  @kiscocap  www.kiscocap.com
  • Houston’s Diamond Offshore Drilling filed for bankruptcy on Sunday with debts of more than $2.6bn, blaming the “unprecedented” impact of an oil price war and the coronavirus pandemic. In Chapter 11 filings lodged with Houston’s bankruptcy court, Diamond said conditions in its “highly competitive and cyclical industry” had “worsened precipitously in recent months”. (FT)
Boeing Cartoon.  @kiscocap  www.kiscocap.com
  • Boeing faces criminal and civil scrutiny into years of widespread quality-control lapses on its assembly line, according to people familiar with the details, potentially exposing the plane maker to greater legal liability than previously anticipated by industry and government officials. (FT)
  • McDonald’s said its first-quarter earnings fell 17% as the coronavirus pandemic led to restaurant closures and a steep drop in sales. Net sales fell 6% to $4.71 billion as the company observed “dramatic changes in consumer behavior” stemming from the pandemic. (Investopedia)
  • Royal Dutch Shell cut its dividend for the first time since the second world war as the coronavirus pandemic halved quarterly earnings and forced the oil major to confront a new longer-term reality for the energy industry. Oil companies are in crisis mode as lower energy prices and a collapse in demand for fuels and chemicals puts intense pressure on their finances, with severe lockdowns and travel bans in place across much of the world. (FT)
  • Norway will cut its oil production for the first time in 18 years, as Western Europe’s largest crude producer moves to respond to the coronavirus-linked crash in fuel demand. (FT)
  • About 7.3% of U.S. mortgages entered forbearance plans in April, providing temporary relief to more than 3.8 million borrowers who have lost income during the coronavirus pandemic. The loans have $841 billion in unpaid principal balance, up almost 12% from a week earlier. Under legislation passed in late March, borrowers are allowed to defer payments without penalty for as long as six months initially. (280 Securities)

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

Paul J. McCarthy III - President of Kisco Capital

Regards,

Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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