View from the market trenches

03/27/20
  • Rebound continued as stimulus details emerge
  • Short squeeze? SPX up more than 20% from Monday’s low
  • US indexes approaching potential resistance levels

When a market sells off 35% in a little more than a month and then rallies around 20% in three days, you learn to expect the unexpected.

A company you’ve probably never heard of, health care products provider Henry Schein (HSIC), rallied 22% intraday yesterday on volume of more than 6.2 million shares, with a LiveAction scan showing call options volume was more than 20 times its average level.

It should come as no surprise the move followed the company’s announcement that it planned to distribute several hundred thousand rapid (15-minute) coronavirus test kits by the end of the month.1 By midday, though, the stock had pulled back to a more “modest” 8% gain:

Chart 1: Henry Schein (HSIC), 1/31/20–3/26/20. Henry Schein (HSIC) price chart. Spiked on coronavirus test kit news.

Source: Power E*TRADE


Whether the “juice” from yesterday’s news continues to fuel more upside is unknowable, although the stock’s intraday give-back suggested some traders thought the rally was overdone. HSIC shares were trading at record levels above $70 in late February before the coronavirus sell-off, and bulls who liked the stock before may still see potential for an eventual return to those levels.

But aside from the usual warning to avoid chasing stocks on “hot” news, shorter-term (and more skeptical) traders may choose to limit risk by trading options—for example, with a bull call spread (long at-the-money option and short out-of-the-money option with the same strike price). For reference, yesterday, HSIC July $55 calls were trading around $7.20; a further cool-down in share prices may allow call buyers to get into positions at slightly cheaper prices.

From support to resistance: While for weeks traders were busy referencing various support levels to see where the stock market might at least find a temporary bottom, the S&P 500’s (SPX) 20% rally off Monday’s low—that's more than two-thirds of what it gained in all of 2019—has flipped the script.

Traders who think the market may, at some point, test this week’s lows before all is said and done may now be looking at potential resistance levels within the February–March down move. The following chart shows some of the usual suspects—the three primary Fibonacci retracement levels (38.2%, 50%, 61.8%), along with the late-February swing low, which sits between the latter two Fib targets. The SPX came close to tagging the 38.2% level yesterday:

Chart 2: S&P 500 (SPX), 2/13/20–3/26/20. S&P 500 (SPX) price chart. Potential rebound resistance levels.

Source (data): Power E*TRADE


Aside from the basic relief of seeing the government step up to support the economy and markets (that’s why they call them “relief rallies”), there’s a good chance some short sellers who had bet on further downside after Monday’s sell-off have gotten squeezed, fueling the upside momentum.

The unprecedented fiscal and monetary policy measures rolled out over the past 10 days have accomplished one of their initial goals—stopping the market’s bleeding, at least temporarily—but in these conditions, traders need to coolly assess every move, up or down.

It’s worth remembering the stock market didn’t stop falling after the Troubled Asset Relief Program (TARP) was passed on October 3, 2008, regardless of how instrumental it may have been in steadying financial markets in the long-term.

Swing traders will likely find no shortage of price swings in the coming weeks.

Market Mover Update: Airline stocks—along with Boeing (BA)—continued to leave the broad market in the dust yesterday, and the emerging details of the latest US stimulus package may help explain why. The Coronavirus Aid, Relief, and Security Act (CARES) passed by the Senate yesterday earmarks $25 billion to support the aviation industry. And that’s just one of the drops in a very large bucket.

Energy still energized: The S&P 500 energy sector gained more than 4% yesterday, despite a 6%-plus drop in crude oil prices (see “Stocks embrace stimulus” and “From beat up to bid up”).

Report from the econ front lines: The all-important monthly jobs report doesn’t come out for another week, but yesterday’s weekly jobless claims number may have provided a glimpse of what investors can expect in coming months: It came in at a record 3.28 million—nearly five times the previous record of 695,000 from 1982.2

Today’s numbers (all times ET): Personal Income and Spending (8:30 a.m.), PCE (8:30 a.m.), Consumer Sentiment (10 a.m.).

Today’s earnings include: SecureWorks (SCWX).

 

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1 Reuters. BRIEF-Henry Schein Announces The Availability Of A Coronavirus 2019 Point-Of-Care Antibody Rapid Test. 3/26/20.

2 Briefing.com. Initial Claims unlike anything ever seen before. 3/26/20.

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