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Week Ahead: U.S. Stocks Enter Correction Territory; Room For A Bounce Next?

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewMar 01, 2020 07:09AM ET
www.investing.com/analysis/week-ahead-us-stocks-enter-correction-territory-room-for-a-bounce-next-200512225
Week Ahead: U.S. Stocks Enter Correction Territory; Room For A Bounce Next?
By Investing.com (Pinchas Cohen/Investing.com)   |  Mar 01, 2020 07:09AM ET
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  • Sharpest selloff since financial crisis
  • Rate cut likely, but to limited effect
  • Gold plunge signifies irrational market
  • Pessimism that a recovery in the global economy will not be able to withstand the global spread of coronavirus, provoked the worst weekly sell-off in U.S. equities since the 2008 crash. U.S. markets lost $3.6 trillion in value last week as investors fled to a small group of safer havens.

    Demand for the Japanese yen and Treasurys increased, while both the dollar and gold sold off.

    Enduring Negativity Loop?

    The S&P 500, Dow Jones and Russell 2000 all closed lower on Friday, though the NASDAQ managed to eke out a small gain; nevertheless, each of the major U.S. indices slumped into correction territory as the trading week came to a close.

    Stocks dropped for the seventh straight day on Friday, with the S&P plunging 12.6 percent. The Dow Jones Industrial Average plummeted 14%, to its lowest level since June. The NASDAQ dropped 12.5%, and the Russell 2000 was down 13%. By Thursday, American equities had already fallen more than 10%, the official figure for a slide to be considered a correction.

    We've written repeatedly about there being "room for a correction." With that prediction fulfilled, the technicals are now indicating there could be a bounce, at least in the short-term.

    Dow Daily
    Dow Daily

    On Friday, the Dow produced a powerful hammer at the June 3 low, which also hits above the uptrend line since the February 2016 bottom—a point that happens to encompass the entire Trump trade.

    To be clear, we're not saying the sell-off is over, no one can know that. Rather, the selling has reached a technical point that provides room for a bounce, to whatever degree or duration.

    Of course, the fundamental problem remains Covid-19. Global economic growth is still in shock from the epidemic and company earnings are taking a hit, the result of supply chain disruptions and rising costs as workers are furloughed and factories closed.

    Overlaying all this are the unsettled financial markets, leading to pockets of illiquidity, provoking the stress selling we’ve been experiencing. Unfortunately business and financial conditions feed into each other; right now they're creating an enduring negativity loop.

    We’re looking for the formation of a bottom, which has not yet taken place. However, some investors, in search of the big score, will likely take the risk of riding a potential rebound that could be as violent as the freefall that preceded it.

    On the final day of weekly as well as February trade, the S&P 500 declined 0.8%, trimming losses of more than 3% during the final 15 minutes of trading. The benchmark index still dropped for a seventh day, its longest slide since 2016.

    Bank shares underperformed. JPMorgan Chase (NYSE:JPM) sank by more than 4%. This fits with the financial disruption we discussed above, as liquidity evaporates. Funding may dry out as lenders assume defensive positions, something that was done during the 2008 financial crisis.

    All of which may force the Fed to cut rates as a way of trying to ease credit, though probably moreso to placate markets since the U.S. central bank already knows such a move won’t have any lasting effect. A move such as that would lead Europe and Japan to punish banks with even deeper negative interest rates. Could that be where the U.S. is ultimately heading as well?

    UST 10Y Daily
    UST 10Y Daily

    Yields on the U.S. 10-year Treasury plunged, taking them deeper into uncharted territory, after having fallen below the previous record low of July 2016. This was before the election of Donald Trump reawakened the market’s Animal Spirits.

    Right now, however, a death cross suggests there are more potential declines ahead for rates, which have actualized the drop implied by the previous two patterns.

    The U.S. dollar also had a terrible week. The global reserve currency fell 1.75% in four out of the last six sessions, after its Feb. 20 high saw the greenback hit the highest point since Apr. 21, 2017.

    DXY Daily
    DXY Daily

    However, the sell-off provided an opportunity for the uptrend line since the beginning of the year to prove itself, and it didn’t undo a golden cross.

    Gold was annihilated on Friday. The yellow metal experienced its worst plunge since 2013. This is nothing less than shocking given the obvious risk-off sentiment currently pervading markets. What’s more, the USD plunged at the same time, making gold even cheaper.

