Beyond Virus Count, Here’s the Signs to Watch for Market Rebound

As the week begins with another limit-down tumble in U.S. equity futures, market participants are increasingly veering away from any attempt to predict a bottom, while ramping up analysis of what might presage one.

“There seems little natural support for stocks,” Amir Anvarzadeh, a three-decade stock-market veteran who’s a strategist at Asymmetric Advisors in Singapore, wrote in a note Sunday. He described his suggestion last week that equities could find a solid floor in the short term as, in retrospect, “wrong and hugely naive.”

Anvarzadeh’s is just one of countless abandoned calls as the toll of death and economic wreckage from the coronavirus piles up. Besides the obvious metric — a peak in new cases — strategists are highlighting the following as among potential measures for a turnaround:

  • Two or three straight days of gains for equities
  • A stabilization in funding markets
  • Fiscal packages seen as sufficient enough to avert mass bankruptcies and support incomes for those laid off
  • A pharmaceutical development that offers a solution

The following are comments from market participants on what they’re watching.

Fiscal = Critical

Dennis DeBusschere, head of portfolio strategy at Evercore ISI:

“According to investors, until cases peak, there is a pharma solution and a significant fiscal offset (in that order), volatility and correlations will remain at extremes and dire market scenarios remain on the table,” DeBusschere said in a note Sunday, citing an Evercore investor survey published Friday.

“Fiscal offsets bridging the gap to peak cases are incredibly important though. Otherwise we get peak cases and a deep recession.”

Central Banks

Kamakshya Trivedi and Zach Pandl, strategists at Goldman Sachs Group Inc.:

“Given the amount of policy support announced each day — asset purchases, income replacement schemes and fiscal stimulus plans — a temporary bounce could happen at any time.”

But for a sustained recovery, investors will need visibility on the duration of the economic disruptions that are now still escalating, they wrote. “A strong policy response that finally gets ahead of the deterioration in the data” is also important. Fiscal and monetary moves so far are in the right direction, “but we doubt that they yet cover all that will be needed.”

Central banks’ lender-of-last-resort actions “need to be broader and more unconditional,” they said. They may also need to become “purchaser of last resort” to address dislocations in funding and fixed-income markets, the Goldman analysts wrote, among their observations.

Two Days

Larry Peruzzi, director of international trading at Mischler Financial:

“For U.S. markets, back-to-back ‘up days’ would be a great signal — let alone three days in a row. That is what makes Friday’s sell-off that much more painful, as U.S. markets were positioned for their first back-to-back gains since Feb. 11-12,” Peruzzi wrote in an email Sunday.

Money Funds

Julian Emanuel, strategist at Btig LLC, highlighted the following questions:

  • “Will governments’ still-growing fiscal response be enough to help investors ‘look past’ the damage, as they were able to do at the prior jobless claims record in 1982.”
  • “Can the beginnings of stabilization seen in dollar funding markets after coordinated central bank action help calm equity and other markets?”
  • “When will investors feel confident enough to deploy the money-market cash reserves built up over the past two years, now near the GFC-era highs?”

Restaurant Reservations

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets:

“The precipitous decline in the S&P 500 over the last few weeks has occurred alongside an equally sharp drop in diners at restaurants that use OpenTable,” Calvasina wrote in a note Thursday. “We think this data point will be important to monitor later in the year, when the consumer backdrop starts to return to normal and investors are looking for insight into whether consumer trends are improving.”

Fiscal Speed

Torsten Slok, chief economist at Deutsche Bank Securities:

“The key issue to look out for in the ongoing U.S. fiscal negotiations is the speed with which any fiscal package will arrive in the hands of companies and consumers. The longer it takes, the deeper the ongoing slowdown will be.”

“We probably have to wait until mid-May before the stimulus money arrives in the hands of U.S. consumers” due to lack of mechanisms like direct deposit to American consumers, he wrote.

Defensive Trades

Tom Lee, cofounder at Fundstrat Global Advisors LLC:

“Something unique in this sell-off has been the shift in sector movements,” Lee wrote in a note Friday. “On Monday, during the 12% crash, leading the declines were cyclicals like discretionary, FANG, tech, energy, etc. And defensives, naturally outperformed. This pattern continued on Tuesday as well (defensive led). But Thursday and Friday, staples and utilities, the bedrock defensive trade, underperformed. Is this a sign of selling exhaustion? Maybe.”

FX Trade

Mark Cranfield, a strategist with Bloomberg’s MLIV blog:

Australian dollar is a gauge of risk, while the Swiss franc is typically a haven, so the cross-rate between the two could be a valuable metric. The Aussie-Swissie cross has dropped almost 17% since the start of the year, reaching record lows. “Until the Aussie can make a sustained rebound, only the bravest of investors will be calling for an end to the broad rout in risk assets,” Cranfield said.

‘Suckers Rally’

Matt Maley, equity strategist at Miller Tabak & Co.:

“Even though we’re suggesting that investors dip their toes back into the market in a small way, we do believe that we’ll see lower lows before the ultimate low is reached,” Maley wrote in a note Sunday.

“First,Ronin Capital is the first failure, not the last. Second, we have no idea what the final outcome of the coronavirus will be. Third, we always see a failed ‘suckers rally’ before the real capitulation takes place. It’s going to be an extended period of volatility and nervousness. Stick to a plan. Let the market come to you.”

Ronin Capital Forced to Shut as Global Market Freefall Continues

Forward Earnings

Troy Bombardia, Sundial Capital Research Inc.:

“The S&P 500’s forward earnings yield has improved significantly from where it was before this crash. However, it still isn’t as attractive as I would like it to be,” Bombardia wrote in a note Saturday. “If stocks are to return a long term average of 10% per year (not adjusted for inflation, including dividends), I would like the forward earnings yield to reach at least 8% before I start to buy heavily.”

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