After the worst day in months, there is a small bounce in the indices. There is hope that the Chinese coronavirus is being contained, but there is not any clear information to support that belief yet. Even if the virus is being contained, there is already substantial economic impact. There is news this morning that it will be difficult for Apple (AAPL) suppliers to meet planned increases in demand.
Since the big market drop that took place in the fourth quarter of 2018, the market players have been relatively mild and new highs occurred quite quickly. This history of price action has optimistic bulls anticipating a fairly quick resolution to the current issues, and then a V-shaped bounce -- but there are a number of problems with that scenario this time.
The biggest problem that the market faces right now is that there simply isn't much clarity about the fallout of the coronavirus. How well will it be contained and what will be the economic impact? Those two questions simply can't be answered at this time. There is an inclination among some market participants to conclude that the news coverage is too negative and sensationalistic. That is true most of the time, but it doesn't help us to quantify the ultimate impact.
Not only is the market dealing with this virus uncertainty but it is dealing with indices that are still badly in need of corrective action. The sharp dip on Monday is not likely to be shrugged off quickly or easily. Those that were trapped by the drop are likely looking to reduce some long exposure into strength and that may produce increased pressure to sell into some of the strong earnings reports that will occur in the next couple weeks.
Apple reports tonight and the response will be instructive as to overall market sentiment. Expectations are quite high and the chart is technically extended but the amount of money that has been pouring into the stock in recent months is stunning as it has been regarded as a safe haven. A change in character there will have a profound impact on the broad market.
At this point, market players have to be watchful for a failed bounce. The news flow that we are seeing right now is not likely to produce a sharp, immediate recovery. Bears are now feeling more confident and will be more aggressive into strength and the bulls that have been confident that a wave of Fed-created liquidity would carry things ever higher, now have some doubts.
There is now a greater likelihood of selling pressure into earnings news. When that is coupled with the coronavirus uncertainties it will be challenging for the indices to hold the lows that occurred on Monday.
3M (MMM) reported this morning and is trading down after missing both top and bottom line but the worries about the spread of the virus are easing and that is resulting in a bounce.