The stock market has rushed with historic speed to an extreme place. This means, among plenty else, that the tape is becoming stressed and stretched in a way that tends to precede the kind of reflex rally that is sudden, powerful and probably untrustworthy.
The damage toll from the 12% collapse in seven trading days is a litany of rarities.
On the highest weekly volume in nearly a decade, the selling became indiscriminate and generated oversold readings for the record books.
This means the coronavirus-spread panic opened a trap door under the market and almost everything fell through.
We're now in the investing equivalent of assessing various hurricane models. The storm has devastated the outlying and coastal areas – the final 12% upside of a bull market that has delivered a 12.5% annualized return for the past decade.
The more populated regions are now threatened. Most of the meteorological models say storms like this don't last much longer at full strength before spinning out to sea. The forward returns from similarly equity washouts have been better than average market performance over ensuing months and out to a year.
But the exceptions to this comforting pattern are scary, and to many, the smart move seems to be to prepare for the worst.
"There has been enough near-term downside exhaustion to suggest a reflex rally should occur," says Krinsky. "How far and how long that lasts, however, is going to need to be monitored on a day to day basis."
As usually happens in a market shock, there are proximate causes and collateral factors.
Obviously, the global spread of coronavirus infections and the dramatic measures being taken to contain it have halted the Chinese economy, upended prevailing expectations for an imminent global-growth acceleration and fogged the corporate-earnings outlook, while compressing bond yields to unseen levels and stoking urgent calls for aggressive central-bank responses.
But all this struck a market that was also richly valued and over-loved, with a huge implicit bet on continued calm and enduring leadership by the marquee growth stocks of our time.
So, aside from pricing in the growth impact of the virus outbreaks, we're seeing a headlong unwinding of strategies premised on market calm and momentum — a wave of forced selling that has largely if not entirely washed through the market by now.
Still, the CBOE S&P 500 Volatility index remained above 40 Friday, even as it slipped from a high close to 49. On one hand, a surge and retreat by several points is one clue to a fear crescendo and possible rebound attempt.
On the other, a VIX above 40 (up from 13 earlier last month) also shows intense hedging by trapped market participants and suggests investors shouldn't be too stridently confident in trying to map the path from here.
A few observations about where this has taken the market:
That might not seem like enough of a cushion to rely on against the frightening headlines and wide uncertainty band facing investors.
We very well could be early in the economic-reckoning process — or this could be a weeks-long panic that fades quickly as a driver of the markets.
The best advances of this 11-year uptrend have come when the saturating fear of some daunting threat (sovereign-debt defaults, oil crash, China financial crisis, trade war) proved unfounded or overdone. It's worth remembering this — without treating it as a sure thing in the current market test.
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