A week ago, various government leaders were preparing the country for what was likely to be one of the gloomiest periods yet for the coronavirus crisis. Last Saturday, President Trump told reporters that I really believe we probably have never seen anything like these kind of numbers, maybe during the war -- a world war. A World War I or II or something."
While the number of deaths in the U.S. did increase this past week, there was a surge in optimism that there was slowing in the number of coronavirus cases and hospitalizations. While hot spots other than New York and New Jersey did continue to expand, the various models that were being touted were cut dramatically and there was a marked shift in sentiment about the possibility of parabolic growth in coronavirus.
This surge optimism helped to ignite buying this week and produced the biggest weekly gain for the indexes since 1974. The Fed added to the positive momentum with another massive stimulus program, but much of the strength this week was driven by underinvested market players looking for the counter-trend bounce to fail. The fear of missing out on a "V"-shaped recovery also contributed to the strength.
All week long, the technically inclined, who have been predicting, a retest of the lows, remained steadfast in their conviction, but the Fed's introduction of even more liquidity created some doubts that there is going to be much downside in the near term.
But as the battle grows more intense in the weeks ahead, the focus will shift from coronavirus data to the actual economic damage that has been done by closing the economy. Large banks will begin to report earnings on Tuesday morning and there are sure to be more reports about economic issues as unemployment grows.
The bearish argument here is that the market is ignoring the economic issues as it focuses too much on coronavirus data. The economy is not going to return to normal for months. While the Fed will be helpful, it isn't going to solve all the problems. Many stocks are still expensive, especially since they can't even issue any guidance.
The bulls response to these arguments is "don't fight the Fed."
The good news is that the big bounce this week should provide some trading range action, as we digest the moves. It would be helpful if volatility slowed, but the potential for great trading opportunities to develop is very good.
Enjoy the holiday and I will see you on Monday.