Sky-High Correlations Diverge Between Key Sectors

Sky-High Correlations Diverge Between Key Sectors
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Commenting on the sky-high correlations and today’s trading Gorilla Trades strategist Ken Berman said:

While stocks spiked higher in early trading today, the industries most-exposed to a possible pandemic remained under pressure, suggesting that more short-term pain might be ahead for bulls. We might have seen a typical ‘dead-cat-bounce’ on Wall Street this morning, and although the historic selloff already created buying opportunities, volatility will likely remain very high until the economic uncertainties persist.

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The majority of stocks finished lower for the fifth session in a row, and while today’s today losses were limited compared to the rout of the past couple of days, the major indices closed way below their intraday highs. The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 124, or 0.5%, to 26,958, the Nasdaq (INDEXNASDAQ:.IXIC) gained 15, or 0.2%, to 8,981, while the S&P 500 (indexsp:.inx) fell by 12, or 0.4%, to 3,116. Decliners outnumbered advancing issues by a more than 2-to-1 ratio on the NYSE, where volume was well above average again. 

The Divergence Of The Sky-High Correlations

Following two days of sky-high correlations between stocks across the board, the key sectors diverged substantially today. Tech stocks and consumer-related issues held up well even considering the afternoon selloff, while healthcare stocks were also stable throughout the session. The energy sector was hit hard again as the price of oil dropped to a more than one-year low after Moody’s downgraded its outlook for the global auto industry. Small-caps also lagged the broader market, and the Russell 2000 closed at its lowest level since late-October, breaching its 200-day moving average as well.

It’s hard to keep track of all the countries that already reported confirmed coronavirus cases, and more and more experts agree that a global pandemic is now inevitable. The CDC and the World Health Organization (WHO) both urged governments to prepare to mitigate the impacts of the virus, as there were more new cases globally than in China for the first time since the start of the epidemic. While a public outbreak in the U.S. has been avoided so far, barring an unlikely complete travel moratorium, the virus will likely enter the U.S. too.

Germany Removes Its Public Debt Limit

Germany’s decision to remove its public debt limit could finally open the floodgates of fiscal stimulus in Europe. The country was very strict about government deficits in the whole Eurozone despite the recessionary trends of 2019, but the coronavirus scare could change that, which could have a profound effect on the global economy and financial markets. The Fed is also likely to keep interest rates low for longer, and according to today’s fresh all-time lows in Treasury, yields investors are even betting on further rate cuts by the Central Bank. This could mean that sky-high correlations continue upwards for the time being.

This week's busiest day of economic releases is ahead of us, and the manufacturing sector and the housing market will be in the spotlight again. The durable goods report could clear some of the confusion that the recent mixed reports generated, and analysts expect a dip of 1.5% in headline orders, while core orders are forecast to increase by 0.1%. The second reading of the fourth-quarter GDP will also be out before the bell, together with the weekly number of new jobless claims, while new home sales will come out in early trading. Stay tuned!

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