The indices are set to gap higher at the open for the second day in a row. There is a combination of factors that are driving the action, the first is continued optimism about the reopening of the economy. Travel and tourism stocks are rebounding as hope for a return to normal gain traction. Optimism about the development of a vaccine is also helping to create positive anticipation.
The optimism about reopening the economy is offsetting and delaying the worries about the economic fallout that is still to come. Unemployment seems to barely be discussed and although many small businesses will be shutting their doors permanently, it isn't part of the current narrative.
Bears and cautious bulls are puzzled by the lack of concern about the economy, but that hesitancy is helping to fuel the continued momentum. It is standard 'climb the wall of worry' action. The higher the market goes, the greater the inclination to put some money to work. As the fear of missing out continues to build, the stronger the desire is to put even more money to work.
Another force at work is continued government stimulus. Europe traded strongly overnight as the European Commission proposes a bailout worth around $550 billion. With these huge sums of money out there, much of it is going to find its way into equities -- and that is a big part of what is keeping things going.
My best advice for navigating this market is to not argue with the price action. The negative and bearish arguments simply do not matter right now. That will change at some point, but it is impossible to time when it might occur. Back in February, we saw similar action when the indices were at all-time highs as the coronavirus was raging in Asia. It didn't matter for weeks, but then one day it did matter and the indices fell very suddenly. That is the sort of shift in market character that we need to watch for.
The current situation is a bit different because of the huge wave of liquidity out there that has no other place to go but into stocks. That liquidity is not going to stop for a while, but there will be some reluctance to buy stocks at some point if the focus on news shift.
Most likely a short-term top will come on an intraday reversal in the indices. Traders are very frustrated with the fact that most of the gains are occurring overnight and they then have to chase. When they throw in the towel and sell into the intraday strength, it may help to promote the negative narrative that has been ignored.
The most important thing to remember is that price action is more powerful than logic right now. You may have the best arguments in the world for what this market should do, but if price action is not on your side, then you will have little success.
