Why Mark Mobius says the stock market hasn’t seen an ‘absolute bottom’ yet

Why Mark Mobius says the stock market hasn’t seen an ‘absolute bottom’ yet

Emerging-markets investing pioneer Mark Mobius made those remarks Tuesday in an interview with CNBC, putting him in the investing camp that expects an inevitable cascade of brutal economic data and corporate earnings hasn’t been fully discounted by investors.

Mobius, who founded Mobius Capital Partners in 2018 after a three-decade run at Franklin Templeton Investments, said corporate earnings would be “pretty bad” and that while some bargains have emerged, investors should keep some cash ready to deploy in the event of a further market downturn.

U.S. stocks hit all-time highs in February, then plunged into a bear market as the global spread of COVID-19 forced the U.S. and countries around the world to largely lock down their economies in an effort to contain the outbreak. Stocks have taken back a large chunk of lost ground since March 23, however, with recent gains tied to expectations the pandemic is near its peak, turning attention to efforts to reopen economies.

Market bulls have argued that the unprecedented nature of the shock and the massive response from the Federal Reserve, other central banks, and governments have rendered most comparisons to past bear markets debatable.

Others have cautioned that stocks are largely sticking to the bear market script.

“Although there are some opportunities to buy, I would say it’s probably a good idea to keep some powder dry for another downturn,” he said. “We might see a double bottom.”

The Virus Peak & Stock Market Bottom

The Virus Peak & Stock Market Bottom

I cannot make any claims about the virus itself and this post is the reaction of major stock markets. A good explanation I’ve found on epidemics and exponential growth is this one on YouTube which I recommend watching if you are not already up to speed.

Looking at the current situation it appears that the market has room to fall further as the economic fallout continues and the virus spreads.

If the virus starts to slow down, it won’t be long before stocks find a bottom given the huge amount of stimulus that central banks are providing.

The most important thing is that we need to see the number of new daily cases start to flatten out.

Currently the virus is spreading at an exponential rate and that is causing businesses and services around the world to enter lock-down.

That has dire consequences for company profits.

Exponential Growth

To summarize some of the information in the mentioned video above, exponential growth means that as you go from one day to the next you have to multiply by some constant.

In the case of coronavirus, daily cases have been increasing by about 1.15 to 1.25 times the previous day’s cases. This results in an exponential curve with the number of new cases increasing on a daily basis. In fact, a virus provides a textbook example of exponential growth since what causes new cases are existing cases. However, there comes a time when exponential growth has to slow down.

For example, as millions of people become sick there are fewer people that can be infected so the rate of new cases must decrease. Likewise, measures such as hand washing and limiting gatherings also have the effect of reducing the spread.

So an exponential curve will eventually level out at an inflection point and turn into what’s called a logistics curve. At this point the number of new cases each day levels out and then starts decreasing. We have already seen this happen in China and now it is happening in South Korea too.

 New cases in China leveling out. Source: John Hopkins University.

Growth Factor = No. New Cases Today / No. New Cases Yesterday

A value over 1 indicates that we are still on the exponential part of the curve and there may be higher magnitudes of new cases ahead of us. In other words the growth is not slowing down.

This is the case right now in the USA and Europe. Whereas a value of 1 means that growth is leveling out and a value under 1 means new cases are decreasing.

Taking China as an example, the coronavirus spread began at an exponential rate which has gradually leveled off thanks to drastic shutdown measures.

With new cases appearing to have peaked the country has been able to get back to work and reboot its economy. Meanwhile, the United States and Europe have only just started to see new cases increase, indicating that they are likely to be near the beginning of the exponential curve.

What does all this mean for the stock market now?

I think we need to see the growth rate of new cases in the US and Europe start to level off before we can put in a major stock market bottom. So we need to see the daily growth rate drop to one or below and then stay there, perhaps for a week or so.

Once that happens I think we will see a bottom in stocks and a significant relief rally thanks to the huge amount of stimulus that is being provided by central banks.

It is because of this stimulus that we will see the slingshot. Importantly, though, I don’t think we need to see growth rates level off for the whole world.

It would be enough to see growth rates in the US and Europe start to slow for a bottom to be put in.
That’s because these areas (plus China) account for the vast majority of global GDP.

To keep on track of this I am using the coronavirus dashboard developed by John Hopkins University which seems to provide the most up to date and reliable figures that I’ve found. The dashboard provides the latest statistics on new cases which can then be used to calculate growth rates. 

For example, new cases outside China was 100.5k on Monday March 15th, higher than the previous day’s 81.7k cases and higher than the 75.1k cases on Saturday, a growth factor of 2.8.