    Gold Daily
    Gold Daily

    This indicates an irrational selloff—one we can only attribute to profit-taking gone bad. However, the price's obvious support by both the 50 DMA and the uptrend line since mid-December suggests the panic-driven repositioning is over.

    On the other hand, if we’re right about a possible equity bounce, gold is likely to fall the next uptrend line.

    Oil dived for the seventh straight session, dropping 16.3% in total. It was the worst week for commodity since the financial crisis. Black gold is now closer to $40 than to $50, as predicted last week.

    Oil Daily
    Oil Daily

    WTI is reaching a staunch support line, in place since 2016. Will it endure, sending prices back to retest the $52 levels—the 2019 lows? Or will we witness a reversal, and a return to the 2016 lows of $26?

    Week Ahead

    All times listed are EST

    Sunday

    20:45: China – Caixin Manufacturing PMI: expected to have plunged to 45.7 in February, deep within contraction territory, from 51.1 the previous month.

    Monday

    3:55: Germany – Manufacturing PMI: predicted to remain flat at 47.8.

    4:30: UK – Manufacturing PMI: seen to edge down to 51.8 from 51.9.

    10:00: U.S. – ISM Manufacturing PMI: probably declined to 50.4 from 50.9.

    22:30: Australia – RBA Interest Rate Decision: the central bank is expected to hold at 0.75%, but has the virus changed policy makers’ views?

    Tuesday

    4:30: UK – Construction PMI: expected to remain at 48.4.

    5:00: Eurozone – CPI: seen to decline to 1.2% from 1.4% YoY.

    19:30: Australia – GDP: expected to remain flat at 0.4% QoQ.

    Wednesday

    4:30: UK – Composite and Services PMIs: each is anticipated to remain flat, all at 53.3.

    8:15: U.S. – ADP Nonfarm Employment Change: forecast to plunge to 170K from 291K.

    10:00 U.S. – ISM Non-Manufacturing PMI: predicated to drop to 54.9 from 55.5.

    10:00: Canada – BoC Interest Rate Decision: the central bank had been expected to hold 1.75% but the virus may have reshuffled policy.

    10:30: U.S. – Crude Oil Inventories: anticipated to have dropped to -0.079 from a gain of 0.452M last week.

    Thursday

    5:00: U.S. – OPEC Meeting: the two-day meeting of OPEC member countries plus OPEC+ countries kicks off in Vienna, amid plunging oil prices.

    Friday

    8:30: U.S. – Nonfarm Payrolls: seen to have fallen to 175K from 225K.

    8:30: U.S. – Unemployment Rate: expected to remain steady at 3.6%.

    Week Ahead: U.S. Stocks Enter Correction Territory; Room For A Bounce Next?
     

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    Week Ahead: U.S. Stocks Enter Correction Territory; Room For A Bounce Next?

