February 27, 2020

Why Recent Market Correction is a Blessing in Disguise

Midas Letter
Midas Letter
Why Recent Market Correction is a Blessing in Disguise

Wealthpress Head Trader Roger Scott joins Midas Letter to discuss what is driving volatility in the market today and why it presents opportunities to traders. Although there are definite catalysts for such market moves such as the CoronaVirus, Roger has seen this coming based on a variety of technicals and fundamentals. The Head Trader provides his expert opinion on underlying economic data and believes we are not even close to the FED lowering rates. Watch the entire interview to find out why Mr. Scott believes things couldn’t be better in the market right now for traders.


James West: Roger Scott joins me now with WealthPress. Roger, welcome. 

Roger Scott: Thank you so much, James. Glad to be here.

James West: You bet. Roger, the markets have been really volatile lately. What is driving everything in every direction?

Roger Scott: Well, here’s the thing, and this is a great question, and I’m glad we’re talking about this issue, because this is what everybody wants to hear about. You know, everyone’s going to tell you that the coronavirus is driving this downside correction, but I don’t agree. I think the corona virus is the catalyst that triggered it, but I think the market was way, way, way overdue for this.

Momentum levels have been at the highest levels we’ve seen in five years. You’re talking about a market that’s been stretched out, stretched out, and has not had the ability for that rubber band to snap back. So what you’re seeing right now is something that needed to happen for months already, and it’s finally happening.

To me, this is a blessing in disguise. And I honestly think the coronavirus is maybe a trigger to this, but not the continuous underlying cause of this. I think markets are just cooling off from being grossly overbought.

James West: Wow, interesting. So the markets, you know, obviously are in need of a corrective phase anyways. The coronavirus being the catalyst, that’s great. So, in your opinion then, the underlying economic data, how much of a factor is that in the bigger picture?

Roger Scott: Another very good question. Very little right now, and I’ll tell you why: there’s a fundamental reason for all of this. The target growth for the GDP which came out at 8:30 EST this morning has been a little bit higher than 2 percent. Economists will – 2.1 percent, but in reality, it’s 2 percent or better, and it came out right on target at 2.1 percent. Unemployment is at a 55-year low. This whole downside, durable good orders were a little bit soft but everything else was right on target or better than expected.

Even earnings on the retail sector came out better than expected. So in my opinion, we are not even close to having the Fed make a move to lower rates. Here’s what I believe is going on: I believe the market is going to capitulate in the next day or two. I think we’re going to bottom near the 200-day moving average. But in terms of the economy, things are solid. Things couldn’t be better than what they are right now, honestly.

And here’s the thing: if the Fed sees that things are really getting out of whack, we already know what they’re going to do.

The question now that everybody’s battling, it’s not really the extent of the coronavirus now, or how many people are going to die. More or less, it is becoming under control. It’s the impact that it’ll have on the world in the first quarter of 2020’s earnings. That’s the question. From what I understand, and we really don’t know what’s going on in China, but from what I understand, they’re working right now at 10 percent capacity.

They came on record and said ‘we’re expecting worse numbers because of this’. Tesla: you got a lot of car companies. So the question is what impact it’ll have on the future. As far as right now, things are fairly steady.

James West: So to what extent do you think that the downdraft in the major markets is, in fact, the market pricing in the poor first quarter in anticipation looking forward?

Roger Scott: And that’s exactly what I think the market’s doing. Look: if you look back about three weeks to a month, you will see that Goldman Sachs, Morgan Stanley, even Bloomberg, very conservative in terms of earnings, they all said this was going to be the first quarter of 2020, which is, you know, the second calendar quarter, but you know how earnings work; everything is one quarter back.

James West: Sure.

Roger Scott: So everybody anticipated, all the big guys anticipated the first quarter of double-digit growth. And analysts have not started beating those numbers down like they did the fourth quarter of 2019, which started out pretty high and then by the time earnings came down, those expectations fell. We have not seen that yet.

