Market players are celebrating a massive bounce that has caused the DJIA to jump more than 4300 points, which is a gain of 24%. While the gain comes as a great relief, it is causing quite a bit of confusion as investors wonder if it is possible for the market to bottom as coronavirus cases grow in the U.S. at a high rate and massive unemployment claims are being filed.
The bull case here is that $6 trillion in monetary and fiscal support has put a safety net under the market. There is optimism about increased coronavirus testing and treatment and hope that social distancing will flatten the curve. The problem is that despite a flood of data and much speculation about coronavirus, there still is not a reliable model of what might happen. Even if the mortality rate is not nearly as high as feared, the disruption to society will remain very high if a high percentage of victims need intensive care.
The bear case is the same as it has been since this market collapse started. There is still no great certainty about the spread of coronavirus and no one knows yet what the ultimate economic cost will be. Governments around the world are throwing record amounts of money at the problem, but some of the problems can not be fixed easily and reverberations will continue for months, if not years. While there is great optimism that the fiscal and monetary rescue packages will provide relief, it is not possible to calculate what is going to happen to the economy.
Another issue that contributes to market confusion is that the big bounce in the indices is not just a function of buyers jumping in because they suddenly believe that stocks are cheap. Much of the volume is caused by billions of dollars being rotated due to shifts in the currency markets and bonds. There are many complicated strategies employed by institutional investors to manage their risk, and that is driving the big bounce more so than a sudden belief that stocks are cheap.
On Friday morning, the indices are indicated lower by more than 2%. News that the U.S. now has more coronavirus cases than any other country seems to be having some emotional impact and the realization that there is still no way to know when the crisis might hit a peak is weighing on sentiment.
The House of Representatives is looking to pass the $2 trillion stimulus bill by voice vote, but the dynamics of accomplishing that task may delay it. At this point, the market is assuming it is a done deal, but its actual passage may still serve as a trigger for computer algorithms.
I believe the action of the last three days is just a very large countertrend bounce. There were similar bounces in 2008-2009, 1987 and during the Great Depression in the 1920s. I don't know if there will be a retest of the lows, but I am looking for a sizable pullback and then some very choppy and sloppy action as the market attempts to sort out this huge shock to the economy. Good opportunities will develop, but it will take patience and the recovery will not be smooth.
We'll see how much dip-buying interest there is this morning, but the weakness is likely to embolden the bears that were extremely skeptical of the big bounce.