Hopes of a V-shaped market recovery suffered a setback Wednesday. Now the primary issue is whether the indices can find some support without a full retest of the March 23 lows.
There was a massive sigh of relief when the indices managed a bounce big enough to produce a headline that the DJIA had entered a new bull market, but the skeptics scoffed at that idea and pointed out how all significant bear markets tend to have large counter-trend bounces as they develop.
Ideally, at this point, there should be some attempt at testing the recent lows. It doesn't need to be perfect and there will be many stocks and sectors that will not be correlated with the S&P 500. For example, small-cap stocks in the Russell 2000 (IWM) are already much closer to a retest than other groups. What happens there will be a good indication of how inclined the market is for a full retest.
At the moment, there continues to be hope that the worst has already been priced into the market and that it will find support without the retest. There is some early strength driven by better action in oil but the main focus is the unemployment number.
Weekly unemployment claims will be reported at 8.30 am ET. Expectations vary widely but a number of 5 million or more would not be a huge surprise. Many state unemployment systems have been overwhelmed by the number of claims and there still may not be full reporting.
While a horrendous number is expected, the question for us to ponder is whether the economic damage wrought by the coronavirus is being priced into the market. Many are hopeful that the crisis will end sooner, with less damage than expected, and they are looking for stocks to find a bottom soon.
Optimism tends to drive the oversold, counter-trend bounces, while reality tends to end them. Concerns Wednesday that China may be seeing a second wave of coronavirus cases was part of the reason that the bounce fizzled out.
The biggest most persistent negative is the high level of uncertainty. We just don't know yet how successful social distancing and other measures will be in flattening the curve of cases. We also don't know the level of hospitalizations that will be required at the apex nor do we have any way to calculate all of the financial ramifications.
There is a great amount of optimism -- as there should be -- but it probably is not realistic to think that we can recover from a crisis of this magnitude without significant reverberations.
My game plan remains the same. I will maintain high levels of cash, look for some index trades and day trades but only make minor buys of individual stocks for the long run.