Another day, another drop. Yesterday, it was Dr. Anthony Fauci that sent equities into a tailspin. This morning, Fed Chairman Jerome Powell scared investors even more.
And though both men weren’t entirely to blame for the two-session plunge – an overbought market was likely the main cause – they certainly didn’t give bulls any reason to continue buying.
The Dow (-2.1%), S&P (-1.8%), and Nasdaq Composite (-1.6%) all closed lower as a result.
“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” said Powell in a webcast interview.
“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.”
When asked if the Fed would consider sending rates negative, Powell made it clear that wasn’t an option.
“The committee’s view on negative rates really has not changed,” he said.
“This is not something that we’re looking at.”
Prior to the interview, President Trump lobbied on Twitter for a negative rate environment.
“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’. Big numbers!” tweeted the president.
But even negative rates won’t be able to save an economy that spends too much time in lockdown – a concept discussed by Nick Raich, CEO of The Earnings Scout, earlier today.
“Everything is dependent on the next several months and how successful businesses can re-open,” said Raich.
“All the stimulus in the world will not offset businesses closing their doors for an extended time.”
Billionaire investor David Tepper went so far as to say that this is the second-most overvalued market he’s ever seen, behind only 1999’s dot-com bubble.
“The market is pretty high and the Fed has put a lot of money in here,” Tepper explained.
“There’s been a different misallocation of capital in the markets. Certainly, you are seeing pockets of that now in the stock market. The market is by anybody’s standard pretty full.”
Most stocks got decidedly less “full” during today’s selling. One, however, managed to escape with moderate losses. And though that could be interpreted as a sign of strength, to short-term bears, it’s more likely a signal to go short.
Franklin Resources Inc. (NYSE: BEN), a global investment firm, has had an odd post-coronavirus crash run. The stock bottomed in late March like the rest of the market, but then stayed down for weeks while everything else rallied.
Finally, BEN shares pointed higher in late April. A new April high was set just two days ago.
Yesterday, though, BEN fell below its 10-day moving average. Today, it plunged beneath its minor bullish trend (represented with the yellow trendline).
Worst of all, the stochastics indicator shows a lower high opposite BEN’s higher high, forming bearish divergence.
Should BEN trade below today’s high by a significant amount, it might make sense to go short on the stock with a trade trigger of $17.00.
Even if the market’s set to make a comeback, it doesn’t seem like it will happen any time soon. Bearish sentiment should crush BEN shares, potentially driving prices down to the stock’s COVID-19 lows.
Which, to nimble traders, could be a late “gift” as investors sour on U.S. reopening efforts.
