From my seat, it appears that stocks are experiencing a "sigh of relief" rally (aka a dead cat bounce) here. As we've discussed, these rallies tend to be impressive (hence the headlines for last week's big gains) and make everybody "feel better" about the crisis at hand. The bottom line is that during the midst of these bounces, folks begin to feel like the worst is over. Check.

It also appears that the current rally is being aided by automatic "rebalancing" tied to the end of the month/quarter as well as all the systematic trading strategies such as Risk Parity. Note that anyone rebalancing here will be selling bonds and buying stocks. However, it is important to recognize that this is a calendar-based thing that should end today or tomorrow. As such, it will be interesting to see how the market trades the rest of the week.

Looking at the most recent action, traders got some good news to work with yesterday including the Fed talking about buying stock market ETFs if needed (this ought to put fear in the hearts of short sellers!), Trump extending social distancing recommendations through the end of April (this removes the fear that the administration would do something to make the situation worse), Abbott Lab’s (ABT) 5-min Covid-19 test, and word of JNJ’s vaccine that could start human trials in September (at the latest). To be sure, this is all good stuff.

On the negative side of the ledger, Oil fell to an 18-year low yesterday (crude is desperately tring to stay above the psychologically important $20 level), Macy’s furloughed 130,000 workers (a trend that will continue across the retail/consumer discretionary sectors), and the St. Louis Fed projected unemployment would hit 32% as a result of the "Great Cessation" (it was 24.9% in the Great Depression).

Next up, Goldman Sachs (GS) dropped its projection for Q2 GDP this morning from -24% to -34%. It looks like Wall Street banks are battling it out to see who can come up with the most pessimistic number (Morgan Stanley had been the leader at -30%).

Getting back to the stock market action, history shows us that the initial bounce from a panic low tends to recover about 30% - 40% of the drop. I will note that the .382 Fibonacci retracement level on the S&P currently stands at 2652 and 22,570 on the DJIA. While not written in stone, such levels "can" provide a decent turning point for a "retest" phase to begin. But not always, of course. Especially if the bulls can get on a roll and convince everyone that things are going to be okay.

S&P 500 - Daily

View Larger Chart

A break through these levels to the upside (which is already happening on the NASDAQ 100) could lead to a test of 2800 on the S&P and 23,900 on DJIA.

Finally, given all the damage that has been done to the tape and the other "issues" the market is dealing with (Oil and problems in the credit markets), I continue to believe that a "retest" phase is likely to occur at some point soon.

However, as I noted Monday, this is also a VERY popular view currently. So, while some "obvious" trades become self-fulfilling, we must keep in mind that Ms. Market does enjoy frustrating as many people as she can, as often as possible. As such, I’ll be watching the action and the news carefully in the coming days.

Thought For The Day:

The truth will set you free. But first, it will piss you off. -Gloria Steinem

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: GS, ABT, JNJ - Note that positions may change at any time.

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