The U.S. stock market is battling rollercoaster levels of volatility. Yesterday, the Dow Jones Industrial Average (DJIA) made a round-trip of almost 2,000 points – something it hasn’t done since the 2008 financial crisis.
The wild volatility suggests we may not have carved out the bottom of this rout yet. When this last happened in October 2008, the stock market was still five months from its lowest trough. Instead, the recent bounce is likely just a ‘bear market rally’ according to JP Morgan analysts.
There is reason to be cautious as this looked to be a relief rally ahead of next week’s start of Q1 earning season and before data reveals the depth of the virus impact.
The long-term reality of living in a world with coronavirus is beginning to set in on Wall Street. In one particularly dire warning, Dr. Janis Orlowski, chief health care officer of the Association of American Medical Colleges, said this morning we should prepare for more lockdowns at the end of the year .
We have to prepare ourselves to go through a similar exercise in the fall, in the late fall.
The Dow Jones opened with a bang, rising more than 300 points despite suffering a mixed futures session . The delay of the European stimulus had a negative effect in the early hours, but the index later recovered.
As of 9:46 am ET, the Dow had gained 311.08 points or 1.37% to trade at 22,964.94.
The S&P 500 rose 1.02% and 1.05%, respectively.
The stock market’s impressive bounce off March 23 lows has some investors predicting a quick V-shape recovery. But that optimism is starting to fade. JP Morgan analysts said the move higher was triggered by funds heading their portfolio risk , not a show of true strength.
Data shows the recent move higher has been accompanied by short covering and de-risking rather than active risk taking on the long side.
There’s evidence that individual investors are ‘buying the dip’ after a 30% plunge. Unfortunately, this is usually a contrarian indicator as retail investors often end up on the wrong side of the trade. As Peter van der Welle at Robeco explains, true market bottoms are built on complete despair, not hope .
From a sentiment angle, recent exceptional bounces suggest that investor sentiment is still in the denial phase, rather than in the phase of capitulation that paves the way for a new bull market.
The relief rally enjoyed an extra boost from news that coronavirus cases were leveling off in Europe and New York. While this is good news, the market may not have priced in the second wave of infections.
Dr. Janis Orlowski said this wave could end by May, but a second wave will return in the winter. We should expect further lockdowns by December 2020.
There’s not going to be a vaccine that’s going to be ready in 6-8 months… Be ready to stay at home. Understand what that means… We’re going to do this again and we’re going to be smarter and better at doing this.
Yesterday’s reversal is perhaps the first sign that reality is beginning to set in on Wall Street. Corporate earnings are just around the corner. The numbers will be brutal. Economic data and unemployment figures will continue to shock.
Some investors are still clinging to the ten-year bull market, as Albert Edwards at Société Générale explains.
This optimism is the legacy of a long bull market. Investors can’t conceive that the Fed will ‘allow’ the stock market to collapse. Think again.
Perhaps the bulls are right. But a painful month of coronavirus deaths, corporate earnings, and economic data lay ahead. Let’s see what happens.