The indices are indicated to open sharply higher again Wednesday morning as fears of the spread of the novel coronavirus continue to subside. There are reports that a Chinese research team at Zhejiang University has developed an effective treatment, but the World Health Organization is saying that there is no known breakthrough at this time.
The dynamic at work in the market is that the strength helps to drive the narrative that the impact from the coronavirus is contained -- and that the economic ramifications are already discounted. This is a very questionable assertion, however, the market is running over those that question it.
That market action presents a dilemma for investors. They must choose between embracing a negative narrative that seems to have solid factual support or honoring the price action that is reflecting the belief that there are no major problem.
It seems quite irrational that the Nasdaq is hitting new all-time highs and completely ignoring any discount for the economic disruption that is occurring in China.
One of the major reasons that this is occurring is that the People's Bank of China is flooding the Chinese economy to offset economic issues. That capital has a tendency to flow into the liquid, big-cap, FANG stocks and that is why they are leading the charge to the upside.
The question that traders must ponder this morning is to what extent do they anticipate that the central bank action will cool off and the obvious economic repercussions of economic slowing take place. As the old saying goes, the market can remain irrational far longer than we can remain solvent.
While the bears will be focused on the irrationality of the market action, the far more important issue is what steps do we take to navigate the price action to produce the best results. It is easy to let a fundamental belief get in the way of effectively surfing the price action.
My game plan continues to stay focused on good charts in individual stocks such as SmileDirectClub (SDC) , which I named as my Stock of the Week on Monday. When those stocks stop working I'll be acting fast to raise cash.
I am trying to avoid timing the indices right now. When there is some weakness in the indices I will look at some index shorts but I have no interest in shorting into strength and anticipating a reversal.