Primary wave 3 down in stocks begins

The Dow kicked off Primary wave 3 down for stocks, fourteen days after it topped on April 29.

Demonstrated below a classic technical head-and-shoulders top was completed yesterday with the Dow closing below a 23,640 neckline. The set-up was the lower-left shoulder in volume illustrated by a three-day trend in total volume across the Dow, S&P 500, and the Russell 2000. Yesterday’s selloff was broad-based with declining outpacing advancing issues by 8 to 1. Volume was likewise excessively negative, with 89.6% of Big Board volume in decline.

Wave 3 Down Begins


The technical start of the next wave down was combined with a grim narrative yesterday by Fed Chairman Powell who in a webinar highlighted how bad the employment situation was for a majority of Americans. Here is what he said that caught everyone’s attention.

“A Fed survey being released tomorrow reflects findings similar to many others: Among people who were working in February, almost 40% of those in households making less than $40,000 a year had lost a job in March” 

Powell at the Peterson Institute for International Economics, May 13, 2020

However, it was the following part of his speech that highlights how scary things could become if a U shaped recovery turns into an L.

“But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt. The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes. These businesses are a principal source of job creation—something we will sorely need as people seek to return to work. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.”

And finally, he reminds us who is ultimately responsible for the tough decisions ahead.

Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.

Go here, to read the full speech and watch the webinar

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