Sustained downside momentum has been a rare phenomenon in the market for a while. Market participants are well conditioned to look for bounces -- and when they don't happen, they panic and the selling accelerates. The action on Tuesday was a good illustration of this as an early bounce attempt failed to gain traction. Once the indices turned red, sell stops were triggered and hopeful bounce buyers ran for the safety of the sidelines.
Overnight, futures have made a few more attempts to bounce, but market players are hesitant and are not willing to step up even after a drop of 1911 Dow points in the last two days the market is very stretched to the downside.
What is plaguing the market at this point is uncertainty. The market is a discounting mechanism. It attempts to look ahead and price in the future, but in the current situation, the damage that will be done by the Covid-19 situation is just too uncertain. There are bulls that believe the market has already overreacted to the news, but there are plenty of worried folks that are concerned that the problem is going to continue to expand and that the full economic repercussions aren't yet known.
It is a trite and simplistic adage, but it is probably the best explanation of what is happening right now: The market hates uncertainty.
The uncertainty isn't just the economic impact that economists and analysts are discussing. It is overall sentiment that is the big mystery. If people in the U.S. and other places that have not been impacted start to grow more concerned and change their daily living patterns, there will be a variety of economic implications. But at this juncture, no one can be sure how this plays out.
The natural inclination of many market players is to believe that there has been an overreaction in the price movement. That is so often the case that the odds of buying a drop of this magnitude are quite good. However, there are times when this sort of downside momentum can build and the selling can continue much longer than many believe is possible. The last time that occurred was back in the fourth quarter of 2018. The drop that occurred in December was very similar to what we are seeing now. At one juncture, the S&P 500 dropped sharply for seven of eight days before finally bottoming on Christmas Eve.
One of the things that is particularly unusual about the current drop is that it has occurred right after the indices hit all-time highs. Typically, there is some churning near tops rather than an abrupt reversal. This is the first time ever that the indices have dropped this sharply this fast while so close to highs.
A consequence of this abrupt reversal is that there are more trapped market players than there would otherwise be. Many folks were distrustful of the market as it ignored the Covid-19 issue, but they expected that they could make a graceful action when the price action turned. There were some warning signs last Thursday and Friday, but unless you acted quickly there wasn't much chance to escape.
Those trapped bulls are a big reason that the market is selling off so aggressively right now -- and they are also likely to sell into the bounce attempts.
My game plan at this point is to simply wait. I don't see any great benefit to betting on a bounce at this point. I'd much prefer to accumulate some favorite individual names, but they need to find some support and to stop going down first. My focus isn't on trying to buy the bottom but on trying to buy when the chances of sustained upside are the highest.
The indices are now showing some very minor gains, but after Tuesday, the bounce buyers are not feeling very confident.