Last Tuesday through Thursday, the markets were on a tear. Action was being taken against the coronavirus pandemic, the President was signing the stimulus bill that Congress had bickered over, and Boeing Co. (BA) jumped 70.5%.
For the Dow and S&P 500, it was the first three-day win streak in months.
Then come Friday, markets tumbled. Still, the Dow was up 12.8% for the week, the best weekly result since 1938.
The big question for April and beyond is whether the winning streak of the middle of last week will carry on, or whether Friday’s tumble is a sign of things to come.
Both narratives have their backers. You have the ultra-bulls on TV, in newspapers, and online saying that the worst is over, the virus isn’t all that bad anyway, and so much liquidity and stimulus has been pumped into the system that will find its way to the stock market that stocks simply have to go up…
And you have the ultra-bears who say the impact of the pandemic is worse than we thought, and could get catastrophic. In their view, this isn’t going away any time soon.
On each side, the believers fully expect not only to be right – but also that the market will act accordingly any day now. For the bulls, everything is OK and getting better, so markets will spike upwards any day now.
For the bears, we’re on the express elevator to an 80% drop, no question about it.
But the Reality Gap here is that, while the bullish believers are convinced they have it right, so do the bearish ones.
And while those two forces battle it out, we’re not going to get either of their outcomes.
Now is Not the Time to Pick Sides
Rather than a quick, V-shaped recovery, or a rapid plunge to historic lows, the market will be caught between the two. It will swing up and down from day to day, interspersed with sideways trading when neither side is getting any new convincing data to back their claims up.
Traders with at least a few years under their belt might recall similar moves from 2011-12. Then, in the lead up to and just after the downgrade of America’s bond rating, markets were stuck in a tug of war between bulls and bears. And rather than prove one or the other right, markets whipsawed up and down, giving both bulls and bears cause for celebration – and tears.
In 2008, we saw something similar in the lead up to AIG’s collapse. Uncertainty about just how bad the crisis was reigned, and so the markets reacted to every little bit of news, positive or negative.
Expect the same in the weeks and months going forward. We’re going to see false rallies to boost the bulls, only to have their spirits be broken when the markets whipsaw down into lower lows.
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For long-term investors, now is the time to either keep your powder dry or start to add quality names like MSFT, AMZN, and AAPL a little at a time.
But for traders, these rapid whipsaws back and forth will be a fantastic opportunity.
In the end, markets will be guided by the reality on the ground. I expect that in the short-term, the bears will be right. We’re going to be seeing lower lows than what we’ve experienced so far.
But longer term, the bulls are correct. We will get through this, the world will not end, and we as a people, as a nation, and a world will recover.
No doubt it will look different. But it will be there. And the stock market will explode upwards to give us a “trade of the decade” opportunity.
But before we get there, expect more volatility. This week in particular promises to give plenty of ammunition to bulls and bears both.
Recall last Thursday, when markets went up even though the weekly unemployment numbers from the Labor Department showed that a whopping 3.28 million Americans had filed for unemployment.
That handily beat the previous record of 695,000, set in October of 1982.
But the markets reacted positively, because it expected a number somewhere between 1m to 4m claims. More importantly, the Labor Department released the numbers without trying to hide, delay, or sugarcoat them.
That transparency was a good sign for traders that we won’t be operating in the dark going forward.
Well, every day this week will be an opportunity for something similar. This morning we saw pending home sales drop by about half. Tomorrow, we’ll see how much consumer confidence has taken a hit, followed by auto sales and the ISM manufacturing index on Wednesday.
On Thursday, another weekly set of unemployment claims comes out, and on Friday we’ll see the latest monthly employment figure.
Now, most of these cover February, not March. So we’re going to see how the economy was doing just before most of the lockdowns. That will give traders a basepoint for next month’s numbers. If they were already bad, that means we went into the peak of the pandemic already weakened.
Markets will be hanging on every number.
Finally, in light of the chaos and uncertainty the coronavirus pandemic has created, I’m going to be livestreaming every weekday at 1:30pm-2pm EST over on MoneyMorning.com, starting today.
Come see me discuss the markets, trading, and answer questions live from you and other viewers.
I can’t wait to see you. Together, we will get through this.
Great trading, stay safe, and God bless you,