Perfect Storm – Update

On Monday we discussed how the combination of the emerging health threat of the Coronavirus, which is causing massive disruptions to manufacturing worldwide, is impacting the markets as markets were already in their timing band for an intermediate (weekly) cycle decline. Tonight we will look at the longer term, yearly cycle.

February is month 14 for the yearly equity cycle, which places stocks in the later stage of their timing band for their yearly cycle decline. A monthly swing high and close below the 10 month MA is needed to for stocks to form their yearly cycle low. Since stocks printed a higher high in February, then the earliest a monthly swing high can form will be in March. Then stocks should close below the 10 month MA in order to print their yearly cycle low.

Perfect Storm

On February 10th and February 16th we discussed how stocks were in their timing band for an intermediate cycle decline. We also discussed the emerging health concern presented by the Coronavirus that was causing massive disruptions that impacted manufacturing worldwide. It seems that these concerns finally came together to form the Perfect Storm.

The Dow Jones Industrial dropped over 1000 points on Monday. The S&P was down over 120 points. Both indices broke below their previous daily cycle low to form a failed daily cycle. Over the past 2 years (14 daily cycles) stocks averaged 39.54 days per daily cycle. Monday was only day 15 for the daily equity cycle. If stocks run their average cycle, then stocks would need over 4 more weeks before printing their daily cycle low.

The Fed will certainly try to rescue the market so I think that we will likely see a bounce at some point. The earliest that stocks printed a daily cycle low over the past 2 years was 23 days. So until stocks get closer to their timing band, any attempt to rescues the market may not gain any traction.

Canary in the Coal Miner Update

On February 16th we discussed how China was being impacted by the Coronavirus. The impact continues to worsen. The Novel Coronavirus (COVID-19) outbreak and related quarantines continue to impact business and technology supply chains at Apple, Google, Qualcomm, Nintendo, Tesla and elsewhere.

* Airbus: The company shut down a factory in China that accounts for almost 10 percent of the production of its most popular jet
* Apple on February 1 said it would close its stores in mainland China, one of its biggest markets, until February 9.
* Hyundai Motor: The company is idling all seven of its plants in South Korea because of a lack of parts from suppliers in China.
* Mobile World Congress (MWC) Barcelona 2020: MWC organizers on February 12 officially canceled the event.
* Robert Bosch: The chief executive of Robert Bosch, the world’s biggest auto components supplier, warned that coronavirus could impact its global supply chain.
* Starbucks: The global coffee store chain temporarily closed more than half of its stores in mainland China.
* Tesla: The automaker warned of delivery delays in China. Deliveries set for early February would be affected. Tesla’s new factory in Shanghai has been closed due to the outbreak.

And millions of Chinese furs face collapse due to a liquidity squeeze brought on by dwindling cash reserves.

The impact of the Coronavirus on global supply chains are being felt worldwide, yet stocks are near all-time highs.

This was week 20, placing stocks in their timing band for an intermediate cycle decline. Stocks printed a bearish weekly reversal this past week. The bearish weekly reversal eases the parameters for forming a weekly swing high. A break below 3328.45 would form a weekly swing high to signal the intermediate cycle decline. The are bearish divergences developing on the weekly oscillators which ofter precede a cycle decline. And once the impact of the Coronavirus starts to get priced in, that should help to send stocks into their intermediate cycle decline.

Canary In The Coal Mine

China, the world’s second largest economy, is feeling the economic impact of the Coronavirus.

Chain’s coal consumption usually trends lower into the Chinese New Year, but then recovers. What is happening is that their daily coal consumption has flatlined, underscoring the impact of the Coronavirus.

Massive Manufacturing Disruptions Due to Coronavirus Include iPhone

About 80% of world goods trade by volume is carried by sea and China is home to seven of the world’s 10 busiest container ports, according to the United Nations Conference on Trade and Development. Nearby Singapore and South Korea each have a mega port too.

“A closure of the world’s manufacturing hub impacts container shipping at large, as it is a vital facilitator of the intra-Asian and global supply chains,” said Peter Sand, chief shipping analyst at BIMCO, an international shipping association. “This will affect many industries and limit demand for containerized goods transport,” Sand told CNN Business.

Alibaba Warns Virus Having Broad Impact on Chinese Economy

“Alibaba, the first major Chinese technology corporation to report results since the epidemic emerged in January, said the virus is undermining production in the economy because many workers can’t get to or perform their jobs. It has also changed buying patterns with consumers pulling back on discretionary spending, including travel and restaurants.” Wyndham has closed 70 percent of their hotels in China.

And more cities are being locked down.

China Locks Down Hangzhou, Mega-City Far From Epicentre of Coronavirus

HANGZHOU: Millions more people have been ordered to stay indoors as China battles to curb the spread of a new virus that authorities said on Wednesday (Feb 5) has already killed 500 people.

Hangzhou, capital of Zhejiang province and home to Alibaba Group, recorded an estimated population of almost 10 million by the end of 2018, according to a metro newspaper owned by Hangzhou Daily Press Group.

Yet stocks are at all-time highs.

Stocks are behaving as if week 17 hosted the ICL. 17 weeks would be early for an ICL. But stocks did form a weekly swing high, break the weekly trend line and close below the 10 week MA on week 17. With the Fed is engaging in Repo operations and central banks are flooding the market with liquidity, in part, to lessen the impact of the Coronavirus — that may be all of the correction that we will see. But the longer it takes to bring the Coronavirus under control, the more severe the reaction will be once the economic effect starts to get priced in. There already are bearish divergences developing on the weekly oscillators, which often precede a cycle top. If stocks close below the 3330.00 break out level that should send stocks into their intermediate cycle decline.