Although the indices have had a record-setting drop over the last three days and are oversold, there is more selling pressure this morning. The primary problem is that the markets are incapable of pricing in the ramifications of Covid-19. While the spread of the virus is slowing in China, it is accelerating elsewhere.
The biggest problem is that there is still great confusion about what may occur in the United States. The Centers for Disease Control and Prevention (CDC) has stated that it is not a matter of "if" but "when" the virus spreads to a greater degree. There isn't news yet to support this view, but market players are extremely nervous as the watch for the headlines that show that the U.S. may not be immune to the problem.
There will continue to be a steady diet of headlines with reports about coronavirus around the world. That is going to make it extremely hard for the market to bounce much because the economic impact of the news cannot be easily quantified. Even the prospect of central banker action is not enough to stop worries about a virus that has so many people fleeing for isolation.
Even with the great uncertainty out there, there are still many market players that have been conditioned by the market over the past decade to buy any and all dips. It has consistently worked -- and when there is this much selling pressure, the chances of a rebound are good. This time, however, the dip buyers are fueling additional downside as they find themselves trapped and have to dump positions to escape. They seem to be giving up some this morning, which may help to get the market sufficiently washed out, but trying to time a bounce is more a matter of luck than skill.
One of the ironies of the market now is that many of the folks that tried so hard to call a turning point on the way up are now trying to call a turning point on the way down. They did a terrible job timing a top but that doesn't seem to change their view of their ability to call a low.
I studiously avoided trying to predict a top and I'm doing the same thing now as far as a low. While countertrend moves are very likely and can be quite tradable, the opportunities to load up on some longer-term positions takes time to develop. It is not necessary to call the bottom. The key is to buy when there are some signs of a shift in trend.
One of the easiest things to do in a market like this is to focus too hard on trying to guess a bottom rather than protecting capital. If you can keep losses fairly small at this point, you can produce great outperformance. Professionals tend to produce major outperformance in markets like this because they are very good at avoiding losses. They aren't nearly as good at outperforming in straight-up markets, which is why they so often lag their benchmarks.
This market is grappling with great uncertainty about Covid-19 and that is what is going to prevent much of a bounce at this time. Market players just can't price in this problem, so they just sit and wait for more news flow to provide clarity.
My game plan is to cover some index shorts into this weakness, work on my shopping lists and stay patient as far as new buys. I see no reason to rush to build positions at this time but I want to be ready because fast action will be required when conditions change.