Despite losses of 3% in the senior indices on Monday, there were signs that conditions were developing for a much anticipated countertrend bounce. These sorts of moves are often a self-fulfilling prophecy and just need a spark of positive news to generate some momentum. We seem to have some sparks this morning that are producing a sharp jump of about 5% in the early going. Markets around the world are also performing well.
Congressional negotiations over a fiscal stimulus bill are still quite contentious, but market participants are increasingly confident that politics will eventually be set aside and a deal will be done. They were unwilling to buy in front of that news yesterday but now positive price action is taking hold and that is creating some fear of missing out on a positive reaction to the news.
In addition to hopes of fiscal stimulus, there are also some positives in the coronavirus statistics that are producing some increased optimism about how long the crisis will last. The number of cases in the U.S. is approaching 50,000, but the mortality rate is not as bad as many had feared and there are dozens of drugs and vaccines for treatment that are being pursued.
Another factor driving the positive action is that President Trump has started addressing the issue of returning to work. While he is being fiercely attacked for the danger this might create, there are many folks that are concerned that the cure for the virus may end up killing the economy. There is no way to be 100% safe until a cure is discovered, but the free enterprise system is anxious to return to work and is happy to see some talk about how to do that.
As you consider this action, keep in mind that this action is highly correlated at this point. Stocks are moving together and without much regard for their individual merits. This is caused by the fact that much of the selling is done through indices and ETFs. Every stock in the index and ETF is sold without any consideration of its fundamentals. As the volatility cools off, there will be a shift back to stock picking, but for now, it is index driven.
Another issue to consider here is that this is just a countertrend bounce at this point. It can be quite sizable and will cause some people to believe that the bottom is in and that a V-shaped recovery is occurring, but that is not the smart bet at this point. There are still substantial economic and fundamental issues that are going to arise as we move through this crisis and try to assess the damage.
I have limited long exposure at this point and will be looking to unload some of the index longs I discussed yesterday, but I'm not looking for this bounce to fail too quickly unless there is some surprise news.
Also, we will have to consider some sort of "sell the news" response when the fiscal stimulus bill is done. As we have seen, the market has sold off on the massive Fed stimulus efforts as the uncertainty of the coronavirus has prevented buyers from celebrating the increased liquidity.
The most important thing to keep in mind right now is that it is a bounce and not a bottom. It makes for good trading, but there will still be plenty of time to build longer-term positions.