The market's wild volatility continues with a swing in the S&P 500 futures overnight of about 185 points which is nearly 8%. That is the sort of move that usually takes months but we are experiencing an event unlike any other that the market has ever seen before.
The indices took another hard hit on Wednesday and the fear was palpable. While it has been panicky action for a while, yesterday had the feeling of a real crash especially when hedge fund manager Bill Ackman made a very emotional appearance on CNBC.
Because of the extent of the drop and how quickly it has occurred, many market players are intently focused on the potential for a bounce. The biggest bounces occur in an environment like this and if caught correctly the gains can be substantial. The key to navigating this action is to make sure that you are very clear about the difference between a counter-trend bounce that may last just a few days at most and a cycle low that will hold for many months.
Typically, market players tend to focus on THE low rather than A low and are quick to assume that every low is THE low. The real pain of a bear market becomes much more severe when a bounce fails and it becomes clear that the worst is not over. Huge drops like we have seen lately has a profound impact on psychology. When there is a bounce it is often an opportunity for stuck bulls to escape a miserable situation and for aggressive bulls to reload. Big bounces also create quite a bit of hope and that hope turns into despair when there isn't a V-shaped move back up.
In recent years market players have grown used to V-shaped moves and tend to expect them. A good example occurred after the big drop in the fourth quarter of 2018. Markets bottomed on Christmas Eve and went straight back up from there with no failed bounces or retests.
One of the reasons there has been V-bounces in recent years is that they have largely been driven by monetary policy. Once the central banks throw money at the market, that liquidity is a cushion that prevents further pullbacks.
In the current market, the huge monetary and fiscal stimulus is not producing the same sort of bounce we have seen in the past. The primary reason is that there is just too much uncertainty about what course the coronavirus will take and its ultimate impact on the economy. At some point there will come a little greater visibility and a bounce will ensue, but then the market will have to go throw a long period of sorting out the economic damage and that is likely to kill the bounce and result in some retesting of the lows.
If you are looking for a bounce play the most important thing to keep in mind is that you should not let it turn into a long term investment if that wasn't the intent. Take the quick gain when you have it and then look for another chance to build the long term position if that is your goal.
You can be sure that when there is a substantial bounce again that many market players will want to believe that the worst is over. Maybe it will be but the risk of a further pullback will remain very high and that should be the primary focus.
The key to navigating the market right now is to watch the reaction to both the coronavirus stats and the stimulus news. The number of coronavirus cases in the U.S. is very likely to accelerate in the next week or so as more testing is done but eventually the increased data will allow for some projections.
The market is not celebrating the stimulus efforts so far but if they can put a bid under the market then the buyers may start to inch back in. Until the volatility slows, individual stock picking will remain extremely difficult.