As the indices drift higher on 4-3 positive breadth, we have an interesting battle shaping up. One group of market participants believes that the worst is over and the market is on a trajectory to steadily improve from here, while a less optimistic group of market participants believes that this is a counter-trend bounce that is destined to fail.
The debate is complicated by the fact that the first quarter of 2020 ends tomorrow and there are likely to be very large allocations by pension plans into equities and out of bonds. The process is much more complicated than that but for longer-term investors, this is the point were those allocations are made. Whether it is very precise isn't of major concern.
Assuming that there is some additional buying pressure caused by reallocation moves, the big question will be whether this counter-trend bounce then fizzles out. As I discussed this morning, the bear market in 2008-9 enjoyed quite a few significant bounces before the bottom was eventually reached in March 2009.
There are plenty of good arguments for why it is different this time. The speed and intensity of the drop, the massive fiscal and monetary stimulus, the possibility of treatments and better testing for coronavirus, and the possibility that the coronavirus peak will be hit much faster than feared.
I remain skeptical that the bear market will end this quickly and easily. As we head into earnings season the great economic uncertainty will become more obvious and the pain of the economic disruption will be felt more intensely. The longer this crisis drags out the greater the likelihood that sentiment will erode further.
The big test will come on Wednesday after the end of the quarter allocations are done. We then will focus on earnings, the next unemployment report, the progression of coronavirus stats, and economic news in general. If the mood continues to improve through those events then the bulls will be in good shape.
The biggest positive right now is that volatility has slowed and emotions seem to have cooled. That is a necessary condition for better stock picking but today is just a start.