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Wkly Round-Up thru Mar 13th 2020; Godzilla vs King Kong

Hello Everyone, this has been a very wild ride in the markets and price action has been one for the history books! But not in a good way….here is my take below;

Weekly Sound Bites:

• This is the most tumultuous market action I’ve seen since we emerged from the 2008 financial recession…in fact sometimes even worse…this past Thursday the DOW suffered its biggest hit since Black Monday 1987 falling 10%…the economic disruptions caused by the COVID-19 Virus combined with the Saud-Russian Oil price war has driven all US Indexes into a bear market in the fastest time in history…over $2 trillion in market cap in the S&P 500 has been wiped out since the start of 2020…and while most economists are lowering their 2020 growth forecasts it may not be enough as more test kits become available here in the US…the current P/E ratio is now sitting at 15.12 which is still elevated should we move into a recession…Goldman Sachs current GDP forecast is for real GDP growth of 0.7% for Q1, 0% in Q2, 1% in Q3 and 1.2% for the full year…their biggest concern is consumer and business confidence…
• Should the American economy enter into a recession we would expect the P/E ratios to dip further which puts more downside pressure on Index prices…but this is a different type of market event, or Black Swan than a normal market decline….do not be surprised if we see more upside moves and then markets moving back lower as lows are tested…the line in the sand for the S&P should be the lows made on Dec 24th 2017 around the 2300 price level…if prices move lower than this level that would essentially mean markets are now forecasting a coming recession given the current valuation models…
• Globally we are seeing Central Banks take action to help provide liquidity and stimulus to a very damaged market…The U.K. announced a coordinated package of fiscal and monetary measure totaling over $15 billion pounds along with the ECB’s coming package announcement this coming Monday…and even Germany will come forth and spend money by pledging unlimited cash to businesses affected by the disease…meanwhile here in the US we will get more details and a vote in the Senate on the initial stimulus response while the FEDs will be cutting rates further, with the only question being, how much?
• This past week we saw the VIX close over 75 which is the 4th highest level since VIX began trading in 1990…COVID-19 appeared to be rotating around the world. Focusing on the most active countries, we are seeing China and South Korea have peaked…now both China and S. Korea’s new cases are coming down which is what we will expect in a few weeks in Europe and possible another 3 to 4 weeks in the US…but in the interim we can expect new cases to dramatically rise here in the US as more test kits become available…
• Excess oil supply will lead to more inventory and lower prices…This looming and large global supply imbalance almost completely mutes the threat of higher prices… from geopolitical risk or anything else short of a major war…The supply and demand imbalance has prompted the EIA to cut its forecast…At the beginning of the year, the EIA was calling for Brent crude to average $65 per barrel in 2020 and $68 per barrel in 2021. Because of the price war and the outbreak of coronavirus, the EIA now expects Brent crude to average $43 in 2020 and $55 in 2021.
• In market panics one of the things Options traders will experience is the widening of bid-ask values for Option Contracts…market makers are traders who commit to post continuous bid-ask prices in their assigned products and thus are key providers of liquidity…in this negative selection process (you initiate the trade and not them) allows them to widen or narrow the bid-ask spread in order to control their risk in the exchange…since every one of their bid-ask spreads could be hit by an order they need to optimize their capital while controlling their risk via the bid-ask spread…for example, at ATM SPX Call with 300 days to Expiration in a low Volatility market may only see a 5 point wide spread but in current market conditions the spread can jump to over 65 points, or a notional value increase of $6,000 on a per contract basis…if order flow becomes overwhelming in one direction or another, it changes the risk/reward calculation and thus the bid-ask spread can widen or tighten based upon risk and liquidity…
Weekly Round-Up;

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