Despite a massive unemployment report and little improvement in the coronavirus statistics, the counter-trend bounce continued for the third day. There was great relief that the Senate finally passed the $2 trillion stimulus bill, but traders looking for a "sell the news" reaction ended up serving as short squeeze fodder instead.
While the market is acting like it has resolved all the recent fears and worries, that is far from the case. This strong action is driven by retail investors who are fearful they may miss out on a recovery, asset allocations by institutional investors and dazed bears that are trying to cut losses and preserve gain.
Despite the magnitude of the gains, this is still just a very large counter-trend bounce. The crashes in both 1929 and 1987 had even bigger bounces on a percentage basis before they rolled over. In 1929 the lows did not hold, but in 1987 there was a solid retest of the lows.
Is it possible this could be another "V"-shaped bounce, like what occurred in December 2018? Anything is possible when there is $6 trillion in stimulus in the system, but the coronavirus and its economic impact are still major unknowns. Big money is moving around and that is pushing those concerns aside, but they are sure to bubble up again as we are hit with news.
There is anticipation that there will be further allocations into equities into the conclusion of the first quarter next Tuesday. Some of the allocation is obviously taking place already and we have to wonder to what extent it may be front run.
Market players that are sitting on large cash positions, like I am, may be concerned that the market is running away to the upside, but the conditions that have caused this bear market in the first place are not resolved.
Despite this giant bounce, only 4.4% of all stocks in the market are over their 40-day simple moving average. This market is still far from a healthy uptrend. The counter-trend bounce is going to produce some confidence, but danger lurks if we are too quick to embrace the idea that this is just another V-shaped bounce back to highs.
Have a good evening. I'll see you tomorrow.