For the last few weeks I have heard several consensus views develop regarding the market. Some of them have been technical and some have been fundamental. But somehow each one has become a market narrative that the majority have jumped on.
For example, there is this notion, mostly among the fundamentalists, that we need to track the coronavirus and when the curve flattens or the deceleration begins, the stock market will be OK. I thought of this as I watched this clip on CNBC Friday afternoon in which Jason Hunter of JP Morgan (JPM) has correlated the Volatility Index to the virus. I agree with CNBC's Michael Santoli, in that you can make anything look like a correlation if you want to, but what struck me is that when you look at this chart, the peak was weeks ago and yet everyone is still talking about the peak coming.
Another narrative that is so front and center is that we've never seen a market fall so far so fast before. Yet, here I am staring at a chart of Nasdaq coming off that high in the year 2000 when it fell roughly 40% in a few weeks. And that rebound in mid-April was roughly 25% before it came down, made a lower low -- it was a retest -- and then rebounded quite nicely over the next few months.
I am not trying to scare anyone, but here's the longer-term view from back then. The red arrow represents that second low on the chart above. In this case isn't this somewhat similar to the post 9/11 chart we looked at last week? Or the November 2008 chart? Meaning we had a terrific rally off the low and didn't collapse immediately thereafter, but held up for a few weeks and months.
That brings me to the other common theme out there: retests. As you know, I am in the retest camp. But not all retests are successful. And just because we have had one successful retest doesn't mean we go right back into the bull camp. Just look at that long-term chart of Nasdaq from 2000 to 2003. That retest in late April 2000 that led to a 30% rally that lasted four or five months was terrific, but eventually gave way.
Testing and retesting after a drop such as we've had is common. It is how stocks find a level that buyers are interested, and sellers as well. It's how we eventually build bases. That takes time. Even in our sped-up world, testing and retesting is the answer, which simply doesn't occur over the course of a few weeks.
The only change in the indicators from last week is that the McClellan Summation Index has stalled out -- it has flattened the curve -- as breadth has weakened. If breadth can't get back in gear and have some positive readings this week, then it will roll right back over. Flattening the curve of the coronavirus is good, flattening the curve of the McClellan Summation Index is not.
The answer to the coronavirus is testing and retesting. The answer to the market is also testing and retesting because that's how stocks build bases.