Market action softened slightly on Tuesday and gave bears some momentary hope. Microsoft (MSFT) reversed sharply after a furious run, and there were a few other strong intraday reversals, but breadth was strong and the selling well contained.
The bears were so anxious for some downside that a number of them raced to embrace the slight pause in the uptrend. That is all that the market needs to produce a gap-up open on Wednesday morning.
The main reason given for the early strength is that concerns about the coronavirus are starting to erode and there are some strong earnings news in Europe. Casinos Wynn Resorts (WYNN) and Las Vegas Sands (LVS) have upgrades by Bank of America, which is also signaling a belief that maybe the worst is over for the coronavirus.
There is still much debate over whether the information about the coronavirus is accurate or not, but the spread of the problem outside of China has been quite limited, and that is giving the market confidence that this issue may not be nearly as bad as some have feared.
Of course, the market has barely flinched due to the crisis, but it is a similar dynamic to what we saw with the China trade issue. There would be some negative news that would have a minor impact and be bought immediately -- and the market would keep making new highs even though the issue still remained unresolved. When it finally was resolved, the market continued even higher and there was no "sell the news" reaction.
This market's reaction to bad news has been totally undermined by computer algorithms, passive investing, a high level of liquidity and fear of missing out. The news flow is simply a backdrop for the big money that focuses solely on price action. This won't last forever, but right now there is no catalyst that looks like it is going to disrupt it in the near term.
The only rational way to navigate this market is to stay focused on price action rather than news flow. If you have focused on the news, you will be completely misled as to how the market should react. It seems like common sense that a dangerous coronavirus would lead to some problems for the market, but structural issues in the market have prevented it.
We have another gap-up on Wednesday morning. If you are trying to time a turn, continue to watch for intraday reversals and weak closes. Otherwise, the best move is to keep looking for a place to deploy capital.