So what I’m trying to say is, there’s some leeway there for the numbers to come off a little bit, and if they do, we know exactly what’s going to happen. President Trump is going to start pressuring the Fed to lower rates, and it’s going to reflect – look, the truth is, if this coronavirus is going to have an impact on the economy, it’s going to reflect in the GDP. There’s just no two ways about it. We’re going to see a lower GDP, and if that happens, the Fed is going to be forced to take action.

Right now, President Trump can’t really go to them and say ‘you’re not doing your job’. Why? Because GDP is at 2.1 percent. What is he going to say, it’s not growing fast enough for me? Anything above 2 percent is above expectations. So the question is now whether or not the market is fully assimilating what the coronavirus will do. And from history, history will tell us the market tends to panic and go overboard. It happens every time.

Look: this morning, last night’s put to call ratio was 133. 133. It hasn’t gone to 133 in a long time. That means puts are overpowering the calls by a huge margin, and usually when that happens, the market is not being reactive; the market is being scared. VIX right now is above 30; we are in scared mode. Logic is not driving this market. Fear is driving this market, and whenever that happens, that usually doesn’t last.

James West: Sure. I’d like to dwell for a moment, if I could, on the put to call ratio, just because my audience isn’t necessarily that financially literate to understand what 133 means in the put to call ratio. Is that a 1 to 33 meaning that for every call there’s 33 puts?

Roger Scott: Yes, exactly. Here’s how I look at – let me give you a very simple analogy to understand. Typically, 95 percent of the time, the put to call ratio is very random. It’s [inaudible]. But sometimes that rubber band – and I like to use the rubber band as an example, because I think it fits very well – sometimes that rubber band stretches out to a point where the only thing left to do is for it to snap back. And when you see the put-to-call ratio at 0.70 or lower, that means the markets are very complacent. Greed is driving the market. Too many calls versus puts are driving the market.

Then, when the market goes the other way, the rubber band snaps the other way, and fear is driving the market. You want to see a put-to-call ratio above 1.15 or higher. Right now, it’s at 1.33, which means puts are really driving this market. And whenever that happens, whenever that fear level gets out of whack, that rubber band stretches out, it tends to snap back. So the ratio is above 1, and whenever it goes a little bit higher than 1.15, 1.20, watch out: it’s going to snap back the other way. Or, gets below 0.70, it snaps back the other way. And right now, it’s at 1.33, and I believe we’ve only had it higher one time in the last five years.

But understand: last time we spoke, momentum levels were at five-year highs. Forget coronavirus; it was time for things to move down. It was just a matter of days. Everybody in my boot camp sessions where I meet every day with my traders, nobody is surprised at this. We saw this coming miles away. It was just inevitable, it was a matter of time, and it would have been coronavirus, it would have been international trade, something would have started this, and it just happened to be the coronavirus. But again, to me, it’s just a trigger for something happening. What we’re seeing now is long overdue.

James West: Sure. Okay, so then what is the intelligent strategy at this point for traders?

Roger Scott: The intelligent strategy is to stay on the sidelines. The S&P right now is sitting right at the 200-day moving average. Here’s what I say: let it bottom out and start moving higher, and wait for the S&P. There’s strong support at the 302 level on the S&P 500, or if you’re looking at the S&P 500 Index, they’re 3020. Right around 3000, there’s major support; if we can trade higher above that level, I want to see the market trade above the 50-day moving average and close above moving average for two days in a row before I go long.

Or, conversely, I want to see it close for five days below the 200-day moving average for me to call this market a bear market. And I don’t know what’s going to happen. I think we’re going to snap back up and I think buying pressure is going to move back in.

One of the telltale signs, one of the biggest telltale signs, is when the market opens – when we’re in a bearish correction, and the markets open higher. Whenever it opens higher, it tends to go lower during the day. Right now for the first day, the market opened lower, and it hit the 200-day moving average, and volatility is off the charts. So we may be very, very close to a capitulation.

Also, gold did not take out the high from last week from earlier this week, excuse me – it’s Thursday already. So yeah, gold did not take out the previous high. That flight to quality is not happening. So I’m seeing the market getting fairly close to its downside goal at this point.

James West: Okay, Roger, well, that’s a great update. I really appreciate the input today. Thanks very much.

Roger Scott: Thank you very much, I appreciate your time, and I’ll see you next time.

James West: You bet.

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