The DJIA plunged more than 1,200 points, or 5%, in the first two days of trading this week. Oil price collapse is deepening as June futures plummeted 43%, closing below $12 a barrel in New York given an unprecedented plunge in global oil demand. Oil needs to be above US$30 at least for US drillers to make money. Storage tanks, pipelines and tankers have become overwhelmed by a vast oversupply driven by Covid-19. Around the globe, cases have topped 2.5 million and deaths now exceed 175,000. Cases of the coronavirus rose 5.7% in US on Tuesday - the biggest jump since April 10. Singapore, once a standard bearer for taming the virus, reported more than 1,000 cases for a second day and will extend its partial lockdown for four more weeks.
 

Question to ask is that how much of this is already reflected in corporate earnings? Deep profit declines often come with no company insight into the remainder of the year and mounting signs that capital investment is set to plunge when average person on Main Street struggling terribly!
 

Emotions are running high on both sides of markets. No victor is emerging until oil ‘super spreader’ stops. When it is going to halt? Oil collapses already spilling into the ETF market. The US Oil Fund is asking the SEC for permission to register an additional 4 billion shares. Until the new shares issuance are cleared, the oil ETF will not purchase more WTI oil futures, which potentially adding downward pressure on oil prices. By implication, there is no rush to build up equity position in my view simply because they already significantly oversold position but simply the idea that buying opportunity will emerge when we see best chance of sustained upside movement. I can feel for fond memories of December 2018 when stocks bottomed out on Christmas Eve then. But things at it is now, is just a reflection of not more than some worries about missing out and impact of nearly US$10 trillion stimulus remains to be seen.
 

Following the sizeable pullback, I would not be too surprise if markets are shifting the goal post again – debate over the potential of a retest of the March lows! Let me put a scenario for brain storming purpose that this market can drift around and not go anywhere for quite a while as UST10-year yield hits lowest level.
 

Do you really believe that stocks have priced in a real earnings collapse? My view is that whatever rally is left in the market now is still very likely a "gift" to sell into because primary mover of markets for last few weeks – Fed’s massive liquidity injection will be absorbed by the “gaping economic wound” over the next few months. In the 2008 financial crisis, the market fell 28.5% to its ultimate low when Fed’s liquidity faced reality check. I must remind readers that historical experiences may not be a fair judge comparing to current state of mind because we never deal with a scenario of an economic shutdown.
 

This shut down caught almost everyone “flat-footed' and ill-prepared for an involuntary 'shuttering'. Current markets, which are rallying on a flush of liquidity and a massive short-covering rally, may be reaching its 'exhaustion' stage sooner than expected over the next could of months.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com