Many market players thought that conditions were good for a bounce Tuesday after the Dow Jones dropped over a 1,000 points on Monday. Stocks did start off with some positive action, but confidence quickly evaporated as story after story about the impact of the coronavirus hit.
What was particularly troublesome was that the Centers for Disease Control and Prevention said that it is bracing for a community spread of coronavirus in the U.S. and that families, schools and businesses should prepare. Although the agency keeps emphasis that the risk is still small in the U.S., it raises the perception that an outbreak in the U.S. is likely, and that is a very market unfriendly event.
Until the last few days, the market has been quite sanguine about the impact of COVID-19. Market players were comforted by the positive price action, although they were also puzzled. There has been a complete change now with the market now deeply concerned about the uncertainty that the lethal pathogen has created. This action comes in tandem with a market that has been looking for an excuse for some corrective action and now it has a much uglier reason than many expected.
One of the most unusual aspects of this action is that it is occurring when the indexes were within days of all-time highs. Most corrective action doesn't start this intensely. Usually, the selling accelerates only after there has been a period of weak action first. Markets don't crash from the highs because there usually is still a crop of buyers anxious to buy the initial dips.
This is a very different dynamic this time and makes it much more difficult to time when a reversal might occur. Historically markets that drop so quickly tend to bounce, but there are no prior examples when this happens right after making new all-time highs and being extremely overbought.
From a trading standpoint, it is important to note that in this sort of market action, stocks tend to move in tandem. Good, bad or ugly, they all go down together. Eventually, the cream will rise to the top again, but we have to wait for the market to sort this out and find its footing. This action will create great longer-term opportunity, but it will take some strategy and hard work to profit from it.
The market at this point is at the mercy of the coronavirus news flow. If the numbers continue to grow and there is little clarity, then buyers are not going to be willing to step up. The best course of action is to stand aside and wait.
Have a good evening. I'll see you tomorrow.