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Global Markets hit by a supply shock due to the Coronavirus

Due to family commitments, this post almost exclusively focuses on the price action following a historic week in global markets.  Time permitting and after some reflection, next month's post will provide fundamental thoughts on how a supply shock risks creating a demand shock and why the Fed must mitigate the risk of recession by following market interest rates lower.  However, for now attention will be squarely placed on the charts.

  • The 10-year treasury yield has finally closed below the 1.3% on a weekly and monthly basis.
  • As mentioned in almost every monthly post since December 2018, the monthly trend is down and should be respected.
  • With that said, the 10-year yield has collapsed a whopping 58% in 12 months.  This is a historic drop and is stretched by almost any measure.  Even during this secular decline in interest rates that began nearly 40 years ago, such 12-month declines usually produce significant rebounds before proceeding lower.
  • The bullish US dollar Index fund topped in October 2019.  This ushered in a powerful potential breakout in US equity indices that also featured global participation.
  • The dollar then bottomed at the start of the year and went on to trend higher right up to major resistance.  Eventually this rebound in the dollar caught up with global stocks which began to decline.  This serves as a reminder that during global equities tend to underperform during periods of dollar strength.  In fact it appears that dollar appreciation tends to precede downward moves in equities. 
  • Fortunately, if this holds true the dollar's recent failure at resistance (red line) should provide some relief in risk assets following a violent sell off.
  • These characteristics are most apparent in the USD/CNH.  The dollar's top relative to the Yuan in September coincided with a global risk on rally that carried markets until the end of this January.  Meanwhile the Yuan's depreciation in February was symptomatic of risk-off.
  • Until the USD/Yuan breaks below 6.92 and then 6.85, an aggressive allocation in risk assets difficult to justify even if some risk taking is still favorable.
  •  In the February post, the 317 & 309 levels on the SPY were highlighted as significant.  These were both swiftly taken out which provoked a reduction in risk taking on the part of this writer.
  • Using this writer's trend model, the daily and weekly trends in US equities are now down.  However, the monthly and year trend are still up.  This favors a period of volatility between the summer lows of 273 and the recent highs of 339.  As time passes, this range should contract before a significant move higher or lower takes place.  
  • Therefore, market participants should look to trade this range and patiently wait to see whether markets are more likely to test the December 2018 lows or move to new highs.  Selling off risk on rallies within the range and buying on dips is now favored over playing for a trend.  
  • Maximum flexibility is required as investors should stand ready to go long should the price action dictate or exit all remaining risk positions if key levels are broken on the downside.
  •  The mirror opposite of the price action in SPY is the VIXY, the VIX short-term futures ETF
  • With US equities struggling to stay out of this 2 year range, VIXY is attempting to form a significant bottom.  However, much like the USD, the VIX is now near or approaching major resistance.  This favors a period of trendless volatility until the next direction is revealed by market participants.  
  • International equities exemplified by the Global Dow and EEM have experienced a failed breakout.  Much like US equities, until the ranges on the GDOW and EEM charts are broken definitively, a period of range bound trading is much more likely for the time being.  
  • As long as the USD trades lower, exposure to US but particularly international stocks becomes favorable.  If this week's reversal in the dollar holds, then a short-term rebound in global stocks becomes much more likely.  
  • As is the common theme running through this post, HYG is now likely to be range bound between 84 and 89 for the coming weeks and months.


  • Oil continues to be stuck in a secular bear market.  Unlike US and global equities as well as high yield bonds, crude is already testing its December 2018 lows.  Meanwhile during risk-on advances, oil has remained capped on the upside.  These are clear signs of continued underperformance that occurs during secular declines.

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