By popular demand – I am bringing back the MWCB (Market Wide Circuit Breakers)

The S&P closed at 2972.37 – So today’s circuit breakers are: (See explanation below)

Level 1. 208.07 pts (7%) or 2,764.30
Level 2. 386.41 pts (13%) or 2,585.96
Level 3. 594.47 (20%) or 2,377.90

Market-Wide Circuit Breakers – (MWCB)

Market-wide circuit breakers are important, automatic mechanisms invoked if markets experience extreme broad-based declines. They are designed to slow the effects of extreme price movement through coordi- nated trading halts across securities markets when severe price declines reach levels that may exhaust market liquidity. Market-wide circuit breakers may result in a temporary trading halt, or under extreme cir- cumstances, close the markets before the normal close of the trading session.

• They provide for trading halts in all equities and options markets during a severe market decline as measured by a single-day decline in the S&P 500 Index.
• A market-wide trading halt can be triggered if the S&P 500 Index declines in price as compared to the prior day’s closing price of that index. The triggers have been set by the markets at three circuit breaker thresholds—7% (Level 1), 13% (Level 2), and 20% (Level 3).
• A market decline that triggers a Level 1 or Level 2 circuit breaker after 9:30 a.m. ET and before 3:25 p.m. ET will halt market-wide trading for 15 minutes, while a similar market decline at or after 3:25 p.m. ET will not halt market-wide trading.
• A market decline that triggers a Level 3 circuit breaker, at any time during the trading day, will halt market-wide trading for the remainder of the trading day.

Global markets are in meltdown mode! The Saudi’s launch an all-out price war in crude oil because Vladimir would not agree to increased production CUTS to support the price of oil so the Saudi’s flood the market sending oil prices lower – causing widespread pain to oil producers, oil producing countries (think Russia) and the markets. Remember, the US is now the number one producer of oil, the Saudis number 2 and the Russians are number 3. And do not expect this latest move to benefit Iran, Iraq, Venezuela, Lib- ya, Nigeria etc., either.

Stocks remain under pressure as the coronavirus continues to spread AND the Saudis strike back at Rus- sia by opening up the oil spigot, slashing the price of oil and ramping UP production, sending oil prices reeling, careening in fact, through $40/barrel and then through $30/barrel to trade as low as $28/barrel as investors/traders and algos tried to assess the damage. US 10 treasuries are SOARING as the safety trade has new meaning and this sent yields plunging – trading as low as 0.3454% while the 30-year bond pierced 1% leaving the FED and every other central banks in a tough spot. It appears that the US might be joining the rest of the world as rates look to plummet into negative territory… and all this a direct result of the decade long central bank stimulus that no one wanted to see end. But that is another story…

US futures traded limit down (5%) by 10 pm last night. Stocks in Asia imploding as the reality of this ‘mess’ hits hard. The mess being defined as a virus that is spreading across the world with no end in sight, causing global analysts to re-think their outlook for broad macroeconomic data as well as individual com- pany earnings and now a ‘food fight’ of sorts being initiated in the Middle East and if that is not enough – North Korea’s “Chubby” (Kim Jong Un) launches multiple missiles just to remind everyone that he is still a player on the world stage.

Japan’s Nikkei falls 5.07%, Hong Kong falls 4.32%, China losing 3.4% and the ASX losing a stunning 7.33%. European markets preparing to get “hit” as well, as investors and traders brace themselves for an ugly day… opening trades have those markets trading lower by 3+% and in a few short minutes all of those markets quickly fall by another 4% as the beating continues…

It is now that I remind you of the US circuit breakers that were instituted after the Crash of ’87 – when global markets went into a tailspin for a range of reasons (but the biggest being a complex algorith- mic trading strategy known as ‘Portfolio Insurance’)… taking 22.5% out of the market in 6 ½ hours… At the time there were no built in protections for the markets to slow the panic that had clearly spread across the globe… that all changed after October 19, 1987. Today, we do have “protections” – but they are fairly wide – to allow the markets to try and price risk – but if panic ensues – then the system will bring it to a halt to allow for cooler heads to prevail… the question is: computers don’t have cooler heads, so will a halt in trading end up creating more panic as the magic break points get triggered?

We don’t know – because they have never been triggered – so today we might find out. And many of the participants that were “there” on October 19th remember that day well. But today, there is whole generation or two that has zero recollection of the what happened that day…so strap in. You’re about to be
educated.

The oil price collapse has the ability to upend life as we know it – Hi Yield credit will come under pres- sure causing defaults and layoffs across the energy industry something we have not seen since the GFC (Great Financial Crisis). Some even suggesting that if oil prices remain at this range for more than a week or two- those defaults and collapse in Hi Yield will happen quickly, causing continued ripple effects throughout the global economy.

US futures are deeply in the red… Dow futures off 1255 pts or 4.87%, S&P’s lower by 145 pts or 4.9%, Nasdaq is down by 410 pts or 4.8% and the Russell is losing 69 pts or 4.75%. Bonds as discussed are soaring, and the market is now pricing in an 80% chance of a 75 bps cut at the March meeting (if not be- fore) – a move which I think will only cause more panic. Complex products that exist today are sure to only add to the chaos as we all get drawn into the storm – because even though you may not own some of those complex products – we are all in the same boat – think of those leveraged ETF products that tend to combine a bit of everything into one product in a ‘one size fits all’ investment vehicle for the sophisticated asset manager. Like so much in history, it’s all good until it isn’t. Products designed for stressful situations usually fail because no one can really test them for what those stressful situations might look like when they do arrive. Do I need to remind you of those times?

Look, between the Chinese and now the Saudi’s – the global outlook has completely changed. Assumptions that we made only months ago now all get thrown out the window – and analysts will now have to reassess what the future looks like. Stocks will adjust to the new guidance, volatility will subside (as it always does) but it could get very uncomfortable in the interim. Try not to get drawn into the chaos. A well-designed plan is built for exogenous shocks like this. Talk to your advisor, plan strategically, but do not panic.

Take good care.

Kenneth Polcari
Chief Market Strategist, Consultant
kpolcari@slatestone.com