The coronavirus has presented a challenge unlike anything we have ever seen before so we shouldn't be too surprised that the market continues to make sudden moves on unexpected news. There is no way to predict what may come next so we will have to be ready for anything and have a variety of strategies in place to deal with what may come.
Over the past three weeks, the indices have seen one of the biggest bear market bounces in history. There has been an intense debate over whether this is just an oversized counter-trend bounce or the start of a V-shaped move straight back up to the old highs.
The Nasdaq 100 is now showing a gain for the year, although it is still well under its February highs. Other indices and sectors of the market are not nearly as buoyant but, with the exception of banks, oils and a few other sectors, most stocks are looking much better than they did at the end of March.
This morning the V-shaped move is extending further on surprise news that Gilead Sciences (GILD) is testing a drug that has shown great promise in treating coronavirus. GILD has said it is too early to draw any strong conclusions but the market roared higher on the headlines hinting at a potential 'cure'. This drug doesn't prevent coronavirus or stop its spread but early indications are that it will reduce mortality.
This news combined with news that there is now a plan in place for reopening the economy gradually has the S&P 500 gapping up to its highest level since March 10. This sort of strength creates great anxiety among underinvested market players that have been anticipated a protracted bear market. The bulls tell us that the bears have been foolishly overlooking the power of the mammoth Fed stimulus. While a V-shaped move may not make sense in most cases, the power of the Fed will overcome normal human emotions.
The bears have two arguments to counter the V-shaped move thesis. The first is that this simply is not the way that bear markets tend to develop and play out. The big counter-trend bounces are to be expected and there should be some premature celebration that the worst is over but human nature is that a second wave of concern will arise even with the mighty Fed doing whatever it takes.
That is the technical argument. The fundamental argument is that the market still has not done a very good job of pricing in the economic damage that is occurring. With over 20 million people now unemployed and the dramatic changes that are taking place in the economy, there is no way to know what appropriate valuations might be. So far we have seen a lackluster response to earnings outside of the medical sector but we have to see any big technology stocks report yet.
So the debate continues - a continued V-shaped bounce or just a giant counter-trend bounce? The action today will be a particularly good test. In a more normal environment, there would be an inclination to sell into the strength and to try to rebuild positions on a pullback but there are two problems. First is that many market players are underinvested and struggling to put cash to work so they don't miss out. These folks will provide underlying support.
The second issue among skeptics and bears is the Fed. Even if you believe the economic picture is far worse than what the market seems to think, to what extent do you fight the Fed?
There are no easy answers to these questions so we have to look to the price action for clues. I expect the market to stay sticky to the upside at this point simply because too many people want to put some cash to work but as earnings season continues, the challenges of reopening the economy are considered, and the economic damage is assessed I'm looking for some pullbacks to occur.
My thesis has been that a trading range will develop. I did not expect another big spike higher before that happened but there is likely to be some period of consolidation as market players assess the many crosscurrents that are occurring.