For a while this week it looked like the market was on a fast train to recovery.
The V-shape bounce that started on March 23 was hitting new highs on Wednesday following news of a coronavirus treatment drug and a press conference by Fed Chair Jerome Powell. The bulls were hopeful that the economy would start to reopen as Covid-19 cases slowed and the $10 trillion in stimulus would make for a quick and easy recovery.
The arguments sounded good. But then a number of major earnings reports from companies such as Facebook (FB) , Microsoft (MSFT) , Tesla (TSLA) , Amazon (AMZN) and Apple (AAPL) were incapable of leading the indices even higher. Results from those names were all fairly good but market players were not interested in chasing the overall market higher.
As the "sell the news" reaction to the earnings reports took place, the narrative that the Fed would prevent any significant selloff in stocks was called into question. While the central bank can prop up bonds and a variety of financial instruments, it cannot create demand where there isn't any. The Fed has trillions of dollars to use, however, some problems like unemployment, are not that easy to fix.
The reversal on Wednesday led to two days of selling, with the downside momentum picking up on Friday. Stocks went out at the lows of the day and now many market players are wondering where underlying technical support may exist. There isn't much support out there since stocks have moved steadily higher. Nevertheless, it is likely that many technicians will be watching the 50-day simple moving average of the S&P 500 at 2758.
Next week we will likely see a very interesting battle between those that still favor a quick and easy V-shaped recovery versus those that foresee a more traditional bear market with a variety of ups and downs as the process continues. Regardless of what does happen, there should be some interesting trading if you stay flexible and have cash to work with.
Have a great weekend. I'll see you on Monday.