Stock markets around the world have lost over $5 trillion in value due to the coronavirus crisis -- and there still are no signs that the downtrend is close to an end. There is another large drop overnight and still no clarity.
Market participants are used to navigating patterns, but the current situation is unprecedented. Never has there been this high a level of uncertainty even after a problem has become quite clear. No one knows how much farther the coronavirus will spread or what the ultimate economic impact will be.
The optimists are certainly right when they tell us that this will end -- and markets and economies around the world will recover -- but what they don't know is how deep this correction might go before it finds a floor.
One of the big problems at this point is that the selling feeds on itself. We saw the inverse of this just a couple of weeks ago when positive momentum drove the markets higher even in the face of the initial negative news about the coronavirus. Many market players were puzzled by the strength because they failed to understand how market structure and the movement of large amounts of money can produce momentum.
Conditions have now reversed and momentum is working against the market. When momentum was strong to the upside, valuation didn't matter, and now valuation still doesn't matter because downside momentum is more effective.
It is very important to keep in mind right now that it is the nature of markets to overshoot. As I've written many times, momentum always lasts longer than seems reasonable. For much of the last 10 years, market players have enjoyed the power of momentum. It has crushed the bears repeatedly, but the one great certainty of the stock market is cycles. That cycle has now turned to the downside and all the positives of momentum that helped the bulls are now working against them.
So how do we navigate this? We navigate it in much the same way we navigated uptrends. We respect the momentum and embrace it and don't try too hard to predict when it might end. We let price action guide us.
On the upside, overbought technical conditions and extended valuations didn't matter. The same thing is true now as powerful downside momentum takes place.
The market's biggest obstacle right now is uncertainty. It can't bounce very well until market players have more information and can process it. We still don't have a clue as to what extent the coronavirus may impact the U.S. There isn't even any widespread testing yet, so it is impossible to know if this an overreaction.
Rather than look for technical levels to signal a bounce, I'm looking to the news flow. I don't believe that U.S. markets can form a good bottom until there are some negative headlines about the spread of the coronavirus. Only then can we fully discount the worst fears of investors.
There is another gap down open on Friday morning, which many traders are hoping will lead to a bounce -- but, for three days in a row now, bounce attempts have failed badly.
There is an old saying that markets don't bottom on Fridays and that may prevent bounce buyers from trying too hard today.