It was a record-setting week for the market but not the same sort of record-setting that many had been celebrating as the indices hit a series of new all-time highs in recent weeks. The record this week was the stunning intensity of the selling. Never in history have the indices dropped from all-time highs so quickly.
On three different days this week, the DJIA was down over 1,000 points. There were also several big bounce attempts that failed badly and led to further drops.
Some market players were relieved to see a sharp upward move in the closing minutes on Friday but this was more about squaring the books, unwinding trades and making some allocation adjustments. It is not action that is predictive of what may happen next.
Also late in the day, Fed Chair Jerome Powell put out a statement that the Fed is ready to act, which isn't surprising but it does set the stage for a cut in correlation with other central banks should the coronavirus issue continue to roil the financial markets.
Market players are hopeful that the sharp decline this week has priced in much of the economic damage that the Covid-19 crisis is doing but it is still very hard to quantify. I am concerned that we have not yet seen a headline about a sharp increase in the coronavirus in the U.S. While there are plenty of warnings that there will be more cases, nothing solid yet. I'm afraid the reality of the news will cause more emotional selling.
Regardless of whether the indices do bounce back from here there are significant obstacles to a V-shaped move. Even without the coronavirus, there are many market players that believe we were very overdue for some corrective action. Maybe not of this intensity and magnitude, though. As we head into first-quarter earnings reports in about six weeks we are going to hear plenty of stories about how the coronavirus has impacted earnings.
Because of the size of the drop this week, the reflexive action among many market players is that it has gone too far and there should be a bounce. Countertrend bounces tend to be big and sudden. However, because of the nature of the news flow this time there is a greater risk of a technical retest than if the drop was caused by other issues.
The strong finish on Friday helped to improve the mood a bit but the DJIA still lost over 350 points on the day and has not shown much ability to bounce so far. News flow over the weekend will determine where we open on Monday. Volatility will likely remain very elevated but there should be some great trading opportunities.
Have a great weekend. I'll see you on Monday.