For anyone who was upset about a lack of volatility in 2019, they must be ecstatic about 2020. Between the tensions earlier in the Middle East and the Coronavirus, different asset classes have been all over the place. For the last 2 weeks, markets have been in risk-off mode due to the unknowns of the Coronavirus. However, given the stimulus pumped into the market and the unsubstantiated stories that vaccines for the virus have been developed (or are being developed), traders seem to have forgotten about the tragic virus and are back to their normal “buy-the-dip” mentality we have seen over the course of the last year.
Look at a daily chart of the Dow Jones Futures. Price ended 2019 at 28508 and proceeded to move to all-time highs on January 17 at 29362, a move of almost 3% in 2 weeks. As fears of the Coronavirus spread, the Dow Jones traded down to 28105, a move of 4.3% lower and giving up all the 2020 gains. This move lower included Friday’s bearish engulfing candle and 595-point selloff. Price moved lower despite stellar earnings from Amazon (NASDAQ:AMZN) on Thursday. Clearly fear was in the driver’s seat.
Source: Tradingview, CBOT, FOREX.com
Something has changed over the last 3 days, right? Not really. As mentioned earlier, except for some unsubstantiated stories of new vaccines for the coronavirus, traders just bought the dip. The low on Friday was 28105. Today’s high as of writing was 29166 – a 3-day rally of over +1000 points, or 3.6%.
Check out USD/JPY. The Yen is thought to be a risk indicator, just as stocks are. When stocks move lower, USD/JPY tends to move lower as traders buy the safe-haven Yen. USD/JPY closed 2019 at 108.62. Just as with stocks, USD/JPY traded to new highs (NOT ALL-TIME HIGHS) on January 17 at 110.29, a move of 1.5% in 2 weeks. As stocks sold off, the USD/JPY surged. Last Friday, the pair put in a low of 108.31, again giving up all 2020 gains. This move included at 58-pip selloff on Friday alone. After the weekend and over the last 3 days, price has rallied from Friday’s low of 108.31 to today’s high so far of 109.84, a 3 -day rally of +153 pips, or 1.4%.
Source: Tradingview, FOREX.com
That leads us to ask the question: What will be the next catalyst to drive market prices? Friday, we see U.S. Nonfarm payrolls. Today’s ADP data was much better than expected, however this isn’t typically a market driver. Also, the next Fed meeting isn’t until March 18, so we will get another round of jobs data before then. Things seem undisturbed in the Middle East, for now. The Coronavirus is seemingly being ignored as traders bought the dip. The New Hampshire primary is next week. Perhaps the outcome of the primary may help steer the market. An OPEC cut to drive crude prices higher? Regardless of what the next catalyst is, traders have stepped in and bought the dip, which obviously has been working, until it doesn’t.