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    Comments (19)
    Jonas Hendrickx
    Jonas Hendrickx Mar 02, 2020 1:26AM ET
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    My friends have been sending me pictures in the infected areas, it looks like panic is getting worse.Lenovo can't honor repairs as the parts are getting out of stock.Ikea Belgium was nearly empty this weekend, which I've never seen in my entire life.I expect it to go down. If it goes up, then it will crash again in 2-3 months after the next quarterly earnings.
    Pinchas Cohen
    Pinchas Cohen Mar 02, 2020 1:26AM ET
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    The question is how much of that is - or at what point would it have already been - priced in.
    trung le
    trung le Mar 02, 2020 1:15AM ET
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    keep bringing up gold as the go to for a bear market..and assume that market is irrational? ionno feels like the younger generation... investors are not into gold all that much maybe? then again it is just me ;)
    Pinchas Cohen
    Pinchas Cohen Mar 02, 2020 1:15AM ET
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    You're absolutely right. The yen has overtaken gold at least from 2016 as a haven asset, and institutions's go-to refuge remains Treasuries.
    German Villanueva
    German Villanueva Mar 01, 2020 6:32PM ET
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    There will be pull back and bounce, but overall the SELL OFF WILL KEEP GO ON......
    Gervais Christopher
    Gervais Christopher Mar 01, 2020 5:22PM ET
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    Bounce is expected this week. "Dead cat" or reversal doesn't matter.
    Gervais Christopher
    Gervais Christopher Mar 01, 2020 5:22PM ET
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    Monday's Manufacturing PMI will be higher than expected (10am). This will move intestments to US from China.
    Vorlon Firstone
    Vorlon Firstone Mar 01, 2020 4:18PM ET
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    this guy has never seen right in his predictions if I remember correctly
    Jason Patcher
    Jason Patcher Mar 01, 2020 3:39PM ET
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    Last week was just the fluff, we should never have been above 3000 s&p to begin with. Good luck, i see more downside.
    Max German
    MaxiGE Mar 01, 2020 1:52PM ET
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    not even a word bout the bad china pmis insane how can u ignore such things
    Zman Trading
    ZmanTrading Mar 01, 2020 1:52PM ET
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    He doesen’t ignore that he is just saying from a TA perspective we may get a rebound before we continue lower.
    Pinchas Cohen
    Pinchas Cohen Mar 01, 2020 1:52PM ET
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    Zman Trading , thanks, and does Zman mean time, as in "time to trade?"
    Edward Chong
    Edward Chong Mar 01, 2020 1:52PM ET
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    of cos there will be a rebound. nothing is one straight line. but TA to time the rebound this time is sucide.
    Pinchas Cohen
    Pinchas Cohen Mar 01, 2020 1:52PM ET
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    And what do you think now?
    Lucky Trade
    Lucky Trade Mar 01, 2020 12:28PM ET
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    I predict 5% more downside next week as US has more infections
    Lake Lot
    Lake Lot Mar 01, 2020 12:28PM ET
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    Nope , we now know what we are up against and will prevail
    John Patrick
    John Patrick Mar 01, 2020 12:13PM ET
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    A Bounce from what? Haven't you been reading the papers. Stop pedaling overvalued stocks
    Kenson Jean Baptiste
    Kenson Jean Baptiste Mar 01, 2020 12:10PM ET
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    We haven't seen anything yet. That was just an earthquake. The tsunami has yet to come.
    joe mutopo
    joe mutopo Mar 01, 2020 11:41AM ET
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    Will nas 100 continue to bounce or its likely to fall again
    Nicole Greenidge
    Nicole Greenidge Mar 01, 2020 11:11AM ET
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    dead cat bounce
    Dev Prajapati
    Dev Prajapati Mar 01, 2020 11:00AM ET
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    fall is very likely
    Zambi rambi
    Zambi2019 Mar 01, 2020 10:53AM ET
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    s&pfutures will be up 50+ at 6pm
    ECL SALES
    ECL SALES Mar 01, 2020 10:04AM ET
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    Gold had declined in 2008 too with the stock market. All asset classes had declined in tandem. Bounce is almost certain given. Oversold & Powell Put! China PMI almost discounted.
    keano giggsy
    keano giggsy Mar 01, 2020 10:04AM ET
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    eh more info on what you say?
    Pinchas Cohen
    Pinchas Cohen Mar 01, 2020 10:04AM ET
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    Gold declined, because it was out-havened by US Treasurys, which is why dollar surged. However, the dollar now declined. That was the point.
    George Steven
    George Steven Mar 01, 2020 9:25AM ET
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    China's official factory and service pmi plunged on Saturday. This will drive markets early in the week. caixan is coming out tonight. If it's not as bad as the official and unreliable numbers, could see a bounce
    Frag Carole
    Frag Carole Mar 01, 2020 9:25AM ET
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    Its not a factor.
    Prince Moabi
    Prince Moabi Mar 01, 2020 9:24AM ET
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    thank u hournarable your ideas seem to become true u r reliable indeed this is not the first true vision to share to the public Prince amen
    Ndubuisi Job
    Ndubuisi Job Mar 01, 2020 9:18AM ET
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    Good week ahead...
    Anthony Dadlani
    Anthony Dadlani Mar 01, 2020 9:13AM ET
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    There was panic selling with gold getting hit in a risk off market. It was a source of capital to meet margin calls. I feel we bounce hard from here. Stocks go up rapidly.
    randychiuuu Chiu
    randychiuuu Chiu Mar 01, 2020 9:13AM ET
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    I predict a 1600 pts bounce next week
    Frag Carole
    Frag Carole Mar 01, 2020 9:13AM ET
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    Chris Martin
    Chris Martin Mar 01, 2020 9:13AM ET
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    Not thinking so dude- when business and companies are closed, profits change. Losses = ×
     
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