Stocks bounced back strongly on Thursday following comments by the World Health Organization. Although the WHO declared the coronavirus a global health emergency, the market was satisfied that containment was working and that continued spread of the virus would be limited.
Overnight, the UK confirmed its first two cases and both the U.S. and Japan restricted travel to China. Market players are a little less certain about the issue on Friday morning and stocks are indicated lower.
Market participants are inclined to dismiss the coronavirus as a limited problem, but there are enough negative headlines bubbling up that the issue won't go away too easily.
In addition to this desire to minimize the coronavirus issue, there was a very strong report from Amazon (AMZN) after the close and IBM (IBM) is trading higher following the appointment of a new CEO. Stocks are still dealing with overbought conditions, but it is a narrow problem driven mainly by big-cap names. Secondary stocks have been churning and the small-cap index (IWM) has been lagging. Breadth was negative yesterday despite the big bounce in the indices, which is an illustration of how narrow big-cap leadership is driving the action.
Market conditions are very tricky right now, with the inconsistent response to the coronavirus and some huge gaps in big-cap names on earnings. Unlike Apple (AAPL) and Microsoft (MSFT) , Amazon had not run up strongly into its earnings report, so there is a different dynamic at work there and that is more positive for the market since AMZN is not already overbought.
The main issue that market players are struggling with right now is that they are still looking for a good excuse for deeper corrective action. The gut feeling of many traders is that this market is due for a rest and that the weakening technical conditions should coincide with some negative news events to produce a pullback. The coronavirus was an ideal catalyst for more selling, but it just isn't gaining the downside traction that many had anticipated. The end result is that there is bounce action that keeps trapping overly-anticipatory bears.
Coronavirus worries are back on the agenda this morning, but after the big bounces on two gap-down opens this week, it seems likely that dip buyers will give it another go. It keeps working regardless of the news flow -- and one thing traders love is a pattern.
My advice to those looking to press shorts is to wait until there is weakness in the afternoon before making any decisions. There has been fairly consistent strength late in the day that has undermined the bears. Until that tendency to buy weakness dissipates, there is unlikely to be much of a downside trend.