A sharp increase in Covid-19 cases combined with lockdowns in France and Germany triggered some of the most energetic selling in the market since March. The thing that has made trading more difficult is that the Covid news is hitting at the same time that the market is dealing with the uncertainty of next week's election. It also doesn't help that the much-anticipated fiscal stimulus deal has been delayed indefinitely.
Despite the confluence of negatives, the price action could have been worse. Market players do seem to be finding some value and are showing signs of support. The Covid concerns have not yet resulted in big downside revisions to earnings and economic growth, but that will happen if there isn't some improvement in Covid trends soon or if there are lockdowns in the U.S.
Here on Thursday morning there is some bounce action on good earnings news from Pinterest (PINS) and a rumored takeover of Inphi (IPHI) by Marvell Technology (MRVL) , as well as positive anticipation of earnings news from Apple (AAPL) , Amazon (AMZN) , Facebook (FB) and Alphabet (GOOGL) after the close. Also, third-quarter GDP will be reported this morning and will show a significant bounce in economic activity.
The big issue right now is how well stocks will hold up as we wait for the election uncertainty to resolve and watch Covid cases continue to rise. Market players still appear to be optimistic about vaccines, treatments from Regeneron (REGN) and lower mortality rates, but if more shutdowns are put in place that will throw cold water on the hope-filled economic sentiment.
It will be particularly instructive to see the market's response to all the major earnings reports after Thursday's close. The FATMAAN names have been pulling back and Microsoft (MSFT) was particularly poor Wednesday, but they are not in terrible shape technically. Will they be able to resume some upside momentum on good reports or will the election and Covid uncertainty trigger a reduction in risk exposure?
It is difficult to see how the market can sustain a bounce at this point, but we will see how well support holds. It is largely a waiting game right now as we won't have any better clarity about the election or Covid until at least next week.
Another positive is stocks in general are not widely overvalued or extended. This is not a market that is overheated and there are some good values as long as Covid worries don't crush economic expectations. Much of the market seems to be looking beyond the next couple months and that is what will help to provide support.
We need to stay defensive and focus on protecting capital while we wait for clarity, but this price action does have some positive aspects to it, which is helpful.