Last Thursday and Friday the price action hinted that a change in market character was brewing. There was increased concern about the spread of COVID-19 outside of China and there wasn't much enthusiasm about the likelihood that central banks could forestall selling pressure with even more injections of liquidity.
The change market character was cemented over the weekend as new cases of COVID-19 grew quickly in Italy, South Korea, and Iran. The market narrative shifted very quickly as concerns that economic growth around the world would job because of supply chain issues around the world.
The market ended up suffering some very classic corrective action. There were major point losses with the Dow Jones industrial average finishing the day down over 1,000 points. Breadth was around 1,070 gainers to 6,475 losers and the number of stocks that traded at a 12-month low expanded to over 500.
The drop in the Dow wiped out its gains for the year, but the S&P 500 managed to preserve a slight profit over its close on Dec. 31.
So now what?
Since the last big drop in the fourth quarter of 2018, the market has had some brief bouts of correction action before quickly bouncing back. Market players are well condition to buy the dips, but that didn't work very well today with late selling stomping out an afternoon bounce try.
There are two major problems at this juncture the first is that selling of this magnitude typically doesn't resolve itself that quickly. There is likely to be a bounce in the next day or two but then the conditions for a retest and potential breach of the lows will be in place. Look back at the price action in the fourth quarter of 2018, if you want to see what very strong downside momentum looks like.
The other problem is the news flow. There is no clarity about how far or quickly COVID-19 might spread. There still are no signs of it expanding quickly in the U.S., but if that changes it will likely have a dramatic impact on the market.
It is time to batten down the hatches and to weather the storm. Our primary job at this juncture is capital preservation. We can't let losses pile up while waiting for the market to find its foot. It is better to err the side of selling than buying.
The good news is that great opportunities are already developing. Stay patient while you track them. The time to buy is when the market is going up rather than down.
Have a good evening. I'll see you tomorrow.