Last week, the indices managed a significant bounce on better-than-expected coronavirus data. Virtually all the models that have been used have overstated mortality and underestimated the effectiveness of social distancing.
While the data provided some much-needed optimism about the progression of the medical crisis, it has not provided much clarity about the economic crisis. The hope is that the massive Fed stimulus of over $8 trillion will prevent an economic collapse, but there is still tremendous doubt about how much stability it will provide.
A good example of the economic challenge that the Fed faces is illustrated in the oil market. Members of OPEC reached a deal over the weekend that will cut around 13% of global oil supply, but there is such a glut of supply already and such a collapse in demand that oil is trading down this morning. The deal was anticipated but it shows that offsetting the economic issues with some financial engineering may not be quite as simple as hoped.
The biggest obstacle the Fed faces is that there is no great clarity. Earnings season begins this week and there will be few management teams able to provide guidance. They simply don't know when they will reopen for business and even when they do reopen the lingering impact of this crisis will likely exist for many months.
Technically inclined market players are debating the possibility of a retest of the March lows, but that really isn't that relevant of a question. The more important issue is whether there is a V-shaped move from here or a choppy and sloppy consolidation as the market works through the economic issues.
Bloomberg is reporting that Goldman Sachs (GS) believes that the indices are unlikely to make fresh lows because of the 'do whatever it takes' approach of the Fed and policymakers.
In the short term, that conclusion really doesn't matter. The important issue now is where the market can hold steady and develop a foundation for more upside, as the current uncertainty erodes. If there is a retest, it isn't going to occur very quickly. It will come after a period of assessment about economic growth and will be a function of a drawn-out bear market.
The V-shaped move last week left the indices overbought in the short term. While the Covid-19 stats helped to drive the action, the economic situation was not clarified and that is what will be more important now as we enter the earnings season. I anticipate that earnings are not going to produce much of a catalyst for upside momentum at this point.
There are economic optimists that have great faith in the Fed, but this is not a market similar to December 2018 when Fed action produced a straight-up, V-shaped move. The nature of this crisis is much different, because there isn't just a financial shock, there is a fundamental shift in economic demand, employment and sentiment. Those things can be repaired, but it will be a process that is impacted by the uncertainty of how long the coronavirus will linger.
My game plan here is to look for the V-shaped action to falter and for trading range action to develop. I'm not immediately concerned about retests but will be watching carefully for some sort of support area to form over the 2500 area. Ultimately I believe that will be retested, but that isn't of any great immediate concern.
I am hopeful that earnings season will provide us with a little stock picking among stocks that are somewhat insulated from the coronavirus, but it is going to be an earnings season unlike any we have ever seen. We have earnings on Tuesday from JPMorgan (JPM) and Wells Fargo (WFC) , which will be instructive.