Morning Notes — Extreme Bearish Equity Sentiment

The uncertain coronavirus-impact on the US economy (demand, supply chain disruption and credit) has resulted in a ~19% SPX decline from 2/19 peak. During the first few weeks of February, we called attention to the unsustainability of new highs based on a lack of cyclical sector participation, but we didn’t expect anything of this magnitude. Yesterday’s Saudi-Russia oil price war created a ‘black-swan’ event for the SPX resulting in the largest single day loss since 2008. Since 1928, there have been only 18 days registering larger declines that resulted in a median gain of ~17% over 12 months that followed. Yesterday’s decline also pushed bearish sentiment to oversold extremes with the CBOE equity put/call ration matching the record 12/21/18 high of 1.12. There is always the concern that ‘this time is different’, but extreme bearish sentiment like this has always led to multi-week rebounds even during cyclical bear markets. Closing levels over the next two day’s will be of particular interests for market technicians. More on that tomorrow.