I believe that great trading is a function of strategy rather than predictions but to develop a good strategy it is necessary to develop a thesis and then to watch as it is tested.
My thesis right now is that the market has not yet formed a bottom and is likely to retest its lows. This thesis is based on the negative momentum that has developed and bear flags on the charts of the major indices.
More importantly, I believe that psychology favors more selling. One of the major things that have been holding up this market is the anticipated coordinated action by central banks as well as some fiscal policy moves around the world. These moves are being announced now and are being priced in the market. The negative reaction on Tuesday to the Fed cuts tells us that they may not be equipped to do anything else in the near term.
The bullish thesis for the market is that it has already discounted the implications of the coronavirus. Some people believe that it is just a severe form of the flu and that the market is anticipating a crisis that won't fully develop. While the drop in the market was very sudden and sizable, the indices are still just a small percentage off of all-time highs which doesn't seem to be much of a correction for an event of this magnitude.
While it may be possible that the worst is priced in, I believe that with the start of major testing in the U.S. in the next few days there will be the announcement of many new cases. The former director of the FDA, Scott Gottlieb, said this morning on CNBC that it is likely that the number of undetected cases in the U.S. is probably in the thousands. I do not believe that the psychology of this is appreciated and that it will create selling pressure.
There has been almost no testing done in the U.S. so far and it will likely take a week or so before the tests are processed and the information released. I believe the market will react negatively as the reality of the coronavirus becomes more apparent. While there has been much preparation for the coronavirus there isn't much reaction as so little news about actual cases has been reported.
My strategy is to stalk entry points on an index short. My preferred vehicle is ProShares UltraPro Short S&P500 (SPXU) but there are a variety of 'ultra' ETFs that can be used to gain some leverage.
If the short trade doesn't make progress fairly soon, I'll cut it back but I am going to put a small position in place now and then watch for entry points. If the market doesn't not react to negative news flow I will know that my thesis is wrong and will stand aside.