Although there is no obvious positive news Monday morning, stocks are set to gap-up at the open. Crude oil is trading down, which was a problem last week, but there is optimism about the more important earnings reports of the quarter. Covid-19 statistics continue to show improvement and the push to reopen the economy is gaining steam.
The main reason that there is strength in the indices again Monday morning is that far too many market players are unprepared for it. For weeks now there has been puzzlement over the market's ability to shrug off the worst financial crisis any of us have ever seen, although even the bears will admit that nearly $10 trillion in stimulus overcomes nearly any logical negative argument.
Earnings will be the main focus this week with reports from a slew of heavyweights, including Alphabet (GOOGL) , Amazon (AMZN) , Amgen (AMGN) , Apple (AAPL) , Berkshire Hathaway (BRK.A) (BRK.B) , Facebook (FB) , Gilead Sciences (GILD) , McDonald's (MCD) and Microsoft (MSFT) .
So far, earnings season has not been the obstacle that many have feared. While guidance has been withdrawn and there is limited short-term clarity, the response has not been overly negative and has not had any major impact on the market.
Optimism about progress in the Covid-19 battle has been the main positive. While there is much controversy over reopening the economy too early in a number of states, the market appears to like that there is such strong pressure to return to "normal."
The primary reason this market remains strong is liquidity. There continues to be a large amount of idle cash looking for a place to go. The fear of missing out on a fast and furious recovery outweighs the concerns about the significant economic damage that is being done. There is no way to quantify what the economic impact of this crisis might be so market players are erring on the side of optimism at this point. They have the Fed on their side and there is no more powerful force.
Technically, the S&P 500 has done a good job of working off overbought tendencies in the last two weeks as it has chopped around and held up very well. It is developing a base of support that is supporting the move higher Monday morning.
My thesis has been that we would see a trading range develop. This trading range has greater relative strength than I anticipated but it has been healthy. There have been narrower trading ranges lately and better individual stock-picking but that has been driven in part by the widely held belief that this market strength is not justified.
While the reaction to earnings this week will help determine where this market is heading next, the very stubborn support suggests that market players are not going to panic easily. We have some clear technical support and resistance developing and that is going to trigger the next big move.