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Black Friday Panic Selling Special Edition
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-7:47

Black Friday Panic Selling Special Edition

A new Covid variant in South Africa is leading to mass selling on a day markets may be ill equipped to handle it. Or the whole thing could be a buying opportunity…

Good morning contrarians!

Stock futures are falling off a cliff this morning. Small caps are being taken out back and beaten to a pulp, with the Russell 2000 off close to 4%. Dow Industrials are down more than 2% with the S&P 500 down 1.8% and Nasdaq about 1.1% lower. Commodities are dropping, with crude oil down more than 6% to trade around $73. Bonds are being bid up, with the yield on the 2-year back down to 0.5% It was up near 0.65% earlier in the week.

Source: Author’s work

This all looks like pretty classic risk off and the cause is our old friend Covid. Apparently there is a new strain of the virus that emerged in South Africa. The variant is so new it doesn’t even have a catchy name yet, and is known for now as B.1.1.529. The concern is over its mutations that are linked to increased antibody resistance, which means existing vaccines could be rendered ineffective. Apparently it’s more transmissible too.

Update: No word yet on whether this new strain is more deadly. Have asked a bunch of folks in the epidemiology community. Hoping for some clarity on this, though it may be a couple of days before anybody is able to comment on it with any kind of authority.

South Africa has banned flights. The World Health Organization has scheduled a special meeting for today. Media are once again scrambling to get epidemiologists on the record to provide what will inevitably be cited as ‘expert opinion.’ So far, all the quotes I’ve read are some variation of “we don’t know much about this yet. More data is needed.”

The concern for stock markets is that this selling takes on a life of its own. There is only a limited window of trading today (in the U.S. at least) with the market closing at 1300. So the activity could easily trigger circuit breakers. These circuit breakers kick in for drops set at 7%, 13%, and 20% of the closing price from the previous day. Trading will halt for 15 minutes when one of these is breached.

That doesn’t mean investors will stop panicking of course. The hope will be that the break in the action will allow cooler heads prevail — or something to happen to get buyers back into the market. That ‘something’ could come from anywhere, including comments from elected officials or just somebody who’s been in the market for awhile.

Remember that liquidity can dry up pretty quickly. We saw this last March and more seriously in 2008. Once there is a full fledged rush to sell, buyers vanish and there is nobody to provide a bid. Investors flock to safe havens. Eventually they sell anything to generate cash and meet margin calls.

We may not get there today. But it’s worth keeping these patterns in mind because eventually there will be more sellers than buyers and asset prices will drop. The pattern is pretty much the same each time. The only thing that is different is the trigger for it. Or maybe not, since we’ve seen the Covid-induced panic movie before.

Market Open Update: Stocks have come in a bit from their lows. More importantly, we are seeing green shoots in the old pandemic favorites such as Peloton (PTON), Zoom Media (ZM), Amazon (AMZN), Etsy (ETSY), and Teledoc (TDOC). And vaccine makers are rallying as well: Moderna (MRNA) and BioNTech (BNTX) are putting in big rallies. The point is that this does not look like the type of thing that would trigger circuit breakers. Or at least not yet…

Bottom Line

The new Covid strain could be more serious than the Delta variant. There could be lockdowns and an even more serious health crisis. The economy could grind to a halt again and stocks could lose all their value. Or maybe the economy will adapt and make use of the same technologies that allowed it to survive 2020. If that’s the case then this is a buying opportunity. It’s really that simple.

Wednesday’s Bottom Line told you to watch the PCE inflation report. That turned in to a bit of a non event, coming in pretty much as expected. Stocks finished green, a color we will apparently not see again in our lifetimes, judging by some of the concerns.

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