09.03.2020 S&P 500 Analysis

09.03.2020 S&P 500 Analysis

Recently as the American stock futures continue tumbling with the losses triggering exchange rules that limit declines at 5%, even as plummeting oil prices added to the backdrop of dread surrounding the coronavirus. Contracts on the S&P 500 sank as much as 5% from a Chicago Mercantile Exchange reference price calculated during the final 30 minutes of trading Friday, preventing the rout from going beyond 2,819 on the contracts. While futures can continue trading at or above that price, they were pinned at that level as of 10:11 p.m. in New York, raising the specter that losses would be deeper if allowed. In fact, Volatility has been rampant in markets around the world amid an outbreak of the COVID-19 that has infected 108,000 people and killed more than 3,700. At least 10 billion shares have traded on U.S. exchanges each day for two weeks, gauges of equity turbulence are at nine-year highs and strategists have begun lowering earnings forecasts for the rest of the year.

However, the last weeks’ drop easily erased the rally that lifted cash equities in the final hour of trading on Friday, as crude sank more than 20% in the deepest rout since the U.S.-led war in Iraq in 1991. While energy and commodity stocks only make up about 5% of the S&P 500, plunging crude prices exacerbated the blow to sentiment and stood as one of the starker signals of the outbreak’s economic toll with the recent market volatility, the use of circuit break3rs have been introduced. Essentially circuit breakers temporarily pause trading once certain decline thresholds are met and can ultimately close the market early should the decline be sufficiently large. For the New York Stock Exchange (NYSE) circuit breakers have three tiers. These circuit breakers react to the price change in the S&P 500. The first tier is a 7% decline in the S&P 500. Should that occur, trading will pause for 15 minutes. The next level is a 13% decline, that causes another 15-minute pause if it happens on or before 3.25 pm. Finally, should the markets fall 20% the markets will close for the day? All these price changes are relative to the previous trading day’s close.

Although the Federal Reserve has already issued an emergency interest rate cut, markets are screaming for more. Hence, investors will not focus on global stimulus measures until they have confidence that the U.S. government and Fed will ‘do what it takes to lower tail risk, which is the chance of a loss occurring due to a rare event, as predicted by a probability distribution.