Trading lessons from a “Blue Monday”
- SPX drops more than 11% intraday as US goes on lockdown
- Fed slashes rates to zero, fires up QE
It may not have been a “Black Monday,” but yesterday certainly qualified as blue, as the S&P 500 (SPX) dropped 12% as much of the US went into lockdown to slow the spread of the coronavirus:
Source: Power E*TRADE
It was the SPX’s second-largest one-day loss since 1957, trailing only the Black Monday—October 19, 1987, when the SPX tumbled 20.47% in a single day. After the closing bell rang, the SPX was less than 2% from the the support level represented by its December 2018 bottom.
The move occurred even after the Fed slashed interest rates for the second time this month, and reintroduced the type of quantitative easing program it used in 2008-2009 to fight the financial crisis.
The following table shows two of this month’s biggest down days have muscled their way onto a top-10 list that had previously been dominated by 2008:
Source: Power E*TRADE
The message is clear: We are in an exceptional environment—not unprecedented, but certainly on par with other market shocks of recent decades—and while there may be opportunities for extremely accomplished and experienced market players, traders need to respect the risks that come with such conditions.
While the worst thing traders and investors can do in such situations is let their emotions get the best of them, this is not an environment to take lightly. If we take history as our guide, the market is known to punish those who trade casually or too aggressively.
Nothing lasts forever, though. Remember, in October 2008, which was host to five of the 10 worst intraday sell-offs of the past six decades, the end of the selling was not too far away, even if few people may have believed it at the time.
Trade safe, and trade smart.
Goldman gives itself more wiggle room: Over the weekend, Goldman Sachs, which on March 11 forecasted a mid-year SPX target of 2,450, allowed that if the economic repercussions of the coronavirus worsen, the index could find its bottom closer to 2,000.
The good news on the virus front: Yes, there is some. While Europe and the US go into lockdown mode, new cases in the original coronavirus epicenter—Hubei province, China—have slowed to a trickle. Last Thursday, for example, just eight new cases were reported,2 and last week China closed the last of the 16 emergency hospitals it had built in Wuhan to treat coronavirus patients.3
The trajectory of the virus in several Pacific Rim nations may also provide hope to countries that move quickly to combat it. Despite being one of the first countries outside China to experience a widespread outbreak, South Korea’s aggressive testing and containment measures appeared to limit the damage, and led authorities last week to express cautious optimism that cases had peaked.4
Singapore and Taiwan have avoided widespread outbreaks, while Hong Kong, and Japan have significantly slowed infection rates, which many experts attribute to a formula of travel restrictions, testing, contact identification, and strict quarantines.5
Circuit breaker update: On Monday, the U.S. stock market’s initial (-7%) circuit breaker triggered for the third time in a week. The good news is that, so far, the stoppages appear to be doing what they’re supposed to—the market has rebounded, at least temporarily, after each of the halts.
Trading is suspended in US stocks when the S&P 500 (SPX) falls a certain percentage below the previous day’s closing price:
Circuit breaker 1: If the SPX falls 7% below the previous day’s close, trading stops for 15 minutes.
Circuit breaker 2: If the SPX falls 13% below the previous day’s close—before 3:25 p.m. ET—trading stops for 15 minutes. (If the SPX falls 13% after 3:25 p.m. ET, trading doesn’t stop.)
Circuit breaker 3: If the SPX falls 20% below the previous day’s close, trading stops for the remainder of the day, regardless of the time.
Stock index futures use the same circuit-breaker thresholds, but they have an additional rule for the after-hours market: Trading is halted after any 5% move above or below the previous day’s close that occurs outside the stock market’s regular trading hours of 9:30–4 p.m. ET.
Today’s numbers (all times ET): Industrial Production (9:15 a.m.), Housing Market Index (10 a.m.), Business Inventories (10 a.m.), JOLTS (10 a.m.).
Today’s earnings include: Baxter (BAX), FedEx (FDX).
1 Bloomberg.com. Goldman Sachs Warns S&P 500 Might Not Bottom Until 2,000. 3/15/20.
2 Fortune.com. China’s number of daily new coronavirus infections has fallen into the single digits. 3/13/20.
3 Xinhua.net. All 16 temporary hospitals in Wuhan closed. 3/10/20.
4 CNN.com. South Korea has 'passed the peak' of the coronavirus outbreak, health minister hopes. 3/9/20.
5 Financial Times. Containing coronavirus: lessons from Asia. 3/13/20.