A small bounce in the last 15 minutes of trading prevented the S&P 500 from closing at the lows of the day. Still, it was the weakest close for the index since January and the poorest price action since the coronavirus scare on Friday, Jan. 31.
Fridays have been consistently weak in 2020 but the market has quickly bounced back on Mondays. The question now is whether the action Friday was just another flash in the pan or was there a significant change in market character that suggests that there is more downside on the way.
Most notably Friday, the dip buyers didn't even try and market players weren't emboldened by the endless liquidity from central bankers to keep the market going straight up. The coronavirus will most likely receive the blame for the weakness but the question is whether the market is now going to start trying to discount the negative economic impact it has been ignoring for weeks.
The market has been hiding behind central banker-created liquidity, large-cap leadership and the illusion that the impact of the coronavirus will be minor. There were some cracks in that narrative Friday and the conditions are in place for it gain traction. Lower lows next week will solidify that a change in market character has occurred.
One piece of good news is that much of the market is not grossly extended. About 42% of stocks are under their 200-day simple moving averages and many of those are in bear markets. The problem is that it will be difficult for these stocks to perform if the bigger cap names are correcting.
There was a shift in market character on Thursday and Friday. It wasn't major but it does suggest that there is more downside to come. The negative news narrative is now starting to be embraced and will feed the selling if that continues.
While some corrective action would be healthy and lead to new opportunities, make sure you protect capital and don't let losses grow too big before taking action.
Have a great weekend. I'll see you on Monday.