After opening lower this morning, stocks surged through the afternoon following a dovish announcement from the Federal Reserve.
It was a stunning turn of events for bulls who were wounded in last week’s selling. At the start of today’s trading session, it looked like the correction would continue.
The Dow hit a daily low down 760 points. The S&P and Nasdaq Composite (temporarily) plunged deeply as well.
Equities reversed course, however, once investors learned that the Fed would buy individual corporate bonds – a historic first that had the market buzzing.
“The decision to buy a broad portfolio of corporate bonds represents a shift to a more active strategy for the secondary market corporate credit facility, rather than the passive approach originally envisioned,” Steven Friedman, senior macroeconomist at MacKay Shields, said in response to the news.
The Fed’s Secondary Market Corporate Credit Facility, which has the ability to buy up to $750 billion worth of corporate credit, has become much nimbler now that the central bank is targeting individual corporate bonds.
To WallachBeth Capital’s Ilya Feygin, it’s also a symbol of the Fed’s authority.
“The Fed is always going to try and show who’s boss,” Feygin said.
“It’s continuously proving it can do more and it’s effective. That’s been the primary driver of this market.”
Feygin’s absolutely right – the Fed is keeping the market going almost entirely on its own. So long as the economy can be strung-along short-term, bulls will keep buying.
They’ll even buy shares of bankrupt companies like Hertz (NYSE: HTZ), which exploded for a 1,400% trough-to-peak gain after announcing its bankruptcy filings.
Sadly, though, the Fed’s continued propping-up of the market will eventually come out of the private sector. The “V-shaped” recovery everyone’s talking about could absolutely still happen, but the second leg of the “V” might take much longer to fully form than initially thought. Capital expenditures (CAPEX) are way down opposite the production of consumer goods as corporations scramble for cash.
In other words, plenty of companies are (rightfully) sacrificing future growth for immediate money. Even with the Fed’s help, finances are still tight while America attempts to reopen amid second wave coronavirus worries.
If Q3 economic reports fall short of expectations, there could be hell to pay for bulls later in the year. And if investors don’t start hearing more good news about the U.S. economic reopening soon, stocks could drop once more to their lows of mid-March.
Thankfully, for short-term traders, there are still stocks worth their time. They just happen to be in non-market correlated sectors.
MacroGenics Inc. (NASDAQ: MGNX) is a biotech stock that has, obviously, erupted during the coronavirus pandemic, as many biotech firms have.
Since peaking, however, the stock has steadily fallen. Now, after bouncing off support and forming bullish divergence, MGNX is heading higher.
Today, the stock broke out above its minor bearish trend and the 10-day moving average.
Should MGNX trade above today’s high, it might make sense to take the stock long with a trade trigger of $22.53.
Even if the general market falls again, MGNX could still soar. In fact, based on the stock’s movement today, a burst upwards seems likely.
