Banking on a Quick Market Recovery Could Cost You…

Markets opened up 4% this morning as yesterday gave us some hopeful numbers. Italy, Spain, and the U.S. reported drops in the daily amount of new coronavirus infections and deaths.

Traders are grasping at this reduction as a sign that we’ve reached the bottom, and it’s a straight shot up from here.

I’m afraid that’s just a load of “hopium.” In fact, if you look back at the last few weeks, Sundays often have lower numbers. Presumably some numbers get reported on Monday instead as even in a middle of a crisis, some people need a break.

But that’s the Reality Gap we’re going to be seeing right now: between people looking at one day’s slightly better numbers as a sign of hope, and the economic reality of real, deeply negative numbers ahead.

Look, the Dow is down more than 25% this year and we’re already in April. It’s perfectly understandable that people are starting to look for the recovery. No one wants to miss out on the rebound.

But the reality is that a single day of not-as-bad numbers doesn’t necessarily make a peak. We may be hitting the top of the growth curve of new infections and deaths (and like everyone, I certainly hope and pray that this is so), but we could also be seeing just a one-day respite in the data.

In either case, the market bottom won’t come around for a while yet.

Because hitting the apex of the curve would mean that the worst of the medical problem is almost over.

That still leaves the economic damage caused by the virus and our measures taken to contain it. We won’t truly know how bad that’s been until we start seeing real numbers on unemployment and especially corporate earnings for the first quarter of this year.

Those earnings numbers are due starting next week, when the big banks start reporting.

In the meantime, people are going to be desperate for hope. We may not hit a lower low any time soon, but we’re also not going to go straight up from here. Expect more volatility ahead as the “hopium” and trillions in stimulus fight against the economic reality that will soon become clear.

The best-case scenario is that markets take anything better than the worst-case scenario for the economy as good news, allowing the massive stimulus infusion to send us skyrocketing.

That’s not the most probable case, however. It will take the next few weeks for the earnings and economics reports to let us know how deep the virus effects will be felt on the economy, here and abroad.

The volatility that will continue will lead us to more quick hit trades, especially selling the rips higher.

Options premium remains high, though it has dropped from the highs, so we’ll continue to look to ETFs and to trade spreads. Look to sell short or play bearish spreads on the fundamentally weak sectors like airlines (DAL, AAL), cruise lines (CCL) and restaurants (DRI).

Great trading, stay safe out there, and God bless you,

 

 

D. R.

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