The positive market narrative that has been in place since the end of January is starting to deteriorate. The narrative has been that while there will be some economic fallout from the coronavirus it will be short-lived and will be offset to a great extent by central banker created liquidity. In addition, the belief has been that there was little danger that the coronavirus would spread outside China.
Both of those assertions are being challenged today and that is keeping dip buyers on the sidelines as they wait to see what happens. There is still great confidence that the central banks will provide support but there is some concern about whether the liquidity will continue to feed the market at the same pace.
Market players have been puzzled about the lack of a market response to the coronavirus so there is some relief that the action is finally more rational but there still doesn't seem to be much fear that a major downtrend is going to develop.
Once again it is very important to see how the market acts into a close. There has only been one day in February when the S&P 500 came near to closing at the lows of the day. There has been consistent strength in the afternoon and that is key to maintaining positive sentiment. A series of weak closes would change the character of the market action.
Many of the smaller cap stocks on my screens are drifting lower and are developing some attractive buy points but I'm biding my time to see if the broader market may rollover before doing much. It is unlikely that small caps will run counter to the major indices. If there is some sympathetic selling in these names that are not extended, there should be some favorable entry points.
The overall market narrative seems to be shifting but there isn't enough evidence yet that it is going to gain downside traction. The close today will provide us with some clues.