Stocks dropped sharply into the close on Tuesday on concerns that the reopening of the economy may not be as quick and as easy as many are hoping. Dr. Anthony Fauci was less optimistic than many had hoped in an online congressional hearing and the County of Los Angeles indicated that it was likely to extend various shutdown efforts for three months.
This less optimistic view of how quickly the economy would reopen, combined with some frothy action in momentum stocks and technical resistance around 2950, caused a sharp drop in the last hour of trading. There was some follow-through selling early in the overnight session but that reversed as the focus shifted to Fed Chair Jerome Powell, who is scheduled to give a speech at 9 a.m. ET.
The main issue of concern to the market is the Fed's willingness to accept negative interest rates. Powell has previously indicated that he was opposed to negative rates but his comments will be carefully scrutinized to see if there is any softening in his stance.
Another issue that probably contributed to the selling late Tuesday was bearish comments by famed investor Stanley Druckenmiller. Druckenmiller is considered by some to be the greatest investor of his generation and his comments that a V-shaped recovery in the U.S. is a fantasy caused concern. Druckenmiller also said that "the risk-reward for equity is maybe as bad as I've ever seen in my career." That level of pessimism is something that many investors will be pondering carefully.
Although the S&P 500 is at the same level it was at back on April 17, there have been some outstanding pockets of momentum and stock-picking for a while. It has truly been a story of two markets with market players chasing growth stocks, FANG names such as Apple (AAPL) , and biotechnology. On the other hand, value plays like banks and industrials have lagged badly.
This has been a good market for active traders but what we have to watch for now is a shift to more correlated selling. In bear markets, the merits of individual stocks tend to become less important as the rush to raise cash becomes paramount. Good stock-picking develops in better markets as traders try to find those names that will outperform.
My overall market thesis -- which is always subject to change -- is that we will see trading range action develop. The main buying focus will be on post-pandemic stocks that will benefit from the new economy while the traditional value plays struggle as it becomes clear that much of the economy will not come back quickly or easily.
We have a mildly positive start Wednesday morning but Chairman Powell's comments are going to create some fast movement.