Dow Jones Tumble Over 600 Points

Dow Jones Tumble Over 600 Points

The Dow Jones futures are plunging today, and the coronavirus stock market rally has come under a significant threat after the S&P500 and Dow broke through some major levels last week. Investors are increasingly becoming anxious after China reported a sizable increase of coronavirus cases for the first time in nearly 50 days.

The infection rate is spiking in the US, and conversations regarding a second wave have become highly misdirected. But the concerns of a potential lockdown in Beijing remain a chief threat due to new cases.

Riskier assets are entirely out of favour, and volatility is likely to surge once again. Oil prices are down massively today, with WTI Crude oil down over 5 percent today. The safe-haven asset, gold, is failing to attract bids. This is because investors are worried whether we are going to see a repeat of the situation that we experienced during March this year when large institutions had to sell their gold positions to save themselves from margin calls.

However, it is essentialto keep in mind; the world is better equipped to deal with a second wave ifthere is one. The chances of shutting down the whole world economy like beforeare still minuscule, even though investors are concerned that it may happen.

What we need is good news on the coronavirus vaccine, and the moment we get more positive announcements about a  coronavirus vaccine, the stock market is likely to roar once again as the bulls stand ready to take their vengeance.

Thestock market breadth,something that filters the noise and provides the actual picture of the stockmarket rally, shows how the bull momentum has lost its mojo.

Hereis more on this

Dow Jones FuturesToday

The Dow Jones futures have tanked over 750 points. This is nothing unexpected because the weekly price action for the Dow Jones Industrial average last week confirmed that there was more pain ahead for the US stock market rally because it set a new low. Yet, there was also a new high (on the weekly candle) for the Dow Jones, and this keeps trader hopes alive for the possibility of a re-bounce in the stock market.

On the weekly chart, the Dow Jones stocks dropped below their 50 and 100-week smooth moving averages (SMA); this indicates extreme weakness in the Dow Jones’ price. The only hope for the bulls now is if the Dow Jones’ price remains above the 200-week SMA. Otherwise, the odds are stacked in favor of the Dow to retest its Covid-19 low.

Thebottom line is that the Dow index has become a lot more vulnerable, and bulls need to show some strength which could happen near the200-week SMA. 

Stock Market Rally

The stock market rally had a roller-coaster day on Friday, and after rising as much as 3%, bulls lost the battle for a short period before claiming the victory by finishing the day on a positive note. But for the week, the S&P500 stocks and Dow Jones stocks snapped their three-week rally and posted a loss. Both stock indices hit a lower floor than the previous week, indicating that more pain could be on the doorstep for the coronavirus stock market rally.

The S&P500 index gained 39 points and jumped by 1.31%, and the Dow Jones industrial average soared by 477 points or by 1.90% on Friday. United Airlines mainly led the gains and had the most substantial move in the airline industry.

Norwegian Cruise Lines also soared over 18%. The energy sector mostly led the gains, with 7 of 9 sectors scored gains. 30-day price volatility dropped to 27.45 against the average of 26.08. The tech index, NASDAQ, closed below its 10,00 mark but gained 0.79%. 

The surge in the new coronavirus infection rate in the US has become the biggest concern for investors, and this is denting the sentiment. For speculators, this is like Christmas coming early, and they have been labelling the stock market rally as one of the most underated rallies in the history of trading.

Yes, valuationsand S&P multiples didn’t make much sense with respect to the economicgrowth, but the hope among optimistic investors was that as the US economybegins to open up, multiples and valuations will adjust. But perhaps, what investorsforgot to factor in what we are experiencing now: surge in coronavirus cases asthe economy reopens.

As discussedpreviously, the fact is that the US never hadcomplete control of the coronavirus in the first place. This is especially trueif we compare the US management of the virus with other countries.

The concern isthat what will happen if these coronavirus cases continue to rise, and the US hasto shut down the country again? Steven Mnuchin, the Treasury secretary, hasalready said that the US isn’t prepared to shut the economy. Still, the realityis that if the health situation begins to get out of control, the US will haveno other choice but to slam on the breaks. This particular scenario could bringthe stocks down to their coronavirus lows.

But, again, I donot think that it will come to that point. I think it was natural forCoronavirus numbers to tick higher as the economy begins to reopen, and as longas the situation remains under control, the current sell-off in the S&P500stocks and the Dow Jones industrial could be an opportunity for investors whosat on the sidelines during the coronavirus stock market rally.

The reason that Iam saying this remains the same: the world is ina much better position today than a few months ago, a large number of countrieshave got the coronavirus situation under control, and the ones that havereopened their economies, coronavirus situation is firmly under control.

StockMarket Breadth

Measuring the market breadth is an important function as it providesa lot more detail about the strength of the stock market rally and it alsohelps traders to filter out the noise.  

 The S&P stocks breadth

  • 6% stockstrading above the 10-day smooth moving average- difference from yesterday +4%
    • 81% stockstrading above the 50-day smooth moving average- difference from yesterday +3%
    • 36% stockstrading above the 200-day smooth moving average- difference from yesterday +3%

The Dow Jones stocks breadth

  • 10% stocks trading above the 10-day smooth moving average- difference from yesterday +7%
    • 67% stocks trading above the 50-day smooth moving average- difference from yesterday +4%
    • 27% stocks trading above the 200-day smooth moving average- difference from yesterday -3%

The NASDAQ stocks breadth

  • 25% stockstrading above the 100-day smooth moving average-difference from yesterday +11%
    • 75% stockstrading above the 50-day smooth moving average-difference from yesterday +5%
    • 37% stockstrading above the 200-day smooth moving average- difference from yesterday +2%

 Bottom line: There has been a massive shift in momentum that it isin still in favour of bears because a considerable percentage of stocks arebelow their 200-day moving average

Coronavirus CasesSpike  

Coronaviruscases have started to surge once again. The mostworrying element is a considerable surge in numbers in China which had notreported any new cases for the past 50 days until now. 80 new coronavirus caseshave been reported in Beijing the weekend. Many of these were linked with freshseafood and vegetable wholesale markets. This has raised the odds of anotherlockdown in China.

Coronavirus casesalso jumped more than 25,000 in the US. States such as Texas and Florida haverecorded the biggest surge in numbers after reopening their economies. Overall, there have been over 2 million positive cases for Covid-19 inAmerica–a bigger number than any other country–and over 100,000 people havelost their lives because of this virus.

On a global basis,Latin America, Brasil, and parts of the Middle East like Libya are facing theirworst days of coronavirus. Additionally, the infection rate has started to gothrough the roof in India once again, a heavily populated country.