Once again stocks are set to open strongly as work on a COVID-19 vaccine progresses, massive stimulus efforts continue and optimism about reopening the economy continues to build.
While there are positive headlines, the most important factor driving the market on Tuesday morning is that many market players are poorly positioned. There still is tremendous skepticism about how quickly and easily the economy will recover, but the market is running over those that are cautious.
It does not take much effort to construct a bearish narrative when unemployment is at levels last seen in the 1930s, there is a fear of a second wave of COVID-19 infections and many companies will not see a return to "normal" anytime soon.
It is classic 'climb the wall of worry' action. While the negative arguments are obvious, many people enjoyed the lifting of restrictions over the Memorial Day Weekend. The return to some semblance of normality is helping to drive the market higher. The fact that there is still so much doubt and worry is only making the underinvested bulls more anxious to put cash to work.
Over the weekend, Goldman Sachs (GS) noted that so far 'early openers' have not seen demonstrably-higher virus incidence. While these results are suggestive, it is still too early to draw firm conclusions. In the next few weeks, will see the debate over the level of health safeguards and whether or not the lockdowns were an overreaction.
Currently, this market is in a very positive mood and it is running over skeptics and pessimists. The Nasdaq 100 is back to where it was the day after the market top in February. That seems highly illogical, in view of the damage caused by the coronavirus crisis. But what is easy to overlook is how the crisis has caused a major economic shift with some major winners in the post-pandemic world. This has been a bull market for some sectors and a bear market for others and if that is not recognized it has been very difficult to navigate effectively.
With the big gap-up open on Tuesday morning. The S&P 500 should open above its 200-day simple moving average for the first time since March 4. What looked like a very big countertrend bounce in a bear market is looking more like just another very sizable V-shaped recovery.
The easiest mistake to make in this market is to focus too much on the indices and not understand the rotations that are taking place and the opportunities in individual stock picking. This pandemic has been a boom for some elements of the economy -- and if you fail to recognize that fact, it is very tough to navigate this market.
I suspect there will be a supply of bears that believe that this euphoric open is an indication that a reversal is coming soon, but trying to anticipate a turn is extremely difficult. My approach is to stick with the price action and focus on reacting as it shifts rather than trying to predict the future.