Stocks are set to build on yesterday's substantial gain with a strong open this morning. Fears of the spread and duration of the coronavirus have dropped sharply as a number of hot spots around the world have posted more positive data and there are few signs of parabolic growth in other locations.
There has been strong political motivation to project the worst outcomes for coronavirus in order to ensure compliance with social distancing and isolation practices, but there now seems to be optimism that the road to 'normal' may not be as long as feared.
The big jump in the market yesterday and the strong open this morning are sure to create FOMO (fear of missing out). The only experience many market players have had with deep corrective action in the market was in December 2018, when the pullback ended in a sharp V-shaped move primarily driven by a dovish Federal Reserve. Given the huge amount of stimulus that is being created currently, there are many market players anticipating a similar recovery this time.
Those that question a V-shaped recovery this time are focused on the huge economic disruption that has occurred, the high level of uncertainty that continues to exist and comparisons to bear markets in 2008-2009 and 2000-2002.
The indices have not retested the recent lows, which is what traditional technical analysis suggests. The proponents of the V-shaped bounce point to the massive $6.2 trillion stimuli and the fact that there is even more on the way. If there is some sense of control about how the coronavirus will progress, then it should be clear sailing higher.
Many times in the past decade I have felt that a V-shaped move was unlikely and was proven wrong. It can never be counted out completely even if the odds of it seem unlikely.
The big question is what action to take now. If you have remained highly invested, then you will feel relieved that losses have been reduced. It may be a good time to do some repositioning into other stocks that may offer more opportunity.
If you are holding high levels of cash like I am, then the focus is on finding individual charts that offer prudent entry points. Due to the high level of volatility and the erratic movement, there are very few charts that are set up well. Keep in mind that there is little benefit to buying stocks rather than indices when the action is this correlated. Individual stocks may offer more 'beta', which is movement that is in tandem with the indices. However, there is not much 'alpha', which refers to the ability of a stock to move counter to the overall indices. Stock picking works best when there is a high level of non-correlated movement.
If you do make entries at this point, then the focus will be on trade management. While charts may not look very attractive, that doesn't mean that you can't still control risk with careful trade management. If you are a buyer into this strength, then the support levels should be obvious stop-out points as the V-shape move fizzles. Controlling risk is key, especially since chasing a V-shaped move has a higher level of risk.
It is very easy to feel that you are missing out when there is a strong countertrend bounce of this type, but it is the nature of a bear market. The opportunities to build longer-term positions are still substantial, but will require patience as the chart develops. The best time to buy the market is when there is a bull market. This is still very much a bear market and it will continue to be one for a while, even after it has formed a low that holds.
