In an historic but somewhat anticipated development, to address the economic fallout in the US from the COVID-19 outbreak, the Federal Reserve has cut its Fed Funds Rate to a range of 0% to 0.25%.
This is the level that was last seen during the Financial Crisis that triggered the Great Recession. The Fed has also announced Quantitative Easing (QE) - another measure that began during the
2008/2009 financial crisis.
The COVID-19 Novel Coronavirus community spread has caused global equities to tumble sharply drawing parallels to the market collapse last seen in 1987.
This major shakeup has simply nullified all prior US and World growth projections. Investors are still trying to determine, somewhat unsuccessfully as of now,
the size of the potential negative impact and the likelihood of a recession, especially with all the three major US Benchmark ETFS tracking the Dow Jones Industrials (DIA),
S&P 500 (SPY) and NASDAQ (ONEQ) dropping over 25% each from their record highs. This is a classic bear market reaction which investors got concerned about.
After the Great Recession ended in 2009, the US stock market had been on an extraordinary 11-year bull run threatened only twice in the interim. The first sharp pullback
occured during the BREXIT/November 2016 US elections timeperiod and the second near bear market correction occured in December 2019. These corrections were somewhat gradual
occuring over a period of 2 to 6 weeks and the recovery was also gradual.
This COVID-19 induced sell-off and market collapse has been so sharp and swift as of now with volatility spiking to levels last seen only during the financial crisis. This is
an exraordinary development as investors reacted quickly in anticipation of a rapid negative economic fallout. On Friday, after US President announced a National Emergency
and provided a stage for business leaders from different sectors of the economy to announce the myriad measures being taken to address this crisis, investors felt a little
more reassuring. This brought buyers back and the major US benchmarks surged over 9% each in another bewildering display of volatility.
For self-directed investors these past few weeks should have been extremely stressful, especially with markets gyrating wildly. New self-directed investors had many teachable
moments which they will never forget in their lifetimes.
This is absolutely a time to be cautious as recent market action has clearly begun to threaten the 11-year bull market convincingly. Small CAP and Mid CAP indexes have
already broken their long term trend lines and this is a clear warning sign.
It must be noted the long term bull trend in the major indexes has still not been fully disrupted despite the market collapse. While this can be considered as a positive,
self-directed investors must remember we are just in the early stages of this outbreak and as per information presently available, there is an expectation for further
community spread which is likely to cause more disruption to the normal economic and social life of many nations.
It will be very important to monitor how the latest monetary policy and QE action today could affect the market over the coming weeks. Futures have reacted negatively to this announcement
but this is bound to get more volatile.
In the coming weeks if the secular bullish trend is broken decisively there will be a high probability of a recession to hit the US economy. There is also an expectation that
the recovery from a such a recession will be somewhat swift. That's a reassuring message which self-directed investors will need at this time.
These are the technical support levels to monitor: For the S&P 500 (SPY) it is around $233 and the NASDAQ (ONEQ) around $243. For the Dow Jones Industrials (DIA)
it is around $216. If these levels are violated on a closing basis by the end of this month we believe there will be a higher probability of further downside.
Good Luck and Safe Investing!