On Monday, the DJIA enjoyed its biggest point gain in history as market players anticipate interest rate cuts by central bankers around the world. The Reserve Banks of Australia kicked off the party with a quarter-point cut overnight. Canada is on deck and both the ECB and the Fed are likely to cut soon.
The aggressive action by the central bankers are even more effective as the coronavirus news has not been as bad as many people have anticipated. China seems to have the situation under control in that country, there is some increase in the U.S., but it is quite small and other countries seem to be doing well with containment.
Many companies have cut back on travel and there is undoubtedly going to be some economic impact simply due to caution. The view of many market players is that dovish central bankers won't just offset the economic slowing of the coronavirus but will provide such a flood of liquidity that stocks will have little choice but to go up.
The stage is now set for a battle between V-shape market action and a "sell the news" response.
Typically, when the market makes a big move in anticipation of a news event, the actual news doesn't have as much impact because it is already discounted by the market to a great degree. If everyone buys in front of a major news event, there won't be as much buying power left to drive the market higher and some of those folks will take their profits.
That is what "sell the news" is all about. But that concept has not worked very well in recent years. A good example of that is how the market continued to rally after a trade deal was done with China. It was well anticipated, but rather than a "sell the news" response, the indices continued to trend sharply higher.
Also, there have been few "sell the news" responses to anything that the Fed has done. Even when rate cuts are a near certainty, the market never seems to fully price in the news.
The most obvious reason for the lack of "sell the news" responses and the inclination toward V-shaped moves is that the central banks are flooding the markets with liquidity. There is just so much cheap cash out there that it continues to flow into stocks regardless of the news flow or valuations.
Everyone knows that a round of very aggressive rate cuts are coming, but they also know that the market is inclined toward V-shaped moves. Will the nature of the coronavirus crisis and its economic impact change the inclination toward V-shaped moves? Many market players are saying no. We will see soon enough, but the idea of retests of recent lows seems very old fashioned in a market that has an endless supply of cheap capital.
Indices are treading water this morning as they consolidate yesterday's huge gain and look ahead to news flow about coronavirus and interest rate cuts.