Well, we just got a true shock to the stock market. As we said over the weekend, stock investors had several weeks to react to the outbreak of the coronavirus. The moves in other asset prices (like gold and especially Treasuries) were staring people right in the face…and telling them that a correction in stocks was in the offing……In the case of the price of oil, however, almost nobody could have seen that it would drop over 20% overnight (down more than 30% at one point). (We say, “almost nobody”….because somebody spent $2.6 million to put-on the June $34/29 put-spread last week. So somebody knew something.)
The double-whammy of the continued problems from the coronavirus…and the new (major) oil price-war induced by the Saudis…has caused stock markets around the globe to fall out of bed. The domestic futures are “down limit” (down 5%) as we write…and the broad U.S. stock index ETF’s are indicating that they’ll open down 6% or so in pre-market trading as we write. So things are obviously looking quite ugly this morning.
This newest development has wide-ranging implications. If crude oil stays in the low-to-mid $30s for any period of time, it’s going to lead to bankruptcies and significant layoffs in the oil patch. It’s also going to have a substantial impact on the high yield market…just like it did during the crash in oil that took place in 2015 (into early 2016).
In other words, as we have been saying for a while now, the REAL problems facing the markets today have to do with stresses in credit markets…and the rate at which these stresses will accelerate just rose DRAMATICALLY. Not only has the stress level risen dramatically, but it has done so OVERNIGHT!
Therefore, the issue of “forced selling” will come to ...