The markets seem to come to a stand still yesterday…as the volume was even lower than Friday’s and the average volume of the past two days has been more than 25% below it two month average. The fact that the stock market was able to eek out a gain despite some concerning news from over the weekend should certainly be seen as positive. However, Warren Buffett’s cautious comments from the weekend…which included references to the Civil War & the Great Depression seemed to give investors a reason to sit back and reconsider what they’re thinking and do. This, in turn, seems to have led them to sit on their hands.
We didn’t hear any further antagonistic rhetoric from the Trump administration about China on Monday, but there was plenty of it to go around late last week and over the weekend, so it’s still going to be an important issue in the weeks ahead. In fact, with the election coming up in November, we doubt this is an issue that’s going to go away any time soon. However the fact that the market was able to shake-off this rhetoric yesterday…and with the futures trading nicely higher this morning…there are certainly reasons for people to be constructive about the very-short-term condition of the stock market.
The credit for this morning’s rise in the futures is going to the fact that many states are easing their lock-downs and thus the economy should get a boost. We also heard from two bulge bracket firms who said yesterday that they’re seeing signs that the global economy is bottoming out……..Yes, this is all good news, but since the U.S. stock market has already bounced-back to a level that existed when the stock economy was some-what thriving, it’s hard to declare that these developments are something that will lead to a significant further rally in the stock market on top of what has already taken place. What we’re saying it that the fact that the situation might be “bottoming”…in an economy that was completely shut-down…is not necessarily as bullish for a stock market that has been in the past if the level of growth is still going to be quite tepid for an extended period of time.
Moving back to the issue of China, the developments in relation to that country should be a point of focus on several levels. Away from the renewed strains between it and the U.S., we also want to keep a close eye on their economy. They reached the peak of the crisis first, so the quality of their economic recovery will also be very more important going forward. In other words, whether they deserve a lot of blame for this global healthcare crisis or not will not be the only issue we’ll be focusing-on going forward….and whether China’s economy can bounce-back in a meaningful way or not is obviously going to be important.
One important leading indicator on this subject should be the action in Alibaba’s stock. Alibaba (BABA) topped-out in very early January of this year…and therefore it was a good leading indicator of the negative impact the coronavirus was going to have on China and the global economy later in the 1st quarter (much like the U.S. Treasury market was during that time).
After its sharp multi-month decline, BABA bottomed in March and rallied quite strongly into mid-April…retracing 2/3 of its Q1 losses. This bounce went along with the bounces in many/most assets around the globe. However, this stock has rolled back over and fallen 10% from those mid-April highs over the past two weeks. It still stands 8% above its March lows, so we don’t want to get to concerned about this action just yet. However, its recent two week decline…during a period when most other assets continued to climb…raises a yellow warning flag for the stock on a technical basis.
We’d also note that BABA was not able to break above its early March highs during its bounce. So unlike many other stocks, it was not able to make a “higher-high.” On top of this, the more recent two-week decline has taken it below the upward sloping trend-line its March lows…AND its MACD chart is rolling over at a lower level than it did back in January. So its recent rally seems to be losing a decent amount of steam…at a lower level.
BABA is also testing its 200 DMA, but we have to admit that this moving average has not been an important technical line for this stock in the past, so a move below that line would not cause us to become a lot more cautious just yet. However, we WILL be watching its trend line from the late 2018 lows. By mid-month, that will come-in at about $175, so if it breaks below that line in any meaningful way as we move through the middle month of the 2nd quarter, it’s going to raise some questions about the rate in growth coming out of China right now. That, in turn, could/should give us an indication of how strong the bounce-back in global growth will be as we move through the rest of the spring and into the summer months.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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