Analyzing these numbers it doesn’t seem all that surprising that 10% drop in US stocks that day coincided with a huge daily growth rate of 2.8 times (this is for locations outside Mainland China).

Final Thoughts

Ultimately, virus growth rates and the stock market are linked and so long as the curve is exponential the markets are going to struggle.

Stock markets are likely to rally every time the virus looks to have been defeated, even when it’s not.

The data isn’t entirely accurate so there is likely to be some false starts. It’s also possible that the market will be able to lead a flattening in the virus whether it is caused by luck, government intervention or some other reason.

But eventually the market will get it right, it always does.

That being said, when stocks are up and the exponential curve has leveled off, review your Daily, then your Weekly charts with signals for Green Light Trade Signals because that will mean we are close to a bottom, or the bottom may be in!

Credit: Mr. Marwood, thank you for your research.

Are Oil Futures Presenting An Evergreen Buy Signal Today?

Are Oil Futures Presenting An Evergreen Buy Signal Today?

Crude Oil is trading up about 10% for the year from last year’s closing of 60.42.

The DBO ETF provides exposure to light sweet crude oil (WTI), which is the most popular oil benchmark in the world for the futures market.

An oil futures contract is an agreement to buy or sell the commodity for a given price at a specified date in the future.  Spot oil prices and front-month oil futures are highly correlated, and for the most part, they’ll track each other closely. However, futures contracts have an expiration date. Anyone holding oil futures contracts on the expiration date must take physical delivery of the commodity. To avoid this, the fund must roll its position over into the next-nearest futures contract before expiration. This process of selling the front-month contract and buying the second-month contract is called “the roll.” If the second-month contract is the same price as the front-month contract during the roll, the fund’s position size won’t change, and its returns will closely mirror those of spot prices.

In reality, front- and second-month contract prices for oil are rarely the same. Due to the cost of storage, it’s common for oil to be priced higher the further out along the futures curve you go, a situation called contango. Most ETFs face contango.  The DBO fund found a better way and rather than mechanically rolling into the near-month oil futures contract, DBO selects the contract from the one-year futures curve that minimizes contango (or maximizes backwardation). Over time, this strategy has proven to aid returns. This can help substantially with market signals because it lowers the marginal spread.

So let’s step back and take a closer look at the charts to see from our Monthly, Weekly, and Daily charts viewpoint on the DBO ETF.

 

Monthly Chart

Looking at the monthly chart, this market is currently in a rising trend. We see here the trend has been moving up for the past 29 months. The previous monthly level low was formed during February 2016, with a brief break in trend during 2017.

 

Weekly Chart

On the weekly level, the last important high was established the week of July 2nd which was up 54 weeks from the low made back during the week of June 19th of 2017. Although we have seen this market has remained a bit weak we will have to wait to validate a further decline against the larger trend.

 

Daily Chart

Our Daily level momentum chart is bullish while the trend in the daily is successive lower peaks since May providing a mixed short-term posture for this market.

Chart Conclusion

When you combine the Monthly, Weekly, and Daily activity, it will not surprise if we see continued sideways movement with a bullish bias. If you are an InterAnalyst Subscriber and follow our Evergreen strategy, look to another green light in your memberships private area.

Prosperously,


*** Do not trade solely based on this post as it may not represent current market conditions. Markets can change abruptly.

Where Are Oil Prices Heading?

Where Are Oil Prices Heading?

Oil ended the past week down 4.4%, despite a brave rally on Friday that resulted in oil closing the week at just over $71 per barrel. Wednesday marked the brunt of the downward price action, with oil prices closing nearly 5% lower for the day after Libya indicated that it would resume export activities at its Eastern ports, helping allay fears over tight global supplies.

Working against the downward price pressure was news that U.S. stocks of crude oil declined by 12.633 million barrels in the week ended July 6, 2018, following a 1.245 million rise in the previous week. It is the most significant drop in crude inventories since the week ended Sept. 2, 2016. The sharp decline in the level of inventories came as a shock to oil traders and analysts who had forecast a drop of 4.489 million barrels.

Despite the appearance of strong oil demand from the larger-than-expected inventory draw, concerns about a growing trade dispute between China and the U.S. related to a 10% tariff on $200 billion worth of Chinese goods plus an end to oil supply disruptions in Libya took precedence in the market and pushed oil lower for the week.

Near-term price momentum also seems to be working against oil, with the Fast line of the moving average convergence divergence (MACD) indicator crossing below the slow line on the daily price chart. The cross is an early indication that the previous upward price momentum is slowing. The signal is typically confirmed when the fast line crosses the zero line on the MACD chart, indicating that momentum has shifted to the downside. For the time being, oil found some support at the 55-day exponential moving average of $69.06 per barrel and ended the week above the psychological price level of $70.

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