For weeks, the indices have been remarkably resilient in the face of constant headlines about the coronavirus. The strong market action has helped to reinforce the attitude that the economic fallout of the pandemic will be overcome very quickly. Even a revenue warning from Apple (AAPL) had a limited impact.
On Friday morning, the indices are indicated lower and the explanation for the softness is that South Korea has declared a health emergency in its fourth-largest city, after 100 new cases of the coronavirus were reported. The number of cases in China has been slowing, but the worry now is the spread outside of China.
The explanation that has been given for the market's ability to shrug off the coronavirus concerns is liquidity injected by central banks in various forms. There is no more powerful force in the market than central bankers.
It is interesting to note that the less-robust action in the S&P 500 this week corresponds with a slowdown in Fed buying. The System Open Market Account (SOMA) that is maintained by the Fed increased by just $3,360,288 this week. In total, the Fed holds over $3.8 trillion in assets.
While the action of the market is only loosely correlated with the short-term changes in the Fed balance sheet, it is definitely a factor that can impact sentiment. Much of the market confidence is a function of the belief that the central bankers are going to continue to provide an endless supply of cheap capital.
In addition to the central bank liquidity, another issue that market timers need to watch carefully is the relationship between various asset classes, such as currencies, bonds, equities and commodities. The dollar has been ripping higher lately as a safe haven. This will have a ripple effect on imports and exports, as well as bonds and equities denominated in dollars.
As I noted yesterday, all the major market corrections in recent years have started with shifts in the currency market. It is the reallocation between asset classes that tends to be the most disruptive force in the market -- and that is what we need to watch for.
The indices have already bounced back some from overnight weakness, but there seems to be a little less bullish confidence at this point. The key is to stay focused on price action and watch for signals that there is a shift in the character of the action. The intraday drop on Thursday on no obvious news was reason for some concern, but the market is still working hard to ignore the onslaught of pessimism.
I'm finding it increasingly difficult to put idle capital to work, which is what determines my market timing more than anything else. While there are no overt signs that the market is about to reverse, the paucity of good technical setups is increasing my cash levels.