Are the proposed stimulus plans effective to reduce risks?

Are the proposed stimulus plans effective to reduce risks?

Commenting on the Government’s proposed stimulus plans and today’s trading Gorilla Trades strategist Ken Berman said:

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Q4 2019 hedge fund letters, conferences and more

Today’s bounce was much needed to ease the panic among investors, but the uncertainty remains very high, and bulls should be ready for more volatile swings. While it’s hard to judge the effectiveness of the proposed stimulus plans, the quick and decisive action by global governments and central banks seem to have reduced ’systemic’ risks today, and the restored trust could be vital for stocks in the coming weeks.

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The major indices climbed higher today in volatile trading, recovering around half of yesterday’s huge losses, as even though the COVID-19 pandemic continues to rage, governments across the globe stepped up and announced unprecedented steps to mitigate the economic effects of the virus. The Dow Jones Industrial Average (INDEXDJX:.DJI) was up 1,049, or 5.2%, to 21,238, the Nasdaq (INDEXNASDAQ:.IXIC) gained 430, or 6.2%, to 7,335, while the S&P 500 (indexsp:.inx) rose by 148, or 6.0%, to 2,383. Advancing issues outnumbered decliners by a 3-to-2 ratio on the NYSE, where volume was extremely high again.

Fed's Proposed Stimulus Plans Lifted Tech Stocks

After several days of extremely high correlation on Wall Street, today, the key sectors diverged substantially which could signal the end of the forced liquidations that led to selling across asset classes. Safe-haven sectors such as utilities, healthcare stocks, and consumer stables performed very well today, with a lot of utility firms registering double-digit gains in relatively quiet trading. The proposed stimulus plans, which could help corporations and individuals with the looming cash problems also lifted tech stocks and the services sector, although travel, tourism, and energy-related issues remained under pressure.

The price of oil is quickly approaching its multi-decade low from early 2016, with the WTI contract trading with a $27 handle today, and some analysts predict sub-$20 prices for the coming weeks. Global demand was already weak before the pandemic and the Saudi’s price war, but now, the energy market is enduring a perfect storm. While the overall effect of low prices on the U.S. economy is unclear because of the huge increase in domestic output in recent years, the all-important consumer sector will benefit from the huge drop in gasoline prices, helping a swift recovery.

DXY Surges To A New Two-Year High

Despite the Fed’s bold moves to provide liquidity and ease the feared global dollar shortage, today, the interbank and corporate credit markets have been showing signs of stress, even as equities remained relatively stable. The Dollar Index (DXY) surged to a new two-year high, erasing last week's selloff, with especially the euro and the Great British pound getting hammered amid the European lockdowns. The intervention in the commercial paper market, which was already rumored yesterday, boosted equities and global risk assets, but it failed to reverse the large-scale moves in currency markets.

Treasury yields gained significant ground today, especially on the long-end of the curve, as safe-haven flows reversed somewhat and the selling panic eased. The moves also show that most participants are hopeful that the proposed multi-trillion stimulus plans could effectively support the global economy in the coming crucial months. Tomorrow, we will get building permits and housing starts following today’s mixed economic reports, but it’s unlikely the releases are unlikely to have a meaningful impact on the relatively weak housing-related issues.

Technical Corner

While we saw almost unprecedented volatility on Wall Street in the last few days, the technical setup hasn’t changed, as all of the key trend indicators switched bearish earlier this month. The major indices all remain well below their declining 50-day moving averages of 3,166 for the S&P 500, 9,044 for the Nasdaq, and 27,615 for the Dow. The benchmarks are now also well below their 200-day moving averages of 8,418 for the Nasdaq, 3,046 for the S&P 500, and 27,155 for the Dow, and their short-term moving averages will likely soon cross below their long-term ones as well.

Out of the S&P 500 sectors, the consumer staples sector has been the strongest since the start of the COVID-19 crisis, and as measured by the popular XLP ETF.  Today, the sector recovered above its low from February, vastly outperforming the other key sectors. The ETF is still well below both its 50- and 200-day moving averages, while only losing a bit more than 10% compared to its all-time high from February. The sector has been very stable and bullish before the onset of the crisis, and while the more cyclical sectors will likely outperform after the pandemic ends, odds are that it will provide a safe-haven for investors until the economic uncertainty remains high. Stay tuned!

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