Market players have long suspected that the coronavirus numbers reported by China were understating the true extent of the problem. Last night, two top Chinese officials were fired and China reported that it was changing its methodology, which resulted in a sharp spike in both the number of cases and deaths.
There is a negative market reaction in the early going on Thursday, but with the indices grossly overbought and in need of some consolidation, it isn't surprising that these headlines are producing a pullback. The question is whether this is a news catalyst that will lead to a deeper pullback or just another dip buying opportunity.
Part of the reason for the market strength in the last couple of days is that there has been some slowing in the number of new coronavirus cases. That may still be the case, but China is now admitting that the base is higher than they have previously disclosed.
What is key -- and is likely to help the market quickly find some support -- is that there still are no signs that coronavirus cases are expanding at a parabolic rate outside of China. There are a few reports in Japan that have caused some concern, but there are still fewer than a dozen cases in the U.S.
Many market players have been puzzled by the market's dismissal of the economic impact of the coronavirus. The second-largest economy in the world has been largely shut down for weeks yet the market acts like this is not going to have any impact at all on earnings around the world.
To a great degree, the strong market action has helped to feed the perception that there is little economic impact, but so far there isn't any real concern. When the price action shifts, the headlines about how the economy has been hurt will start to hit, but the price action will drive the news headlines rather than the other way around.
Gap-down opens like we are seeing Thursday morning have resulted in automatic buying for a while now. The more-important issue is whether the early dip buyers stick around or quickly flip into strength for some fast gains.
To really measure the health of the market, we have to watch the action later in the day. Afternoon weakness and a close at the lows would signal that maybe there is a shift in the character of the market.
Strong markets don't typical reverse at the highs and go straight down. Tops take time to form -- especially when there is a big supply of market players that have been underperforming for a while.