In the early going on Wednesday, the S&P 500 is on track to gain an additional 1.5% on top of yesterday's record-setting advance. Lawmakers in Washington have reportedly agreed on a $2 trillion stimulus deal that, when combined with monetary stimulus, will bring the total package to around $6 trillion.
The vote on the fiscal stimulus bill will be held later today and will require unanimous consent in the House of Representatives. If there is a single 'no' vote, the deal will fail. Back in 2008, the market was stunned when a similarly negotiated deal was not approved, but lawmakers are under tremendous pressure to not let that happen after the delay that has already occurred.
The big question for market participants now is to what extent the market can build on yesterday's giant countertrend bounce. This news is very well anticipated and it is a classic 'sell the news' setup, but with such severe oversold conditions, these sorts of bounces often can run further than many believe is possible.
The current situation is quite different and we have already seen this with the failure of the market to bounce on monetary stimulus from the Fed. After very brief upside, the market quickly sold off on Fed news. That has seldom happened in the past and is particularly surprising given the magnitude of the liquidity created.
The obvious issue is the continued lack of clarity about the economic impact of the coronavirus. While $6 trillion will help to offset a substantial amount of losses, there is still no idea of what the ultimate cost of coronavirus might be. Some of the damage cannot be easily fixed by throwing money at it -- and there are going to be some major shifts in the economy regardless of economic aid.
In past crashes, there have been very sizable countertrend bounces that convince many market players that the worst is over. These bounces proved to be traps as new lows were hit, but the relief is hard to resist. Many market players are already thinking "why can't the market go straight up from here?"
The biggest obstacle for the market continues to be uncertainty. We have not yet seen a peak in coronavirus cases in the U.S. and it will be difficult to see any end of this until there is some data to support the view that it is under control. In addition, the economic ramifications are far from being quantified. They will be offset by the stimulus, but no one knows yet to what degree.
The main focus at this point should be on repositioning for what happens next. If you are confident that the worst is over and the indices will trend up from here, then you have no worry other than putting idle cash to work. But even in that case, the prudent move is to buy incrementally rather than chase.
I believe it is highly unlikely that this will be a V-shaped move back to the January highs. I expect to see elevated volatility for a while and for many stocks to come under pressure as we move into first-quarter earnings season and the actual impact of the shutdowns is tallied.
My game plan now is to do some selling of positions into further strength and to wait for better chart patterns to develop. Right now there are very few attractive charts from a purely technical analysis viewpoint.
The early gain is fading fast as I write. The S&P 500 is now indicated up just a little over 1% as some traders are already anticipating a 'sell the news' reaction.