Global market carnage continues this morning as market participants struggle for clarity. Not only is the market unable to calculate a rough estimate of the economic damage that will be done by the coronavirus, but it is also unable to count on a Congressional rescue package that failed in the Senate last night.
Many market players are hoping that the market is close to pricing in the worst. This has been the fastest 30% drop in the S&P 500 in history, so it makes sense that there be some sort of reflexive countertrend bounce. Markets that are hit this hard, this fast, almost always produce a sizable bounce of some sort.
The big, glaring, problem is that the market has never faced an issue quite like coronavirus. There just is no way to know how bad coronavirus will get or what its ultimate impact might be. This isn't just a matter of stocks trying to adjust to reduced earnings. Various markets around the world are not functioning correctly and there are forced liquidations taking place to pay short-term obligations. There was a warning last night that mortgage securities are at risk of a downward spiral if action is not taken.
A good illustration of the extreme uncertainty is the second-quarter GDP estimates that have been issued lately. JPMorgan (JPM) predicts a drop of 14%, Goldman Sachs (GS) -24%, Morgan Stanley (MS) -30%, and St. Louis Federal Reserve Bank President, James Bullard, has stated that the drop could be as much as 50%.
The magnitude of these predicted drops is stunning, but what is even more stunning is that there is such a wide variation of predictions. No one really has a clue what might happen -- and that is what is preventing stocks from finding support.
Many market players are hopeful that passage of a $2 trillion stimulus bill by Congress will produce some level of confidence and produce a countertrend bounce, but so far none of the monetary or fiscal moves have been up to staunch the selling. While there is massive liquidity in place to fuel the economic engine, the economy is unable to function while it is shut down and waiting for what may happen next.
The biggest issue for market players right now is trying to time some sort of countertrend bounce play without committing to the belief that this is the low for a cycle. A V-shaped recovery seems like a near impossibility when there is so much uncertainty, so it is impossible to trust bounces to last. However, the appeal of catching a countertrend move is easy to understand.
The most important thing right now is to be clear about your style and approach. Avoid the temptation to try to call a bottom. If you are actively trading for a countertrend move, then make sure you don't allow 'style drift'. Don't let a trade turn into an investment if your timing is off.
If you are looking to build longer-term positions, then continue to move very slowly. The easiest mistake to make is to average into a downtrending market too big and too fast and to panic buy at the first sign of any bounce. Stay patient. This is now a bear market and it will last for a while. The big money is made in bull markets and uptrends and that won't happen for a while.
My game plan is to day trade indices and to do very little as far as accumulating individual stocks. There are a few stocks on my radar that have already dropped much more than the indices, and are close to washed out, that I will focus on, but it is not the time to build any major positions.
The indices are bouncing off overnight lows but are still down substantially. I expect more bounce in anticipation that Congress will work out a deal on fiscal stimulus.