Mar 11 2020 - 10-Year Led Stocks Down, Now Will Be Leading Us Up - Don't Sell

Summary

The 10-year crashed all the way down to 0.39%, and took the stock market with it.

If the 10-year took us down, it's going to take us up. It has bounced but no one has paid attention.yet. Once it breaks 1.0% they will.

We bounced off the recent low the 2740ish level. We need to establish this level as our base. We need to get above 2850 and hold it.

If you are looking for good news, read up on the efforts being built around the antivirals. Right now a lot of attention is being paid to Gilead Remdecivir. If you want to speculate, Gilead is very interesting.

Have you been watching the 10-year note? Then you see what I see.

Market participants took their cue to sell by following the 10-year on the way down. In fact, I asked you in my last note to keep an eye on the 10-year for where the market is going. Now, today, we see not only that the 10-year bounced from the lows, but the 30-year and other maturities are moving up. Even the mortgage rates are up, well up, in comparison to just a few weeks ago. The low for the 10-year is 0.3980% it was trading at around 0.7%, touching a bit below that and ended the day at 0.878%. The 30-year is at 1.28% and it was well below 1% at the lows just the other day. Again, 0.878% might sound minuscule for the Treasury note that was 2% not a year and a half ago.

The bottoming process can include a check back to the lower bound.

It has been a lurching and discontinuous bottoming process. We once again tested the prior low and bounced above today toward the close. I believe the market has discounted the bulk of the virus effect already, and it would not be a good idea to sell. If the prior level creates a base, even if it's broken a bit, we need to close up above that point. The level I want to see the market break above and hold is 2,850. I believe that once we will re-establish that level as a base, stocks will once again regain upward momentum.

The experts have not been shy about sounding the alarms

Yes, there's a chance for a deeper dive if the economy goes into a recession. The internals of the economy are very strong and will stay positive, perhaps not with a 3% growth rate right now, but it will stay in the positive zone in this first quarter, and likely in the next. I also believe that this virus scare cannot stay at this level of alarm for much longer. I admit that it has stayed nailed to high alert for far longer than I expected. It's that high-level scare of news flow that's turning the biggest bulls into bears. Many commentators are now throwing the word "recession" around as a certainty, and the more I hear that the more I feel like we are at the bottom. Let’s recognize that the classic definition of what a recession is. It's two quarters in a row of negative growth. Putting that more plainly it's that the economy shrinks for six months. I just don't see that.

Yes, there's a chance for a deeper dive if there's additional bad news that heralds an economy that will be going to a recession. I think the underlying economy is very strong, because it was strong and strengthening going into this crisis, and will stay on the positive side of growth. Many commentators throw the word "recession" around but the definition is two quarters in the negative. I just don't see that.

Another item that gives me encouragement that we are close to the bottom is...

David Kostin of Goldman Sachs predicting a bear market.

The stock strategist slashed his mid-year S&P 500 forecast to 2,450, meaning the investment bank now sees the market falling another 15% beyond Tuesday’s close to levels not seen since December 2018. A lot of other market commentators and traders are expecting the S&P 500 at that level. It's of particular interest that chartists also are fingering that level. The more people assuming the worst, and calling for a recession, bear markets and significantly lower trading levels tell me that the market is washing out, and preparing for the rally to resume.

To summarize, the herald for the stock market dive was that the 10-year went from just under 2% to crash all the way to 0.39% a day or two ago, and bounced. Today the rate fell to 0.6750% and closed today at 0878%, pay attention to this. I know that I already wrote this, but I'm repeating it because it's important. The 10-year has turned, which means that there are more holders of the 10-year note that is selling than buying. If buyers are being more insistent about paying a lower price, it means that the sense of urgency of getting the safety of the 10-year is lessening. This is how turns happen. No one will pay attention until the 10-year is right at the door of 1.0%, and we aren’t too far. Once the 10-year turns, I expect the VIX to follow.

Now for some items for optimism is the direct fight against COVID-19… Gilead (GILD)

The fear is that we won’t have a vaccine for another year at least. That's very frightening. However, there are other drugs that can mitigate the worst affects of the virus. Many of the drugs under development are antivirals that were created for other deadly viruses. The one that has gotten the most attention is Remdecivir by Gilead. It was originally developed for HIV, and subsequently tried against Ebola - unsuccessfully. Remdecivir was first used against COVID-19 in Washington State, after only one day a very ill patient improved markedly, then again for a patient that was ill for 22 days with success. The third patient was not so lucky and sadly passed away. These were instances of compassionate use, were a patient is very ill so an experimental drug is used.

The first patient was actually written up in medical journals and has given many health experts a lot of hope. On CNBC Rod Hochman, CEO of Providence. St. Joseph Health Corp, stated that Rendicivir will be effective for COVID-19. I'm quoting, not paraphrasing. I was surprised by the pronouncement. However, later in the day Meg Tirrell shared that not only were there two Remdecevir trials in China, and another in the US conducted by Gilead itself, there are hundreds of patients granted treatment through expanded compassionate use in the US, Japan, and Europe. In fact, GILD is providing Remdecivir under compassionate use widely in Washington State, a hot zone of infection. What does this all mean? It means that there are many biotech companies working on drugs to mitigate the most deadly aspects of COVID-19. If Remdecevir proves to have some effect, then many other biotechs will search their cupboards for other candidates I assume they are already. I think GILD is a buy.

It will only be another day or two that we will have a lot more testing and we will see to what extent the virus will have taken hold in the US. The news cannot be as bad as our imagination and therefore do not sell.

My Trades: I did something today that I don’t like doing. I added money to my trading account. I rolled down my Amazon (AMZN), The Trade Desk (TTD), Roku Inc. (ROKU), Slack (WORK). I took a loss on my Shopify (SHOP). I used the additional funds and the remainder of my SHOP to reinvest in AMZN, push the expiration out to April 24, and roll the remaining names.

Disclosure: I am/we are long GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have GILD as a long-term investment. However, in this article, I was talking about it for a speculation. In that case I would take an additional position in a CALL spread. I still have AMZN, TTD, ROKU, WORK as CALL Spreads. I also have some VIX PUTs. I sold SHOP at a loss.

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